25th Annual Health Sciences Tax Conference

Transcription

1 25th Annual Health Sciences Tax Conference Impact of life sciences M&A activity on tax operations and compliance December 9, 2015

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Ray Imbrogno Sr. Director Tax Operations Pfizer Peapack, NJ Hadley Leach Ernst & Young LLP Boston, MA Joe Chirichella Sr. Tax Director Becton Dickinson and Company New York, NY Matthew Duncan Ernst & Young LLP San Jose, CA Kyle Harkrader Ernst & Young LLP Richmond, VA Page 3

4 Session objectives Overview of recent M&A trends in life sciences sector Discuss transaction scenarios and related challenges Tax functions face managing tax operations, compliance and reporting across the following dimensions: People/organization Process and controls Technology and data Critical success factors and insights related to application of leading practices to address key challenges Lessons learned in planning for day one readiness and beyond Page 4

5 Overview of recent M&A trends in life sciences sector Continued uptrend of transaction activity with closed deal value of $493b between Q and Q % of biopharmas are planning deals; more focus on larger deals M&A pipeline remains robust: 95% increase or steady, and outlook remains bullish Focus on expansion of global footprint Factors driving M&A mojo higher: Improve structural tax efficiencies and leverage regulatory/legislative opportunities Gain market share in existing markets and move into new geographic markets Recognize that both firepower and credit availability continue to be strong Focus on portfolio rationalization drives innovative deals Capitalize on synergies/reduced costs and improve margins Page 5

6 Summary of M&A in life sciences sector Closed deal dollar amounts Q to Q In the period from Q to Q3 2015, the total value of closed deals amounts to US$493b. Total closed deal value by industry sector in US$m (Q to Q3 2015) 2015 Q Q Q Q Q Q Q1 0 20,000 40,000 60,000 80, , , , ,000 Biotech Health research and testing Medical devices Pharmaceuticals Deal value (US$m) 2014 Q Q Q Q Q Q Q3 Biotech 3,063 9,246 21,295 4,223 10,497 9,042 2,741 Health research and testing 123 1, , Medical devices 8,452 65,150 4,223 19,834 4,909 2,673 1,875 Pharmaceuticals 52,846 62,923 17,928 90,244 68,293 15,310 9,002 Total 64, ,402 43, ,559 83,908 27,467 13,999 Page 6

7 Summary of M&A in life sciences sector Number of closed deals Q to Q In the period from Q to Q3 2015, the total volume of closed deals was 2,274. Total closed deal volume by industry sector (Q to Q3 2015) 2015 Q Q Q Q Q Q Q Biotech Health research and testing Medical devices Pharmaceuticals Deal volume 2014 Q Q Q Q Q Q Q3 Biotech Health research and testing Medical devices Pharmaceuticals Total Page 7

8 M&A and tax functions The challenge based on past experiences, tax leaders have described the impact of M&A on tax functions as: Exciting interesting tax technical issues and opportunities to create value for the company Frustrating well-established protocols and relationships change overnight Increasing risk different standards of quality as well as tax planning strategies require new approaches Overwhelming short-year returns, multiple filings and other activities create short-term inefficiencies or increased workloads The strategy since change along many fronts is required, it is also an opportunity to redesign. Take a fresh look and take advantage of superior practices from each organization Accelerate change since the organization as a whole must change Page 8

9 Tax operating dimensions Considerations for M&A transactions Successful and sustainable management of tax operations must focus on seven key components. Deliver effective and efficient processes in the right location Establish comprehensive controls and governance framework Execution layer Establish a global framework for policies and controls to support global governance and risk management Policy and controls Process and controls Establish a global performance measurement framework Deliver continuous improvement of service levels Performance measurement Organization layer Structure the organization to deliver value to the business Define appropriate local, regional and global structures, including shared services and outsourcing Organization and location Use physical locations of operations to optimize performance Consider real estate and other facilities aspects Resource layer Ensure availability of reliable taxsensitized data at every point in the tax life cycle Data People Technology Define tax technology road map to support short- and longer-term objectives Build an organization with the right resources with the right skills in the right locations, with effective use of external advisors Page 9

10 Case study #1: acquisition to expand portfolio and global footprint Technology Key challenges The acquirer and target have multiple enterprise resource planning (ERP) systems, with the target s systems lacking legal entity detail, necessitating an interim strategy to obtain reliable legal entity data for tax reporting and compliance prior to broader system integration. Acquirer and target are using different technologies for tax compliance, tax provision and indirect tax determinations. There is an immediate need to perform gap/fit for tax technologies. The acquirer is using three different systems for document management with disparate levels of workflow functionality, and target does not have a document management system. Approach and considerations for addressing challenges Team with IT to develop data strategy to ensure necessary support of data meets requirements for tax reporting, compliance and audit milestones Evaluate opportunities to optimize the use of tax technologies and make improvements as part of integration efforts Critical success factors Effective partnering with IT and Finance Continuously improve efficiency and cost effectiveness while integrating tax requirements into finance data and processes Page 10

