Biopharma M&A expansion to continue in 2016 claims new report

BY Fraser Tennant

Following a record-breaking 2015 which saw deals total $300bn, mergers and acquisitions (M&A) activity within the biopharmaceutical industry is set to continue at a “brisk” pace in 2016, according to the new EY ‘Firepower Index and Growth Gap Report’ published this week.

The EY Index, which measures the ability of biopharma companies to fund M&A transactions based on the strength of their balance sheets and their market capitalisation, reveals that the drivers of biopharma M&A last year included payer consolidation, rising healthcare costs and the intensification of companies’ growth imperatives throughout the industry.  

Among the key findings highlighted in the Index are that: (i) deal activity in early 2015 was driven by specialty pharma companies with a majority of deals by total valuation in the specialty or generics sector (big pharma grabbed the limelight later in 2015 while biotech experienced more modest deals); (ii) big pharma’s aggregate growth gap – the revenue shortfall below global biopharmaceutical sales growth – remained stuck at near $100bn due in part to foreign exchange headwinds; and (iii) specialty pharma’s firepower, has decreased by nearly 50 percent following a recent series of debt-fuelled acquisitions and falling equity valuations.

“While we can’t predict more large transformational deals over $100bn in 2016, we do expect a continued brisk pace for acquisitions and a continuation of the robust divestiture environment, as companies seek to focus on and gain scale in their chosen therapeutic areas,” said Glen Giovannetti, EY’s Global Life Sciences leader. “Three times as many companies now possess at least $3bn in firepower than a year ago, meaning more competition for targets as well as a longer list of potential acquirers for divestitures.”

However, while the Index makes it very clear that biopharma companies continue to benefit from an era of increased drug approvals and healthy pipelines, there are a number of challenges and considerations likely to drive M&A in 2016. These include a renewed focus on value-based drug pricing, staunch competition across key therapeutic battlegrounds and consolidated payer clout, which may exacerbate existing growth gaps and result in a continued feverish deal environment.

“These pressures may make the lofty heights of $200bn in annual M&A the new normal for the foreseeable future,” concluded Jeffrey Greene, EY’s Global Life Sciences Transaction Advisory Services leader.

Report: EY’s Firepower Index and Growth Gap Report 2016

Britain’s tech sector boom

BY Richard Summerfield               

The tech sector has enjoyed a meteoric rise in recent years. Developments such as the Internet of Things, Big Data and the Cloud have become key features of the modern corporate landscape.

In the UK, the tech sector is booming. Over the last five years 45,000 new technology firms have been created in the UK, equivalent to one new firm ever hour, according to a new report from KPMG. Though London and the South East have remained the most popular locations for tech sector development, surprisingly a large portion of the growth has been spread throughout the UK. Sixty-three local authorities achieved double digit growth in the number of tech enterprises over the last 12 months. Fifteen of the fastest growing local authorities were found within the capital, including Hackney, Newham, Islington, Camden, Bexley, Havering, Waltham Forest, and Barking and Dagenham.

The past six years have seen steady growth in job creation within the UK’s technology space. That said, 2015 saw a slowdown, hitting the lowest level in two and a half years in Q3 2015, with profitability falling for the first time since Q1 2013. Nevertheless, the long-term trend is positive.

 “We can therefore be justly proud of the Tech scene and be optimistic for the future of what must be a key sector for the UK,” said Tudor Aw, KPMG’s Technology Sector Head. “It is important however, that more be done to help ensure the continued growth of the sector, particularly around STEM subject education, regulatory and fiscal conditions, and last but not least, profile within the media to highlight the importance and success of the sector."

The UK’s primary tech cluster remains in Reading. More than one-in-five enterprises (22 percent) based there are tech sector firms, which is almost three times the national average of 8 percent. Throughout the last 12 months, Warwick has seen the fastest increase at 28 percent, followed by Hackney at 25 percent increase and Rotherham at 21 percent.

Clusters of tech sector specialisation seem to be forming around the country. The South Cambridgeshire cluster, for example, is notable for biotech ; while Nuneaton & Bedworth is renowned for automotive-related tech. The City of London is, unsurprisingly, the focal point for FinTech development.

Optimism surrounding the industry remains high. Fifty-four percent of respondents to KPMG’s survey anticipate a rise in business activity over the next 12 months, while only 7 percent predict a decline.

Report: KPMG Tech Monitor UK

Digital disruption drives deals – EY

BY Richard Summerfield

The digital revolution of the last few years has had a significant impact on almost all facets of our daily life. Smart phones, cloud computing and Big Data have integrated into our daily routines almost seamlessly, and it is for that reason that the digital transformation of businesses has become such a valuable development.

This emerging reliance of mobile, cloud and Big Data technology is significant for many reasons, not least of which is the manner in which it is helping to drive mergers and acquisitions in the technology space. According to a new report from EY, 'Capital Confidence Barometer – Technology', companies are turning to cloud and mobile technology as they look to remain relevant in an increasingly competitive and demanding industry. EY’s data suggests that to the end of October the value of tech related M&A deals was $396.4bn; as such, the record of $412.4bn worth of tech deals announced in 2000 is likely to have been exceeded by the end of the year.

