Europe offers exciting opportunities for international life science companies. Besides being the second largest market for high-margin drugs and medical devices thanks to a well-established public healthcare system, the very large European life science industry offers a fertile ground for investments, collaboration and acquisitions.
The high density of universities and research institutes throughout Europe and well-trained employees in the European life science industry enable international life science companies to build up a broad network within Europe and to evaluate national and international market possibilities.
However, Europe can look amazingly complex to a life sciences executive looking at it from outside the continent. Despite most European countries being part of the European Union, there seem to be more differences than similarities. The variety of tax systems and incentives as well as different labour laws and immigration regulations (with some countries being in the Schengen area and others not) make it difficult to decide where and how to set up a European structure.
Adding to the complexity is the fact that completely different business cultures exist within Europe; from the Anglo-Saxon free market approach to the Nordic country social market models and the French-style centralistic planning. The varying market sizes in regards to the number of life science companies or number of employees in the life science industry emphasise the differences even more.
An additional point not to be forgotten is the existence of the Euro currency block which does not include all European member-states, which means that various currencies still exist within Europe.
The challenge: where to build up your site?
In order to help decision-makers in multinational life science companies better understand the complexity of the European life science landscape, KPMG Switzerland, in collaboration with Venture Valuation, has released its 2015 Report on site selection for life science companies in Europe. It offers facts and figures for international life science companies looking to expand, restructure or consolidate their activities in Europe. The report compares seven European countries (Belgium, France, Germany, Netherlands, Ireland, Switzerland and the UK), among others, with strong life science clusters and/or important attractiveness to Foreign Direct Investors (FDIs) on how they support life science companies in:
- Strengthening their capabilities by collaborating with peers and universities for various activities such as R&D, supply chain management or marketing through clusters of life science companies
- Improving their agility to react quickly to changing market environments, client needs, regulations and technologies
- Increasing their values by benefiting from tax planning and incentive models.
Key findings
- In total there are roughly 11,000 life science companies (biotech, pharma, medtech) across 14 European countries and in Israel
- The largest concentration of life science companies is found in Germany, the UK and France. Germany leads in medtech, while the UK is the leader in pharma and in biotherapeutics
- Switzerland is the leader in workforce in the life science industry compared to the size of its population
- Strong macroeconomic data in Germany and Switzerland is complemented by exceptionally strong labour productivity. Germany has the highest labour productivity in Europe, followed by Switzerland
- In terms of Foreign Direct Investments, the UK clearly leads the group with 37 regional HQs of foreign-owned life science multinationals, but other smaller countries such as the Netherlands, Belgium or Switzerland are equally attractive when taking into account the size of their respective economies
- The UK has the largest number (eight) of top-ranked universities. Compared to the size of their population, however, Switzerland, the Netherlands and Belgium (with four each) are ranked better at a worldwide level
- Switzerland is rated the most innovative country in Europe, followed by Germany, Belgium and the Netherlands
- Annual wage growth over the next five years is expected to be highest in the UK, Germany and Ireland, medium in the Netherlands, France and Belgium and lowest in Switzerland.
Key business environment factors which influence the agility of a life science company are, among others, flexibility of labour laws and the ease of attracting qualified staff. Here the Anglo-Saxon countries, along with Switzerland, fare especially well.
Diligent and forward-looking tax strategies are important tools to increase the value of a life science company
Flexibility of labour market and labour regulations
Diligent and forward-looking tax strategies are important tools to increase the value of a life science company. Particularly important are tax rates for income generated by intellectual property, as well as incentives for R&D. The countries covered in this report apply various strategies to remain competitive in this field. However, ongoing discussions on Base Erosion and Profit Shifting (BEPS) which focus on substance for sustainable tax planning will limit certain tax planning strategies.
Outlook
Going forward, the report draws a mixed picture of the outlook for the seven countries covered in detail.
- Currently, the UK and Switzerland clearly stand out from the rest of the countries in regards to attractiveness for regional HQs, complex manufacturing and R&D centres. The main challenges for the UK are low productivity, increasing salaries, appreciating currency and political uncertainties. Switzerland’s main challenges are high salaries and uncertainty about immigration
- Ireland, Belgium and the Netherlands are attractive for regional HQs, manufacturing and certain R&D activities, due to their appealing tax and incentive systems. However, they lack clusters of life science industry when compared to the size of Switzerland’s life science sector. Ireland, the Netherlands and Belgium will have to prove that they have the capacity to host true value-driving substance such as R&D or complex management or manufacturing operations
- Germany and France have large life science clusters but for many fast-growing overseas life science companies their business and tax environments are not flexible enough.
Instead of purely focusing on taxes, in the future life science companies will have to also consider other factors for selecting their ideal site. BEPS requirements will force companies to align profits, risks and actives with qualified substance. This might provide opportunities for countries such as France and Germany, if they are able to offer more flexible business conditions.
The UK and Switzerland will have to fight to maintain taxes at competitive levels while keeping salaries under control and reducing political uncertainties.
A new approach towards site selection
Defining where to set up European HQs, an acquisition vehicle, an R&D centre or manufacturing plan should be based on a detailed analysis of the value drivers which drive growth or value and the goals which want to be achieved by entering or expanding into Europe. While certain projects involving a presence in Europe focus on strengthening innovation or gaining market access, others are geared towards improving processes and organisational structure (which can lead to lower effective tax rates). The authors of the report suggest that the value drivers should be assessed first, in regards to their contribution for general profit generation or for reaching the goals of an (expansion) project, and then should be divided into key value drivers and secondary value drivers. The different locations in play should then be compared in regards to their capacity to host these key value drivers.
Life sciences companies will have to consider other factors [not just tax] for selecting their ideal site
Key value drivers in life sciences
Key value drivers which are of specific importance for the life science industry are research and development, operational excellence, procurement, manufacturing, sales and marketing. Depending on the project, each value driver is weighted differently and different locations might prove to be ideal for re-locating these value drivers. In particular, potential adjustments to an existing value chain should take the following key trends into consideration, as they affect key value drivers:
- Manufacturing: A key trend is creating standardised manufacturing platforms which optimise existing manufacturing facilities. Also, increasingly the so-called continuous modular processing is gaining traction against the classical batch manufacturing system with a series of stop-and-start steps. These two trends support an life science business’ agility, which can be a huge determinant of success in today’s rapidly changing technological and scientific landscape
- Operational excellence: There is a clear trend in the life science industry towards complementing internal capabilities with external resources. Demand peaks and troughs, such as for transportation or staffing, can be managed with the collaboration of suppliers, peer companies or specialised outsourcers. Another key trend in operational excellence is the proper alignment of tax planning with the underlying value chain. National tax policies have a significant impact on the competitiveness and value of an life science company, and only a tax-compliant model can deliver sustainable value over time
- Research and Development: The possibility of collaborating with universities continues to be important. By strengthening ties with academic institutions, life science companies can improve their attractiveness to qualified researchers while simultaneously enhancing their capabilities to deliver commercially relevant research results. Another key trend in the field of R&D is the increased focus on certain tax-planning tools such as the beneficial taxation of income from patents or the tax-efficient treatment of R&D costs. Such instruments can significantly improve the return on investment for R&D activities and therefore the value of a company.