Biotech struggles continue despite attracting finance

BY Richard Summerfield

The global biotech industry has seen continued investment in new treatments despite experiencing a number of strong headwinds, such as a pull back from capital markets in the US and the EU, lower valuations and increased pressure from payers, according to the 31st annual EY report 'Beyond Borders: Staying the Course'.

The report notes that revenue for US and Europe-based biotech companies reached $139.4bn in 2016, an increase of just 7 percent on 2015. Furthermore, net income dropped 52 percent year-over-year to 7.9bn and financing dropped 27 percent to $51.1bn in 2016 – the first decline in four years.

Regardless of these struggles, early biotech financing has remained promising, investment in seed and series A biotech venture rounds totalled $3.6bn in 2016, a record 36 percent of the $10bn of venture capital raised. This figure is higher than the previous 15-year average of $1.3bn. In 2016, IPOs in the biotech space endured a difficult period, however.

Dealmaking remained active in 2016, with acquirers taking advantage of reduced biotech valuations. Mega deals also played a key role: five biopharma mega deals accounted for three-quarters of all M&A value in the industry in 2016. As a result average M&A value for deals with announced terms was more than $1bn for only the third time in the past decade. Overall, 2016 deal activity was down 12 percent year-on-year to 79 deals, however, M&A volume remained above the past decade’s average of 65.

Research and development (R&D) spending reached a record high of $45.7bn, up 12 percent on 2015. Pamela Spence, EY global life sciences leader, said "The biotech industry's financial commitment to R&D, while impressive, needs to be coupled with efficiency improvements to achieve better returns and ultimately to drive greater affordability of its products. With pricing pressures expected to escalate, firms will need to incorporate new digital and artificial intelligence technologies into their traditional drug target selection and overall R&D processes to achieve those returns or risk being outdone by firms that do. Furthermore, the payer-driven slowdown in revenue growth industry-wide provides further evidence of the need for companies to accelerate their shift in business models to fee-for-value from fee-for-service. Fundamental to the success of this transformation will be to form data-focused partnerships with the digital technology companies increasingly entering the health care space."

According to EY, the US is the “biggest source of innovation” in the R&D field, though China and the UK are also making impressive strides.

Report: Beyond Borders: Staying the Course

Canadian VC strong while PE sluggish in Q1 2017

BY Fraser Tennant

Canadian venture capital (VC) was strong in Q1 2017 while private equity (PE) was sluggish, according to a report published this week by the Canadian Venture Capital Association (CVCA).

In ‘Q1 2017 VC & PE Canadian Market Overview’ the CVCA reveals that VC saw $905m invested across 98 deals (Q1 2016 saw $956m invested over 128 deals). In comparison, PE continued at a slower pace in Q1, with $2.8bn invested over 105 deals.

Among its key findings, the report confirms that the average VC deal spiked to $9.2m in Q1 – 84 percent higher than the quarterly average deal size of $5m for the period of 2013 to 2016. Furthermore, the top 10 deals in Q1 accounted for 68 percent of all VC dollars invested, with the quarter also marking an acceleration of VC exits totalling $255m – nearly one-third of the number of deals and half the dollar amount of all 2016 VC exits.

“Canadian VC experienced a robust first quarter in 2017 – the second-best quarter since 2013,” said Darrell Pinto, research director at CVCA. “The pace of investment is reflective of healthy deal flow across all industry sectors. Another sign of a heath is the long-awaited turnaround trend in VC-backed exits – 10 exits totalling $179m in Q1 (compared to 31 exits in all of 2016) – and by all indications this will continue in Q2.”

Turning to PE performance, almost half of PE investments came from the two largest deals in Q1: the $723m Manitoba-based Arctic Glacier acquisition by The Carlyle Group from H.I.G. Capital and the $575m sale of British Columbia-based Performance Sports Group’s assets to Antares Capital and Fairfax Financial. The Arctic Glacier acquisition propelled Manitoba to the top-ranked provincial share of PE dollars invested (26 percent). This was followed by Quebec on 24 percent and British Columbia on 21 percent.

“PE remained flat in Q1,” confirms Mr Pinto. “As depressed global oil prices continue to put downward pressure on Canadian PE activity, investors have been finding alternate investment targets in non-traditional sectors like consumer and retail and cleantech. However, a bright spot was the PE exits environment, with 31 exits totalling $1.5m – already half the number of 2016 PE exits. This included the first PE-backed IPO since 2015: the $445m Canada Goose listing on both TSX and NYSE.” 

Progressing in a balanced fashion, Canadian VC and PE investment is showing results.

Report: VC & PE Canadian Market Overview Q1 2017

Dodd-Frank dead?

BY Richard Summerfield

Since the financial crisis, banks and other financial institutions have grown accustomed in increased regulatory oversight and scrutiny. However, following calls from president Trump to overhaul the regulatory regime established under former president Obama, the US Treasury Department this week announced a wide ranging plan designed to remake the country's financial regulatory framework.

The nearly 150-page report produced by the Treasury has recommended more than 100 changes, most of which would be made through regulators rather than Congress. The most notable proposal concerned the easing of restrictions big banks now face in their trading operations, lightening the annual stress tests they must undergo and reducing the powers of the Consumer Financial Protection Bureau (CFPB) which has been has been aggressively pursuing financial institutions over their malfeasance.