The impressive pace of M&A driven deals is also unlikely to slow going forward, according to EY. Forty-five percent of the technology executives surveyed for the report noted that they intend to pursue deals in 2016; this number is higher than in the last three surveys carried out by EY in the third quarter of the year.

Thirty-four percent of respondents will look outside of their own sector. Thirty-seven percent believe that ‘digital future’ – EY’s term to describe the disruption of all areas of enterprise caused by technology – is the most important driver in M&A deals today.

Jeff Liu, Global Technology Industry Leader, Transaction Advisory Services at EY, said, "As the overall M&A market hits its stride, the technology sector has continued to shatter M&A records from one quarter to the next. While digital disruption is not a new story, we have clearly entered a new chapter in its impact on M&A. It is one in which the customer is becoming a more digitally empowered protagonist. Changing customer behaviour is driving technology company acquisitions of non-technology companies — and vice versa."

Given the increasing confidence in the global economy, tech companies are feeling bullish about completing further deals in the year ahead. Though many tech executives are concerned about lingering geopolitical difficulties and their effect on the wider global economy, they will not be put off pursuing deals. With companies willing to commit 60 percent of their available capital to growth in 2016, the deals will keep coming.

Report: Capital Confidence Barometer — Technology

Property price growth rate drops - report

BY Richard Summerfield

Property price growth rates have slowed in many of the world’s major city markets, according a new report from Knight Frank and EY.

In recent years, affordability has become a problem, limiting price growth. The report, entitled 'Global Tax Report 2015', examines holding and selling costs for overseas buyers of prime residential property between 2010 and 2015. According to the data, the slower rate of price growth in most major markets has made transaction costs and taxation increasingly important factors for investors.

“When purchasing property as an investment, tax is not necessarily the first concern but it is important because it is often the after-tax return that measures the success of the investment," said Carolyn Steppler, private client tax services partner at EY, UK & Ireland. "Our research shows that the tax burden across the cities in this report varies considerably both in amount and extent,” she added.

The joint report examines non-tax purchase, management and sale costs across 15 leading global cities, highlighting considerable variations. For example, international investors hoping to acquire property overseas can get the lowest costs in Shanghai. Monaco offers the lowest level of taxation when purchasing property valued between $1m and $10m.

The cost of UK tax equates to around 9.7 percent and 20.7 percent for $1m and $10m properties respectively. Taxation governing residential property in the UK and London specifically has changed considerably over the last two years. In December 2014, progressive stamp duty land tax rates were introduced, and in April 2015 the taxation of capital gains on the disposal of property by non-resident owners was also introduced. Potential alterations to inheritance tax in the UK could also impact activity as certain property investment structures will become much less attractive to investors. However, London’s position as an economic and cultural powerhouse will help maintain the city's lustre for international investors.

Cities where property costs are highest include Paris, Berlin and Geneva, with costs for a $10m property can exceed 10 percent.

Report: Global Tax Report 2015

Volatile global markets leave financial services sector in business volume slowdown

BY Fraser Tennant

Volatile global markets are having a marked effect on the financial services sector with business volumes slowing from July to September, according to the latest CBI/PwC Financial Services Survey.

Strong competition is being blamed for the slowdown, with financial services firms taking a big hit on fees & commissions, net interest, investment and trading income.

Despite this impact on income growth, the overall business situation is viewed as stable, with profitability still growing, albeit at a significantly slower rate than that seen in recent years.

The Survey’s key findings include: (i) 25 percent of financial services firms reporting that business volumes were up, while 21 percent said they were down (the slowest rate of growth seen since September 2013); (ii) 24 percent of firms expecting business volumes to increase, while 8 percent believe they will fall; and (iii) 28 percent of financial services firms stating that they felt more optimistic about the overall business situation compared with three months ago, while 26 percent said they felt less optimistic (the lowest rate of growth since September 2012).

“The winds of volatility blowing through global markets have left a clear mark on the financial services sector, impacting business volumes and investment intentions, particularly in investment management and securities trading," said Rain Newton-Smith, director of economics at the CBI.

“Nevertheless, building societies’ business volumes have rebounded, and with financial sector costs under control, profitability is in good shape. At the same time, investment in IT is set to increase as firms aim to improve efficiency.”

Mr Newton-Smith also points out that slower growth in China and other emerging markets has had a knock-on impact on confidence in the world economy, with the Federal Reserve holding off raising interest rates in the United States.

Kevin Burrowes, PwC’s UK financial services leader, added: “Business confidence among banks flat-lined in the quarter leading to September 2015, leaving the sector cautious over its short-term outlook. Recent macro-economic events such as the fall in oil prices, China’s Black Monday, and the ongoing turmoil in global stock markets might have fuelled this sentiment. With interest rates expected to remain on hold, growth for UK banks continues to be challenging.”

Challenging for sure, but the outlook for the financial services sector is encouraging with growth forecast to pick up over the coming months (keeping pace with business volumes in  life insurance, building societies and securities trading), although still well short of the growth levels seen in early 2015.

Report: CBI/PwC Financial Services Survey – September 2015