Is Biotech Globalization Worth the Investment?
The metaphorical pendulum has swung back and forth in recent years on whether companies should globalize. One need look no further than the U.K.’s 2016 Brexit vote, the U.S.’s recent positions on NAFTA and the TPP, and the increasing number of populist candidates in other countries to see that referendums on protectionist trade measures and tax policy, along with tightening immigration requirements, are gaining significant traction.
For U.S.-based biotech companies, the question is does globalization still make sense? The life science industry is already facing numerous challenges, including varying regulatory and pricing pressures throughout the world. However, where there is disruption, there is often opportunity. In addition, globalization can take many forms in order to help mitigate risk. Let’s take a closer look at a few globalization options for biotech firms.
A life science company can simply sell products or services in a foreign country, as witnessed by the emerging markets mega trend. According to a Grand View Research report, the Asia-Pacific region is expected to grow at a compound annual rate of 11% over the next 10 years. This is due to the increase in outsourced U.S. FDA manufacturing sites, the growing worldwide health care burden, and expiring patents of several drugs that can boost the outsourcing market. Furthermore, a growing middle class in these emerging markets is creating new demands for medical devices and generic drugs.
When you examine the past 20 years, countries are spending more on health care as a percentage of GDP, and emerging markets – such as China and India – are steadily increasing spending (Figure 1).
Figure 1: World Bank Organization global health expenditure, public % of GDP, 1995 to 2014.
Furthermore, it is expected that various regions throughout the world will significantly increase pharmaceutical spending (Figure 2). Based on these and other industry projections, there appears to be significant growth opportunities via emerging markets for innovative solutions in biotechnology, medical devices and pharmaceuticals.
Figure 2: Global spending on medicines by regional share forecast 2020; forecast of global medicine spending distribution in 2020 by region. Source: 2015 IMS Health Survey.
Establishing a Foreign Presence
Establishing a foreign entity, either self-created or via an M&A, offers arbitrage opportunities to leverage lower cost of materials, labor and production. It’s clear that the search for talent and the drive for R&D globally are significant. R&D Magazine reported more than $165 billion in worldwide R&D spending in life sciences, $100 billion of which was outside of the U.S. (Figure 3).
One significant reason to look overseas is the opportunity to take advantage of less-onerous regulations. For example, Israel and the United Kingdom have enjoyed large advancements in regenerative medicine due to their long-standing laws that promote therapeutic cloning and stem cell research; whereas in the United States, similar research has been somewhat inhibited due to legal and political opposition.
Figure 3: R&D Magazine, winter 2016 – life science R&D spending.
Biotechs often establish joint ventures and collaborate with local companies to advance capabilities. In 2017, Microsoft and India-based Indegene announced a joint venture to combine their platforms, Dynamics 365 and Omnipresence, respectively, to address life science manufacturing challenges and enable a cloud-based technology solution to lessen content-creation barriers to provide life-science-specific tools.
Any life science company that is considering globalization needs to perform the necessary cost/benefit analysis. Here are a few due diligence items to examine:
- Understand the Environment – Learn about the cultural and geographic environment (i.e., what particular medical challenges do they face?).
- Pricing – Determine price points for local health care systems based on factors such as cost of living.
- Legal and Regulatory Risks– Understand the regulatory approval process in each country. What is the country’s position on protecting intellectual property?
- Resources and Supply Chain– Examine the distribution structure as well as the infrastructure (transportation, power supply, etc.) of the host countries. Does the audience understand the importance of your innovative, or even generic, drug or device; or is there a learning curve for consumers to negotiate?
- Management Team – Make sure you have the right team in place. This means ensuring that your management team is capable and knowledgeable to interact with key people in foreign countries.
- Taxation – Locate a knowledgeable tax team to understand your international taxation exposures. Should you account for transfer pricing between subsidiaries? Are there any requirements to disclose offshore assets?
While fraught with potential risks and challenges, life science globalization can be an effective strategy to increase market share. The key is to first perform the necessary research on each country and execute accordingly.
Stephen A. Doneson, CPA, is an EisnerAmper audit manager who focuses on the life science and technology sectors.
Catalyst - Summer 2017