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UK Pharma in the M&A Crosshairs

Authored by Karl Simpson

22/07/2014

Deal or No Deal? This seems to be the game being played out in the UK pharmaceutical industry this year. With global life sciences M&A exceeding $300bn in 2014, UK and Irish companies have attracted particular acquisitive interest from their US rivals as taxation incentives have fuelled transactions.

The two major stories of the year centre on AstraZeneca and Shire. At time of writing, AstraZeneca has wriggled free of Pfizer’s talons but Shire seems increasingly likely to fall prey to the ambitions of Chicago based AbbVie, who last year emerged from the split of the previously known Abbott Laboratories. AbbVie has finally got agreement from Shire’s Board on the latest proposal of $53bn and they are presently combing through the books to make sure this offer can be made formally to Shire’s investors. No doubt, Shire’s Board, led by investment banker Chairman, Susan Klisby, is negotiating break-off terms in the event that legislative or legal issues surrounding the tax structure of the deal become insurmountable for AbbVie.

AbbVie’s interest is not solely aligned to tax inversion, they also want to begin to replace the revenue loss that will be incurred by the patent loss of Humira in 2016, a drug which currently sells $11bn annually and has been a growth driver for AbbVie. Ironically, AbbVie came to acquire Humira after it acquired BASF Bioresearch Center in Massachusetts, which at the time was in a co-development deal with Cambridge, UK based Cambridge Antibody Technology, which later became part of Medimmune.  This company is now part of AstraZeneca, and its drug pipeline was a major factor in shielding AZ from a well-publicised acquisition approach by Pfizer in recent weeks.

AstraZeneca, was however, successful in its defence of independence. The company, currently going through somewhat of a transformation under CEO Pascal Soriot, managed to garner sufficient investor support and provoke political pressure to give its robust defence a chance. Dimensions Shire has been unable to muster.

In part, Shire is not able to leverage the political capital in the UK to bring this defence. It chose to abandon the UK and set up in Ireland while being incorporated and registered for tax in Jersey. It also has disseminated its workforce over multiple hubs, transitioning many jobs to the US or Switzerland in recent years. Whereas AstraZeneca in the UK still has a research and development jobs base, which means scientific skills, something the UK government is very much using as part of their growth and prosperity plan. One year ahead of the general election, they were never going to watch the possible deconstruction of an important scientific industrial flag-bearer like AstraZeneca. It is here the paths of AstraZeneca and Shire diverge most significantly.

It’s difficult to determine the true impact on the UK life sciences sector that these acquisitions might have. In one sense it shows the UK is capable of building successful and highly investable companies. On the other, it perhaps shows their limitations, usually being acquired not acquisitive – as Shire has been on its route to a $50bn+ valuation.

Shire’s loss as an independent company will invariably have direct ramifications for the UK and other biotech companies situated here. The scientific skill base in the UK is very deep, something which attracts many companies to form here, particularly around biotech clusters in Oxford or Cambridge. However, the business of biotech talent is one that needs to operate across international borders. The success of the UK sector depends upon the ability of UK companies to attract international talent and the prospect of continued acquisitions threatens to disrupt talent supply from overseas because of that very uncertainty.

Although AstraZeneca mounted a credible defence of independence, it has a certain challenge to execute on its broader plan of transitioning the company to the new site it has selected in Cambridge, UK. This will unquestionably demand new people, with leading skills and experience from high demand segments of the industry. Having been the subject of such public acquisition interest will only fuel greater uncertainty about AstraZeneca’s future and invariably make it harder to attract world-class talent from across Europe or the rest of the world.

Mergers and acquisitions, real or speculative, create significant emotional gyrations inside of the acquired and often the acquirer. At the point of acquisition announcement, employees become highly active in looking externally for other opportunities. Depending on the competence of the management and their ability to communicate quickly, clearly and transparently, this anxiety driven interest can dissipate as individuals begin to gain confidence about a potential future. However, as decisions get taken about integration and new structures, activity typically peaks once again, particularly where individually unfavourable.

Good leadership on the part of the acquired and acquirer can be fundamentally important in locking down the important talent. Mismanaged, and the talent flows freely towards the open market. In the context of deals like the AstraZeneca/Pfizer and Shire/AbbVie, the underlying message which emanates from a deal initiated for the purpose of tax savings, perhaps doesn’t communicate to the acquired workforce that they’re a large part of the value in the deal. AbbVie’s handling of Shire, if it completes, will perhaps give us more evidence of this impact.

There are many arguments about the merits of M&A in pharma and biotech but clearly companies can find value in deal making, like AbbVie did with Humira, and as Gilead is finding with PharmaAsset. It can also lead to a stronger future for both companies. Yet, this rather targeted focus on the UK and Ireland for ‘compatible’ companies has a more significant impact that needs to be truly examined. Political intervention is seemingly selective on both sides of the Atlantic, but from a UK biotech perspective, some joined up thinking is required otherwise the UK might just lose its shiniest jewels.

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