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ANALYSIS
A Site Selection Web Exclusive, November 2015
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More Than Dots On a Map

Value chain analysis will sharpen your site selection strategy in Europe — and anywhere else.

ANALYSIS
GSK's global headquarters is located in London. The UK competes neck-and-neck with Germany across several measures of life sciences success.
Photo courtesy of GSK

by André Guedel, Head of Sales and Business Development, Tax, KPMG Switzerland

For a life sciences executive, looking at Europe from outside the continent looks amazingly complex: Despite most European countries being part of the European Union, there seem to be more differences than similarities.

A variety of tax systems and incentives — or different labor law and immigration regulations with countries being in the Schengen area and others outside of it — make it difficult to decide where and how to set up a European structure. (The Schengen Agreement, signed 30 years ago and implemented 20 years ago, allows free movement across 26 member countries without border checks to some 400 million EU citizens, as well as non-EU nationals, businessmen, tourists or other persons legally present in EU territory.)

Country Biotechnology Biotech
Therapeutics
Medtech Pharma
Austria 94 40 52 15
Belgium 265 50 135 74
Denmark 137 58 71 10
Finland 82 14 37 10
France 720 138 160 94
Germany 1,042 159 572 103
Ireland 65 18 39 11
Israel 334 154 545 36
Italy 518 59 104 87
Netherlands 409 86 117 40
Norway 120 27 32 8
Spain 421 83 80 60
Sweden 408 115 301 41
Switzerland 346 104 230 47
United Kingdom 979 246 275 110
BayArea 380 214 199 13

The total number of LS companies analyzed in the new report is 10,737, across 14 European countries and Israel. The greatest concentration is in Germany at 1,876, closely followed by the UK at 1,610 and France at 1,112.
Source: www.biotechgate.com

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 social market model or French-style centralistic planning (not forgetting the existence of the Euro currency block, which doesn't include all European countries).

On the other hand, Europe offers exciting opportunities for life sciences companies from North America and Asia. Besides being the second largest market for high margin drugs and medical devices thanks to a well-established public healthcare a system, the very large European life sciences industry and the region's many top-rated universities offer fertile ground for greenfield investments, collaboration and acquisitions.

A New Report

In order to help decision-makers in multinational life sciences companies better understand the complexity of the European Life Sciences Landscape, KPMG Switzerland, in collaboration with Venture Valuation, has released its 2015 Report on “Site Selection for Life Sciences Companies in Europe," which offers facts and figures for international companies looking to expand, restructure or consolidate their activities in Europe.

Country Biotechnology Medtech Pharma Total
Belgium 15,000 5,000 40,000 60,000
France 11,000 40,000 95,000 146,000
Germany 37,000 100,000 110,000 247,000
Ireland 6,000 9,000 12,000 27,000
Netherlands 8,000 9,500 9,000 26,500
Switzerland 20,000 45,000 40,000 105,000
United Kingdom 30,000 71,000 73,000 174,000

The country with the most life sciences employees is Germany (247,000), followed by the UK (174,000) then France (146,000). This distribution is similar for all three sectors. As a percentage of the total population, Switzerland has the highest number of employees.
Source: Venture Valuation estimates, 2015

The report compares seven European countries (Belgium, France, Germany, Netherlands, Ireland, Switzerland and the UK) with strong clusters and/or important attractiveness to foreign direct investors (FDIs) due to how they support life sciences companies in:

  • strengthening their capabilities by collaborating with peers and universities for various activities such as R&D, supply chain and marketing through clusters of life sciences companies
  • improvingtheir agility to react quickly to changing market environments, client needs, regulations and technologies
  • increasing their values by benefiting from tax planning and incentive models.
In terms of total financing (public and private) in 2014, UK companies raised the most at almost US$3 billion, while the Netherlands and Ireland came in second at around US$1 billion each. To give an idea of scale, while California's Bay Area raised US$10 billion in 2014, the whole of Europe raised just short of this.
Source: Venture Valuation, 2015

The report's key findings:

In total there are roughly 11,000 life sciences companies (biotech, pharma, medtech) across 14 European countries and Israel.

The largest concentration of life sciences companies can be found in Germany, the UK and France. Germany leads in medtech, while the UK is the leader in pharma and in biotherapeutics.

Country R&D
(% of all)
Manufacturing
(% of all)
Research on
Contract Basis
(% of all)
Austria 91 (54%) 49 (29%) 16 (10%)
Belgium 170 (32%) 308 (59%) 41 (8%)
Denmark 125 (45%) 100 (36%) 28 (10%)
Finland 55 (42%) 55 (42%) 21 (16%)
France 523 (47%) 479 (43%) 149 (13%)
Germany 696 (37%) 995 (53%) 178 (9%)
Ireland 72 (54%) 68 (51%) 6 (5%)
Israel 476 (45%) 485 (45%) 24 (2%)
Italy 365 (48%) 418 (54%) 39 (5%)
Netherlands 273 (42%) 254 (39%) 71 (11%)
Norway 85 (45%) 67 (36%) 7 (4%)
Spain 329 (51%) 269 (42%) 43 (7%)
Sweden 388 (45%) 411 (48%) 68 (8%)
Switzerland 323 (45%) 327 (45%) 55 (8%)
United Kingdom 652 (40%) 561 (35%) 196 (12%)
Total 4,623 (43%) 4,846 (45%) 942 (9%)
Bay Area 448 (76%) 211 (36%) 22 (4%)

A breakdown of the main activities of life sciences companies across Europe shows that about 43 percent of companies engage in R&D in their respective countries. Country concentrations range from 54 percent in Austria and Ireland to 32 percent in Belgium. Meanwhile, 45 percent of companies have a manufacturing focus, with national concentrations ranging from 59 percent in Belgium to 29 percent in Austria.
Source: www.biotechgate.com

Switzerland is the leader in workforce in the life sciences industry relative to the size of its population.

