Developments in Industrial Automation

Rapid developments in technology have always permeated the manufacturing industry. In the late 19th century, the First Industrial Revolution took place, replacing cumbersome hand production methods through the leverage of steam-enabled machines. Just prior to World War I, the Second Industrial Revolution manifested, marking the electrification of machinery. The Third Industrial Revolution, commonly known as the Digital Revolution, took hold in the 1980s, applying computer processing to production processes. Currently, manufacturing is entering the Fourth Industrial Revolution, also known as “Industry 4.0.” Industry 4.0 is being shaped and defined by artificial intelligence, machine learning, blockchain, the Industrial Internet of Things, and cloud computing, among other 21st century technological marvels.

Some of the technologies mentioned above have been around for a decade or more. However, they are just now exiting their nascent, developmental stage and being harnessed at a commercial level. Accountable to greater reliability and lower cost, the technologies are ready to be used in a widespread and scalable way, changing how manufacturers conduct business. These advancements in technology will help them deliver value-added products cheaper, faster, and of higher quality than ever before.

To harness the power of modern-day computing, manufacturing industry leaders are partnering with technology companies to develop software and products that will create “smart factories,” highly digitized and connected production facilities. However, a recent study published by Intel suggests that software alone will not suffice to create these smart factories.  Employees will need to be trained and equipped with the right skills to handle new technologies, and legacy systems will need updating or replacement to achieve seamless integration.

Manufacturers have much to gain from such investments. On a micro-level, the main benefits of the smart factory model are the elimination of labor-intensive jobs and mundane tasks, allowing manufacturers to realize operational efficiencies and reallocate their resources to higher-priority, higher-value-add tasks. Additional benefits include an ability to mitigate injuries and fatalities in dangerous working environments, significantly improving the health and safety of workers. On a macro-level, the potential benefits are endless. The cost of doing business across nearly every industry will fall, boosting economic growth. Global trade will expand, creating opportunities for people worldwide to provide and receive products and services from all parts of the globe.

In fact, some manufacturers will likely fear that employees will not be able to adapt to the new technologies apace. However, using previous Industrial Revolutions as a proxy, humans tend to find a way to sift through the intricacies of new technologies and harness them to the greater benefit. Industry 4.0 will likely prove no different.

Sources:
https://www.intel.com/content/www/us/en/industrial-automation/overview.html
https://www.pwc.com/gx/en/industries/industries-4.0/landing-page/industry-4.0-building-your-digital-enterprise-april-2016.pdf
https://www.mckinsey.com/business-functions/operations/our-insights/manufacturings-next-act

 

Augmented Reality

While fairly established in some arenas already (e.g., the military, entertainment industry) brands and retailers are increasingly adopting augmented reality (“AR”) as a means of engaging with their customers. AR is a technology through which a view of a real-time, physical environment is “augmented” with digital information (typically visual or auditory, though other senses can be engaged too).  In layman’s terms, a consumer directs his/her smart phone at a product on the shelf, and through an app, certain images trigger the AR presentation on the smart phone.  The AR content can range from presenting a product tutorial, to allowing one to “see” inside the box, to communicating information on product options or upgrades, to simply conveying an entertaining brand “story” (regarding the latter point, check out 19 Crimes – an Aussie wine company).

With their traditional brick and mortar models under assault, retailers are simultaneously attempting to improve their in-store experience while simultaneously catching up on eCommerce capabilities. Similar to pure eCommerce players leveraging pop-up shops to address the loneliness of online shopping, brick and mortar retailers can utilize AR to close the gap from the opposite end of the spectrum.

Unlike virtual reality (“VR”), a cousin of AR which is self-contained, AR operates at the intersection of the real and perceived worlds (the consumer is physically in a store and making real-time decisions based on a number of physical and digital influencers).  For retailers and brands, AR has the potential to significantly improve their understanding of the consumer journey and behavior, particularly when connected to loyalty or incentive programs and/or married to existing in-store video cameras or tracing systems.