11 Case study #1: acquisition to expand portfolio and global footprint Process and controls Key challenges Target s non-us tax provisions are prepared by local country controllers who have limited knowledge of ASC 740. There is an overall lack of process and data source documentation related to tax reporting and compliance processes. Q3 financial reporting is due three weeks after the transaction close. Approach and considerations for addressing challenges Develop detailed checklists to support Tax and Finance for each milestone (quarters and financial close) Develop detailed processes and controls for post-transaction close quarterly and annual provision, including the identification of sources of information, financial systems and communication of roles/responsibilities for each milestone Critical success factors Invest time before the transaction close to analyze tax and business processes and facilitate best practices for the combined tax function Page 11

12 Case study #2: spin off of non-core business with planned initial public offering (IPO) People and organization Key challenges Set up new tax function and determine future-state operating model, including number of full-time equivalents (FTEs) and necessary budget to support Spin Co. Evaluate highest and best use of external advisors to support transition in interim and longer term Approach and considerations for addressing challenges Parent takes proactive role in helping to design operating model, processes and controls for Spin Co., and pressure-tests cost benefit of future tax operating model and sourcing strategies Critically evaluate spans of controls, roles and responsibilities, and reporting lines to right-size and implement optimal tax sourcing model to support day one readiness, day two and beyond Critical success factors Effective use of Transition Services Agreements (TSAs) Early identification of leadership for Spin Co. Page 12

13 Case study #2: spin off of non-core business with planned IPO Technology Key challenges Need to carve out financial systems and data and convert from legacy parent s financial systems to new Spin Co. systems Separate process and technologies to support full life cycle of tax compliance, reporting and audit Approach and considerations for addressing challenges Proactively assess current systems and architecture, and team with IT to develop interim and longer term tax technology plan for source data and tax technology tools Evaluate, select, implement and optimize technology tools, processes, workflow and controls for tax provision, tax compliance, document management and workflow Critical success factors Build business case to support investments and resources by Tax for system transition and migration Team effectively with Finance and IT Page 13

14 Case study #2: spin off of non-core business with planned IPO Process and controls Key challenges Immediate need to develop and rationalize process and controls for Spin Co. Approach and considerations for addressing challenges Team with stakeholders to develop comprehensive TSA to provide guidance on timing and level of support to be provided by Parent Co. Develop detailed procedures to support quarterly and annual compliance milestones that are aligned with rationalized controls for the Spin Co. Establish materiality standards and control governance framework Develop key performance metrics to measure progress and success Critical success factors Active engagement of key stakeholders outside of Tax Page 14

15 Lessons learned for day one readiness and beyond Plan and develop formal integration work plan, and actively manage/monitor the transition Identify, document and communicate transition issues, key risks, dependencies and interdependencies Develop and communicate resource plan to satisfy interim and longerterm tax functional requirements and responsibilities Actively participate in cross-functional integration project team activities with dedicated resource(s) Assess, define and communicate future-state tax operating model, roles and responsibilities, and sourcing of tax activities/work early in the transition process Use this event as a catalyst/platform for change and improvement to address any legacy process, system, organizational issues and challenges Page 15

16 Appendix Page 16

17 Challenges related to managing tax operations questions for panelists How do tax functions establish a foundation to deal with serial M&A vs. discrete one-off transactions? How do you effectively manage dependencies with Finance and IT? What was the approach and methodology for addressing challenges and risks? What are the critical success factors for effectively addressing tax operational challenges associated with transactions? Page 17

18 Day one readiness and beyond Organizational design and realignment Evaluate operations and co-develop optimal organization model for the combined enterprise Assist with analysis of build vs. buy alternatives, as appropriate Rationalize interim and longer-term staffing of tax function Assist with assessment of tax staffing requirements and roles and responsibilities for combined tax organization Build road map and transition plan for future-state tax organization Share, co-develop and implement tax performance metrics Loan staffing or selective outsourcing Evaluate interim and longer-term staffing needs and requirements for the combined enterprise Provide saleable staffing solution, satisfying both immediate and longer-term needs Outsource certain tax activities or tax functions for domestic and/or foreign operations Apply service provider s tax process, tools and technology know-how Process optimization and integration Analyze tax and business processes and facilitate integrating best practices for the combined tax function Redesign, streamline and automate tax processes to improve operational efficiency and effectiveness Identify quick hits improvements Align tax resources to key tax drivers of tax liability and risk, and redeploy resources to advisory services System optimization and integration Assess current systems and architecture, including transition/migration plans that impact the integrated tax function Co-develop interim and longer-range tax technology plan Develop technology integration and transition plans and provide project management assistance, as appropriate Build business case for investments and resources required by Tax for the system transition/migration Develop document gathering and management approach covering electronic and non-electronic records and content identification Assist with optimization of systems and use of technology improving data collection, storage and retrieval of tax information, and automation of tax processes Page 18

19 Benefits of a successful integration Alignment with the company s integration strategy Monitor and incorporate changes in tax operations required from other workstreams inside Tax or from critical non-tax workstreams (e.g., Finance, IT, HR) Risk mitigation Document and maintain inventory of tax filings, processes, controls, technologies, data and resource needs Proactively identify and define data and technology requirements to be addressed through financial and tax systems Secure budgets and resource needs to support the new structure and business operations Increased efficiencies Identify opportunities to streamline disparate and unique processes into a single integrated process Identify opportunities to leverage ERP functionality to enable direct access to tax data for the future operating model tax function Page 19

20 Questions? Page 20

21 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved ED None