Marketplace Intelligence: Life Sciences
Richard Woolley -
The life sciences sector enjoyed mixed fortunes over the past year. A marked increase in M&A among pharmaceutical companies was accompanied by lack of investment and, in some cases, insolvency in biotechnology companies.
The optimistic expansion of innovative drug producers played out against a backdrop of patent expirations that could spell huge losses in revenue in coming years. And the viability of multinational life sciences companies’ expansion into some emerging markets was complicated by stringent new regulations.
Despite an uneven year and an uncertain future for some clients, the lawyers in this edition have not seen a drop-off in the demand for their services as companies roll out strategic plans for growth and development. The majority of firms are adding to their bench strength with several expanding their presence in emerging jurisdictions in preparation for the future.
Transactions
When the last edition of this book was published in 2008 the life sciences sector was entering a period of lucrative and high-profile consolidation. The first quarter of 2009 saw mergers between Pfizer and Wyeth (worth $68 billion), Roche and Genentech ($47 billion) and Merck & Co and Schering Plough ($41 billion), which pushed the total disclosed value of deals conducted between summer 2008 and spring 2009 up to $226.2 billion, a 185 per cent increase on the same period in 2007-08 according to KPMG. Many of the lawyers we consulted welcomed these big-ticket deals and were confident about the future, with consolidations and agreements between large clients expected to create more work.
This period also saw financial institutions take a back seat to pharmaceutical companies when it came to investment in biotechnology groups as the financial crisis took its toll. The level of equity financing available for biotech companies fell steadily over the course of 2008 and made the prospect of consolidation with financially secure pharma companies more attractive. “Licensing deals have been extremely popular in 2009,” according to Cheryl Reicin of Torys LLP in New York, “and while the later these deals take place the better it is for biotech companies, there has been a trend to license earlier with the drop-off in venture financing.” The transactional lawyers we consulted saw a great deal of M&A activity over the course of 2009 and many see the trend continuing through 2010. “There will be a lot more M&A going forward,” according to one source, as “the Big Pharma companies have a lot of spending power and they are on the lookout for new products”.
IP
Last year, patents expired on blockbuster drugs (such as GlaxoSmithKline’s Valtrex), a trend that will gather pace dramatically over the next five years with several top-selling drugs going off-patent. This is another factor driving the increase in consolidation between small and medium-sized biotechs and innovative pharma companies looking to restock their pipelines. With several cash-strapped biotechs becoming absorbed and many others facing bankruptcy (Reuters reported ten Chapter 11 filings among biotech companies between November 2008 and March 2009) life sciences lawyers are seeing a contraction in the marketplace, even as companies grow in size. “There are fewer and fewer companies and law firms are focusing their efforts on smaller sets of clients,” according to Steve Scheve at Baker Botts in Houston. As a result, some lawyers expect there to be more competition for contracts with prominent clients among law firms as the trend towards consolidation continues.
Regulatory
Another effect of this trend is the increasing global reach of major life sciences companies. For example, at the time of its merger with Merck, 70 per cent of Schering Plough’s revenue came from outside the United States, allowing Merck access to several new markets. Life sciences lawyers with a range of different backgrounds are also seeing their work take on a more international flavour. “IP is becoming more international due to the size of companies,” says Giovanni Galimberti in the Milan offices of Bird & Bird, “and we are now helping companies devise strategies regarding the entire EU.” At Sidley Austin LLP in Illinois, Sara Gourley notes that: “Without question, litigation is becoming a lot more global: in 2008 I was dealing mostly with the US, Canada and the EU, but now my work goes far beyond this.” International law firms are benefiting from the expansion of Big Pharma and many are increasing their coverage in key jurisdictions with new offices and strategic alliances with local firms.
The expansion of major life sciences companies coincides with the rise in prominence of emerging markets such as China, where many lawyers expect to see work in the future. “China is going to play an increasing part in global life sciences in the future,” says Sara Gourley, “the whole Asia-Pacific region is opening up and a lot of law firms are building practices there.” Bird & Bird and Covington & Burling LLP have both opened new offices in China since 2008, while Sidley added a senior life sciences counsel to its team in Shanghai.
The number of major clients entering China has prompted lawyers to closely engage with the current wave of regulatory changes being enacted in the country as part of its 2009 health-care reforms. A major concern for pharmaceutical companies is the stricter regulation of the pricing of medical systems and medicines that could see them lose revenue, as well as closer government supervision of pharma companies and retailers. Regulatory lawyers who can assist companies in their compliance with this legislation will see greater demand for their services as China continues its rise.