In terms of FDI, the UK clearly leads the group with 37 regional HQs of foreign-owned life sciences multinationals, but other smaller countries such as the Netherlands, Belgium and Switzerland are equally attractive when taking into account the size of their respective economies.

The UK has the largest number of top-ranked universities (8). Compared to the size of the population, however, Switzerland, the Netherlands and Belgium (each with 4) rate better.

Switzerland is rated the most innovative country in Europe followed by Germany, Belgium and the Netherlands. (This finding was reinforced last week by Swiss business school IMD, whose second annual World Talent Report rated Switzerland No. 1 in in developing, attracting and retaining talent to satisfy corporate needs.)

Key business environment factors which influence the agility of a life sciences company include flexibility of labor laws and ease in 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 sciences 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. 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:

  • The UK and Switzerland currently clearly stand out from the rest of the countries in regards to attractiveness for regional HQs, complex manufacturing and R&D centers. 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 attractive tax and incentive systems. However, they lack a truly sizable life sciences industry such as Switzerland’s. 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.
Country Global Headquarters of Domestic LS Companies Main Activities in Addition to HQ Activities Regioinal Headquarters of Foreign Owned LS Companies Main Activities in Addition to HQ activities
Belgium 36 Manufacturing 67% 23 Manufacturing 78%
France 112 R&D/Manufacturing 63% 25 Manufacturing 84%
Germany 158 Manufacturing 77% 25 Manufacturing 76%
Ireland 29 Manufacturing 59% 6 Supply / Distribution and Manufacturing 83%
Netherlands 46 Manufacturing 72% 17 Supply / Distribution 82%
Switzerland 97 Manufacturing 68% 22 Supply / Distribution 64%
United Kingdom 146 Manufacturing 53% 37 R&D 54%
Total 624 Manufacturing 66% 155 Supply / Distribution 66%
Bay Area 110 Manufacturing 49% 6 Manufacturing (83%)

Germany and the UK have the highest number of global HQs of domestic life sciences companies, followed by France and Switzerland. The number of regional HQs of foreign-owned life sciences companies is highest in the UK (37). More than 50 percent of the global HQs also undertake manufacturing in the country where they are based. In France, R&D and manufacturing are equal at around 63 percent.
Source: www.biotechgate.com
  • Germany and France have large life sciences clusters, but their business and tax environments are not flexible enough for many fast-growing overseas life sciences companies.
  • Pure tax considerations will not be sustainable in the future. BEPS requirements will force companies to align profits, risks and activities with qualified substance. This might provide for opportunities for countries such as France and Germany, if they are able to offer more flexible business conditions.
A first step towards analyzing a location is to compare the ordinary corporate tax rates of each country applicable to general business activities. Reasonable taxation of IP income from patents, technology or trademarks is an important consideration for life sciences companies that own mature income-producing IP. Trading income is also taxed at a lower level in some countries such as Ireland and Switzerland, whereas in other countries trading income is generally subject to ordinary taxation.
  • The UK and Switzerland will have to battle to maintain taxes at competitive levels while keeping salaries under control and reducing political uncertainties.

A New Approach

Defining where to set up a European HQ, an acquisition vehicle, an R&D center or a manufacturing plant should be based on a detailed analysis of the value drivers and the goals company leaders want to be achieve by entering or expanding in Europe. While certain projects involving a presence in Europe are focusing on strengthening innovation or gaining market access, others are geared towards improving processes and organizational structure (which can lead, for example, to lower effective tax rates).

The authors of the report suggest first assessing the value drivers with regard to their contribution for general profit generation or for reaching the goals of an expansion project, and then dividing them into key value drivers and secondary value drivers. The different locations in play should then be compared with regard to their capacity to host these key value drivers.

Key value drivers of specific importance for the life sciences industry are research and development, operational excellence, sales and marketing, and manufacturing. Depending on the project, each value driver is differently weighted, and different locations might prove to be ideal for (re)locating these value drivers.


André Guedel, Head Sales and Business Development TAX for KPMG Switzerland, is an economist with extensive experiences in site selection and site promotion. He heads KPMG Switzerland activities for regional HQs of multinational companies in Switzerland, and regularly advises companies on their expansion activities to Europe.


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The Site Selection Life Sciences Report features exclusive and in-depth reporting and analysis on the most important life science projects and issues. Topics covered include pharmaceutical R&D and manufacturing, biotechnology, medical device manufacturing, health-care services facility trends, clinical research and other key life science sectors.


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