Regarding the proposed changes, Treasury Secretary Steven Mnuchin said, “We were very focused on, what we can do by executive order and through regulators. We think about 80 percent of the substance in the report can be accomplished by regulatory changes, and about 20 percent by legislation."

The new plan would greatly expand the authority of the Financial Stability Oversight Council, as well as change the way global capital standards are implemented to help US banks compete with overseas rivals. Smaller banks will also stand to benefit from the new plan; those banks with less than $50bn in assets would be less constrained than their larger rivals who would be subject to greater – though reduced – regulatory oversight.

These changes, should they win approval, would be welcomed on Wall Street and by many financial institutions which have long complained that the existing regulatory framework was too overbearing. The promise of lighter capital and liquidity standards and reduced supervision has already helped boost shares of Goldman Sachs and Morgan Stanley.

Away from the US, the Treasury’s report was also critical of international standard-setting bodies including the Basel Committee on Banking Supervision and the Financial Stability Board, noting the bodies had “overlapping objectives” and displayed a lack of transparency in their deliberations.

One of the key tenets of President Trump’s election campaign was the reduction of regulatory oversight in a number of key areas, including financial services. With the publication of the Treasury’s recommendations, the beginning of the end of the Dodd-Frank Act may have begun.

News: U.S. Treasury unveils financial reforms, critics attack

Toshiba invests $3.68bn to complete troubled US nuclear project

BY Fraser Tennant

Providing a much needed injection of capital into the beleaguered US nuclear industry, Toshiba Corporation has announced its intention to pay $3.68bn toward the continued building of two nuclear power plants in the US state of Georgia.

The payment, an agreement between the Japanese conglomerate and Georgia Power (a subsidiary of energy provider Southern Company, will allow for the completion of the Vogtle project – two nuclear reactors known as Vogtle Units 3 and 4 that were originally under construction by Toshiba’s nuclear unit Westinghouse Electric Company (WEC) in 2013.

However, the future of the reactors had been thrown in doubt after WEC filed for Chapter 11 bankruptcy in March 2017 following difficulties with a number of key projects that cost the nuclear unit billions. As a result of the bankruptcy, project management of the Vogtle nuclear power plant project was assumed by Georgia Power.

"We are pleased with the positive developments with Toshiba and WEC that allow momentum to continue at the project while we transition project management from WEC to Southern Nuclear and Georgia Power," said Paul Bowers, chairman, president and chief executive of Georgia Power. "We are continuing to work with the project's co-owners to complete our full-scale schedule and cost-to-complete analysis and will work with the Georgia Public Service Commission to determine the best path forward for our customers."

In a statement, Toshiba confirmed that the agreement with Georgia Power would see payments begin in October 2017 and continue to January 2021 when the Vogtle project is scheduled to be completed. Toshiba also confirmed that it had set aside loss reserves for the payment and that this would not have an impact on earnings projections.

Struggling to say afloat financially, Toshiba has also announced its intention to sell a significant stake in its highly-regarded memory chips business – considered to be the crown jewel of its semiconductor business operations – to help cover the billions lost due to the cost overruns overseen by WEC.

Thomas A. Fanning, chairman, president and chief executive of Southern Company, concluded: "We are happy to have Toshiba's cooperation in connection with this agreement which provides a strong foundation for the future of these nuclear power plants.

News: Toshiba to pay $3.7 billion to keep building U.S. reactors

Uncertain world forcing global technology leaders to rethink strategies, says new survey

BY Fraser Tennant

Unprecedented political and economic uncertainty across the globe is forcing technology leaders to rethink their strategies, according to a survey carried out by Harvey Nash and KPMG.

‘Navigating Uncertainty’ is the largest IT leadership survey ever undertaken and includes 4498 responses from chief information officers (CIOs) and technology executives across 86 countries. In the main, the survey finds that technology leaders believe that the level of change they are experiencing has reached unprecedented levels and is increasingly coming from unexpected corners.

That said, many technology executives are turning this uncertainty into opportunity and are helping their organisations to become more nimble and digital, a strategic rethink they feel will help them navigate through unpredictable change and thrive in an uncertain world.

“Few would have predicted the seismic shift caused by recent political change in many western countries”, wrote Albert Ellis, chief executive of Harvey Nash Group. “And few would have predicted the astonishing advances that have been made in data analytics, cloud, or – as this year’s survey reveals – automation."

The survey’s key findings include: (i) two-thirds of organisations are adapting their technology strategy because of unprecedented global political and economic uncertainty; (ii) 89 percent of organisations are maintaining or ramping up investment in innovation, including in digital labour; (iii) digital strategies have been embraced by businesses at an entirely new level; (iv) cyber security vulnerability is at an all-time high; (v) female CIOs are far more likely to have received a salary increase than male CIOs in the past year, although the number of women in IT leadership remains low at nine percent; and (vi) weak ownership, an overly optimistic approach and unclear objectives are the main reasons why IT projects fail.

The survey (now in its 19th year) also found a clear divergence between organisations that are effective at digital transformation and those that are not. CIOs at these ‘digital leader’ organisations are almost twice as likely to be leading innovation across the business and their organisations are investing in cognitive automation at four times the rate of others.

“Whilst the future might be difficult to predict, what is very clear is that many technology executives are turning this uncertainty into opportunity”, wrote Lisa Heneghan, global head of technology at KPMG. “They are helping their organisations become more nimble and digital, to navigate through unpredictable change and thrive in an uncertain world.”

Report: Navigating Uncertainty