Examples of questions/topics that AR can help address are:

  • Did AR aid in the discovery of the product (e.g., did the consumer see or hear another consumer engaging through AR)?
  • How did the consumer engage with the product on the shelf (e.g., did they view or listen to the whole AR presentation)?
  • Was the consumer more or less prone to engaging with sales staff or other consumers while utilizing AR?
  • Was the customer more likely to buy the product after absorbing and processing the AR content?
  • Where in the store was the consumer prior to, and after, engaging with the product through AR?
  • Was the consumer more or less likely to promote the product, brand or retailer through social media (enabled real time through AR) or opt into email communication?

So the next time you’re wandering an aisle, with purpose or not, educate and entertain yourself with a dose of AR! It could be how we all shop in the not-too-distance future!

Tuition Reimbursement Programs and Policy at a Glance

The decision to pursue a higher education degree has become increasingly difficult as tuition costs continue to rise. The average cost of a bachelor’s degree is over $25,000 per year, which reflects a compounded annual growth rate of 5.5% over the last 30 years*. To help ease the financial burden of higher education, many companies offer tuition reimbursement programs to employees as a supplement to their existing benefit packages.

What’s in it for Employers?
The benefit to the employee is obvious, but you may find yourself wondering why employers would be willing to foot the bill for employee-education expenses. Like other benefits, tuition reimbursement programs help attract and retain top-tier talent. Studies have shown that employer-provided education benefits have a positive impact on a company’s bottom line. These perks not only reduce the costs to fill open positions, but research also suggests that participants in these programs earn promotions more frequently and employee turnover among participants is lower. Young professionals motivated to pay off student debt are incented to both perform and maintain their positions due to this desirable benefit. In such instances, it is fair to say the tuition reimbursement program is a win-win for everyone!

Tax Benefits for Companies
Generally, employer-provided benefits are subject to income taxes. However, when it comes to tuition reimbursement, the Internal Revenue Code of 1986 exempts up to $5,250 per employee of education expenses covered by the employer. Companies incurring such expenses on behalf of their employees can treat the cost as a business expense as opposed to wages, which therefore, are not subject to payroll taxes. As a result, hundreds of companies are now offering student loan repayment programs in some form. Out of this growing trend, new companies have emerged that develop various programs for client businesses. Gradifi, a Boston-based firm, provides student loan repayment and refinancing programs. The company believes that its platform and programs provide a better match between the benefits offered and those desired by young professionals.

Upward Mobility Enhancement Act
Interestingly, the $5,250 tax-free cap has remained constant for more than 30 years. Meanwhile, tuition costs have sky rocketed! In response to this dichotomy, U.S. Senators Catherine Cortez Masto and Jeff Flake introduced the Upward Mobility Enhancement Act in 2018, which aims to modernize this tax loophole by enhancing the tuition reimbursement benefit to employees. The bill intends to raise the tax-exempt cap to $11,500 and incorporate an inflationary index mechanism to allow for future increases to the cap. Though the Upward Mobility Enhancement Act was not addressed when Congress passed the Tax Cuts and Jobs Act in December 2017, there is speculation it will be a priority in the 2018 Tax Reform 2.0, particularly due to the initial level of bipartisan support for the bill. While the final result remains to be determined, MHT Partners, a leading education investment bank, makes it our goal to remain abreast of trends and changes in the education landscape, from the influences of the broader political and economic markets to new products and services. Stay tuned for more insights from our team on our Learning Curves blog!

Source: Based on the total cost of education for four-year institutions, including tuition, fees, room and board from 1984 through 2014, as provided by the National Center for Education Statistics

Lifesaving Therapies and Eye-catching Returns in the CRO Market

On average, pharmaceutical companies spend $2.6 billion over the course of 10 years to develop a single new drug. That equates to over $115 billion invested in the 46 novel drugs approved by the FDA in 2017—not to mention the 90%+ of therapeutics that never advance further than clinical trials.