Innovative pharmaceutical companies have also encountered regulatory scrutiny in Europe. The European Commission’s pharmaceutical sector inquiry, which concluded in July 2009, focused primarily on the antitrust concerns raised by the methods, such as defensive patent strategies, supposedly taken by innovative drug producers to prevent generic drugs entering the market. As a result, the legal departments of several pharmaceutical companies were raided by the EC on suspicion of competition infringements. “The Commission’s inquiry caused a lot of clients to ask for advice on best practice,” notes Mark Hodgson of Howrey LLP in London, and a number of lawyers across Europe specialising in IP and regulatory law are witnessing the same trend, with many predicting their competition benches will grow in 2010.
Speaking in November at Global Competition Review’s 2009 competition law review conference in Brussels, Commissioner J Thomas Rosch of the US Federal Trade Commission commented on merger regulation under the Obama administration: “The agency’s merger enforcement efforts remain active despite a sagging economy and […] the agency is not gun-shy about going to court to block anti-competitive measures.” Rosch added that the FTC staff responsible for health-care mergers had been “particularly busy” since the agency’s new chairman was appointed in March 2009. Lawyers in the US reported an expansion in demand for regulatory and competition advice among clients, particularly at a time when companies are increasingly turning to mergers to ensure future stability.
Product Liability
March 2009 also saw the US Supreme Court deliver its verdict on the case of Wyeth v Levine, finding in favour of the plaintiff Diane Levine, who lost her arm to gangrene after being injected with Wyeth’s anti-nausea drug Phenergan. Wyeth was held liable for not adequately warning users about potential risks, despite the US Food and Drug Administration’s (FDA) approval of the product’s labelling. The decision rejects the concept of “pre-emption”, which held that federal regulatory laws on certain products pre-empted tort claims in state courts and effectively shielded drug developers from claims brought against FDA-approved drugs. This ruling is likely to prompt an increase in patient lawsuits against drug developers in the US by opening the floodgates to cases from the country’s highly developed plaintiffs’ bar, and many of the lawyers in this edition are expecting a decisive upturn in advisory work and court time.
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The first few weeks of 2010 have already justified Mark Hodgson’s claim that life sciences patent disputes are “as busy as ever”. Before the year was a week old, biopharma company Cephalon confirmed that it was suing Watson Pharmaceuticals over the latter’s plan to create a generic version sleep disorder drug Nuvigil, while Eli Lilly was revealed to be in a patent fight with APP Pharmaceuticals LLC over a generic version of chemotherapy drug Gemzar. “It is sometimes said that patent disputes are recession-proof,” says Hodgson, “and certainly while the downturn may have seen less demand for opinion and advice work, companies usually cannot afford not to defend their patents, even in difficult economic times.” This rings true for the IP and disputes lawyers we consulted, several of whom have patent matters coming to trial in 2010.
As the global markets chart a tentative course in the wake of the recession, investor confidence is returning and financing conditions for life sciences companies are looking healthier. According to a recent survey by Ernst & Young, senior executives at life sciences companies are expecting the industry to perform well this year. The majority predict that current transaction levels will continue, with 77 per cent expecting consolidation to accelerate and 64 per cent saying they would take advantage of any deal opportunities that arise. While this is good news for transactional lawyers who are expecting more work, many are mindful of the increasingly complex regulatory environment in key jurisdictions like China, Europe and the US. Regulatory lawyers predict that the ability of a company to respond quickly to a transactional opportunity will be contingent on effective compliance, and watertight regulatory advice will consequently be valued highly moving forward.
According to industry journal Drug Topics, Pfizer, AstraZeneca, Merck, Johnson & Johnson, Boehringer Ingelheim/Astella and Wyeth will all see blockbuster drugs go off-patent in 2010. And while the trend towards consolidation is expected to produce new innovative drugs and help sustain revenue among these companies, lawyers and commentators in the US are concerned that the Wyeth v Levine ruling could hamper innovation. The day after the Wyeth ruling was handed down, the Wall Street Journal ran an article describing it as a “dream come true for the plaintiffs’ bar” now that FDA approval does not provide protection against lawsuits. While this is bad news for pharma companies and could slow the production of innovative drugs as companies become more conscious of safety issues, it will create a greater demand for product liability expertise and lawyers specialising in this area will see a robust flow of work for the foreseeable future.
Lawyers and their clients in the life sciences sector were spared the worst effects of the downturn and the prevailing mood among our sources is one of optimism. While leading companies in other sectors faced bankruptcy, Big Pharma went on a spending spree with a return to large-scale mergers unseen in the marketplace since 2004. None of the lawyers we spoke to reported lay-offs in their departments, indeed those firms that had not expanded their teams in the past two years were in the minority. The unpredictable period of 2008-2009 ended with good levels of liquidity among leading companies, and life sciences is currently one of the most active practice areas we cover. As high levels of consolidation and regulatory reform continue into 2010, the demand for quality legal counsel will remain undiminished.