With such astronomic costs looming over the industry, it’s no surprise that pharma companies are doing whatever they can to make R&D processes as efficient as possible. The need to cut costs and optimize development has given birth to a number of ancillary industries, from specialized PR firms to outsourced drug manufacturers (“CMOs”). The value proposition is simple: provide the time and labor-intensive services necessary to take drugs across the finish line at a lower cost, while allowing pharmaceutical companies to focus on what they do best: developing lifesaving therapies.

Contract research organizations (“CROs”) constitute one of the largest industries to emerge from pharma’s mandate to lower costs. CROs design and conduct clinical (as well as pre-clinical and post-clinical) trials for the drugs in pharma firms’ pipelines, carrying out studies and analyzing the statistics that are imperative for FDA approval. CRO specialties run the gamut, from statistical analyses for Phase-I biologics development to Phase-III infectious disease trials. No matter where they sit in the arduous drug approval process, CROs create meaningful efficiencies throughout pharma firms’ product pipelines by bringing their clinical trial recruitment, management, and data analysis expertise to bear in the development of new drugs and therapies.

CROs’ value proposition is so compelling that in 2017 industry revenues approached nearly $20 billion in the U.S. alone. It should come as no surprise that investors have taken notice. Notably, high-profile deals have been closed successfully between both strategic and private equity (“PE”) buyers over the past several years, including Quintiles’ $9 billion merger with IMS Health in 2016 and Pamplona Capital’s $5.3 billion take-private of Parexel in 2017.

The thesis for consolidation among CROs is supported by efficiencies of scale, enhanced capabilities to better serve customers, and access to specific patient cohorts around the globe. Scale provides both operating benefits, like purchasing and administrative synergies, and an opportunity to consolidate vast amounts of institutional knowledge. For example, some CROs specialize in biostatistics for Phase-I oncology trials, while others design Phase-III trials for neurological conditions. If the CRO that works on neurological conditions runs trials for a major pharmaceutical company with a robust cancer drug pipeline, a merger with its oncology-focused counterpart may increase the oncology CRO’s chance of winning future contracts with the pharma company. Additionally, a merger may bolster the consolidated company’s competitive edge as best practices, such as data analytics capabilities and trial-optimization techniques, are shared.

One aspect of the CRO industry that has been particularly attractive to PE groups, is its significant fragmentation. While the six largest CROs have approximately 43% market share, the other 57% of the U.S. market consists of an estimated 3,919 firms, each of which serves pharma companies with unique expertise.

Many PE groups seek to employ a “buy-and-build” strategy in which they acquire a company in a fragmented industry as a “platform” and subsequently build the platform through acquisitions. These strategies can build capabilities, create market access, and diversify customer/trial sponsors in a cost-effective manner, allowing consolidating groups to rapidly build assets of scale in advance of an exit. As an example, Pharmaceutical Product Development (“PPD”) is the product of a successful buy-and-build strategy in the CRO market. After the company was acquired by the Carlyle Group and Hellman and Friedman for $3.6 billion in 2011, PPD purchased 6 companies in 5 years. In 2017, the group of PE buyers decided to double down on their investment, recapitalizing the company at a value of over $9 billion rather than taking it public (an alternative that the group originally considered). With returns like that, it is no wonder that PE firms continue to show strong interest in the space.

As CROs consider strategic alternatives or prospective M&A, it is imperative that owners/decision makers partner with healthcare services investment bankers who possess a deep knowledge of the healthcare industry to ensure that their business is positioned to maximize options and value for the seller. MHT Partners focuses on serving market leaders in the healthcare services industry. If you would like to learn more about MHT’s experience in the space, please e-mail Taylor Curtis (tcurtis@mhtpartners.com) or Alex Sauter (asauter@mhtpartners.com).

Sources:
“Cost to Develop New Pharmaceutical Drug Now Exceeds $2.5B,” Scientific American, November 2014.
FDA, “Novel Drug Approvals for 2017.”
“I Do Hate To Tell You This, But…” Science Translational Medicine, January 2017.
Ibisworld, Contract Research Organizations in the U.S., February 2018.
Ibid.
“PE-backed PPD valued at $9B in recap”, Pitchbook, April 2017.

Wine in a Can

You’ve probably never had a sommelier ask you if you’d like them to “crack one” for you….that could be changing.

Wine in a can is one of the fastest growing segments of the wine industry, and while still a relatively small market segment (~$2mm in 2012, $28 million in 2017), the space is exhibiting strong growth (up 54% for the 52 weeks ended 12/31/17) that speaks to its rapid ascendancy.  Much like the craft beer industry adopting cans (5 years ago less than 5% of craft beer was sold in a can, today that number is greater than 25%), the wine industry is following suit.  The demand for canned wine is so great that in California it is starting to surpass supply chain capabilities.  Limited thus far to smaller volume wineries such as Union Wine Co., the Constellation Brands of the world have yet to enter the fray….but likely will.

So what’s driving the rapid growth?   In a word, “millennials.”  Already fervent fans of vino, millenials bring different needs and preferences to the wine industry, an industry largely static for decades from a packaging perspective..

Offering a convenience factor much more conducive to fun, outdoor activities, a significantly smaller carbon footprint than glass, a lower price point, and aesthetically less “elite and stuffy” than the bottles their parents prefer, aluminum cans have much to offer millennials, America’s newest most influential generation.

And for those of you thinking “bigger” – wine on tap is also surging, another trend to watch in the wine industry in the coming years.  As an investment bank with deep consumer experience, MHT Partners looks forward to observing how these new food and beverage packaging trends unfold.

 

Source: Nielsen data

Growth in Online Higher Education

College graduates can all relate to classes taught in lecture halls with sometimes up to several hundred other students. Today, it is not uncommon to take at least one college course without ever meeting another classmate. The ubiquity of technology in education is transforming the way students learn but also the way that courses are taught. Particularly in higher education, the once non-traditional method of online learning is now part of a new norm.

From 2002 to 2016, the number of students enrolled in at least one distance education course increased from 1.6 to 6.3 million students. Recent growth rates in students taking courses online are impressive, as they come at a time when overall higher education enrollments have declined. A number of factors have influenced the growth in online post-secondary learning. Increases in tuition and living expenses have positively impacted online enrollments, as students seek affordable methods to earn degree credits. Online enrollments are also driven by students seeking flexible schedules and formats for courses and degrees. Increasingly, students enrolled in on-campus programs are also registering for hybrid to fully online courses throughout their academic career.

External factors, such as decreased funding combined with internal pressures to reduce costs and increase revenue, have caused many higher education institutions to turn to hybrid or fully online courses as a way to boost enrollment beyond their on-campus student bases. Currently, nearly 70% of distance learning courses are offered by public institutions, and the vast majority of enrollments, approximately 82%, are in undergraduate courses. While it is clear that leaders at these institutions foresee online education a critical part of their long-term strategy, these classes do not come without implementation and expansion challenges. A tension exists between academic leaders and faculty in the acceptance of online education and its effectiveness. Concerns exist whether online courses allow teachers to adequately motivate, discipline and retain students to help influence their success. Collectively, these concerns represent meaningful barriers to a fully digital post-secondary experience.

Distance learning, whether blended or fully online, is no longer a trend; it is here to stay. Over 31% of students in 2016 took at least one course online. To put this figure into context, the proportion of students taking at least one online course fifteen years ago was under 10%. With the value proposition of higher education in question, students will naturally look for ways to save on their degree. Distance learning courses, particularly for lower division courses which are the most transferrable credits, will remain the most easily accepted way to do so.

Data Source: Grade Increase: Tracking Distance Education in the United States, Babson Survey Research Group, 2018.