business research project-report

BUSINESS RESEARCH PROJECT

BMAN 73160

Student Id: 9564014 Degree Programme: MSc Management

INDIVIDUAL WRITTEN REPORT

FINANCIALISATION IN THE PHARMACEUTICAL INDUSTRY: A CASE STUDY ON PFIZER’S

ATTEMPTED TAKEOVER OF ASTRAZENECA AND ITS IMPLICATIONS FOR THE BRITISH LABOUR

MARKET

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EXECUTIVE SUMMARY

This report analyses the impact of financialization on business models in the

pharmaceutical industry. It investigates how blockbuster models were

replaced by restructuring through mergers and acquisitions to meet the

demands of capital markets. It provides evidence how this transformation is

complemented by other factors in the environment such as technical change,

product market regulations and institutional frameworks.

Key findings in this section are the following:

Erosion of the blockbuster drugs model in the pharmaceutical industry

paved way to era of restructuring

This was due to various interlinked economic, technological and legal

forces

Companies faced a patent cliff due to patent expiries, which resulted in

loss of revenue from blockbuster drugs. This along with generic

competition, increasing drug development costs and declining

profitability posed major problems for companies.

The institutional framework that the industry is embedded in is also

undergoing various transformations such as in the public and private

healthcare spending, where the Government is trying to control costs.

These had adverse effects on profitability and growth of industry,

leading to increased shareholder pressures to raise returns through

mergers and acquisitions

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M&As have significant short-term benefits in relation to growth and

profitability, however, in long term, it destroys value and leads to

decline in R&D productivity

It then evaluates the impact of M&As on high-skilled jobs in the UK, taking as

an example, the case of the proposed deal between Pfizer Inc. and

AstraZeneca Plc.

Key findings in this section are the following:

Key role of pharmaceutical industry in UK economy in terms of GVA

and employment

Pfizer presents a significant threat to high-skilled jobs in the UK,

however, AstraZeneca’s role as defender is not completely justified

The Government has an obligation to protect jobs

The report was built based on research and information was collected from

various relevant sources including analyst reports, accounting data, and

newspaper coverage.

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“The pharmaceutical industry is a prisoner of its past successes. “

-(Gilbert et. al, 2003)

The pharmaceutical industry has always been one of the most innovation-

driven and profitable industry sectors.

It consisted of mature, large enterprises with origins in the 19th century

chemical industry. The golden era of the pharmaceutical industry witnessed

immense growth and expansion of pharmaceutical firms, with double-digit

growth rates throughout the 1980-90s. Internal cash flows supported blue-sky

research, with significantly large investments in R&D, human and

organizational capital and marketing assets (Cockburn, 2004). According to

Froud et.al. (2006, p.153), the high returns in the pharmaceutical industry

were the result of “a combination of enforceable patent rights, price-sensitive

purchasers and a sympathetic regulatory environment. “ Knowledge of

market, widespread physician and distribution networks, innovative R&D and

strong product portfolios all contributed to competitive advantage. The period

from 1980s was quite productive producing an average of 31 drugs per year,

with a peak of 54 drugs in 1996 (LaMattina, 2011).

However, in the following years, the industry underwent major structural

changes disrupting the stability. The several interdependent economic,

technological, and legal forces that brought about these changes will be

examined in the following section.

INDUSTRY OVERVIEW-KEY CHALLENGES FOR BIG PHARMA AND CHANGING

BUSINESS MODELS

Regulation and constraints:

Perhaps the most significant factor that has weakened the stable structure of

the industry is the decline of the blockbuster drug. Blockbuster drugs, defined

as those that generated more than $1 billion annually, were heavily invested

in since they saved millions of lives as well as fuelled growth and returned

considerable profits, leading to excessive reliance on these drugs for

generation of sales. However, their ability to create such high returns was

greatly undermined by patent expiries, which opened the market for generic

drugs produced by smaller pharmaceuticals. The severity of this phenomenon

is visible in the patent expiration of Lipitor, Pfizer’s blockbuster drug, in 2005.

Although Pfizer tried to reduce the impact on profit through a licensing deal

with an Indian company, the losses were still steep. After losing exclusivity,

global sales were down by 42% and Pfizer’s total profit declined by 19%. The

resulting loss in profits in turn led to an attempt to curb costs through various

measures.

Lack of innovation in drug discovery has also impacted the production of

blockbuster drugs. R&D investments in the US have grown steadily, with

spending on R&D amounting to 21% of its sales. Although figures show an

increasing investment in R&D over the years, this has not been combined with

output in terms of new drugs. According to the report published by IFPMA

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(2014), new chemical or biological entities launched fell from 178 a decade

earlier to 163 in 2008-2012. Here, Scannell et al., (2012) refers to the Eroom’s

Law, where despite the efforts put into understanding and improving

management of the R&D process, productivity shows steady decline.

(Gleade et.al., 2014)

The increasingly stringent drug testing has also influenced this decrease in

productivity. On an average, 10-15 years are required for development of

medicine from time of discovery to time it is available for treatment due to the

complex nature of the process and the immense resources required (Fda.gov,

2015). Drug review times increased to three years, and time required to test

new drugs and submit new drug applications rose from 3 to 7 years. These

increased regulations have adverse effects in terms of loss of effective patent

protection. Figures show that out of 250 compounds that enter the pre-clinical

phase, only 1 could get approved. The high failure rates result in lost R&D

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investments. Overall failure rate increased from 87 percent in 1990 to 92

percent in 2004. The costs associated with failures depend on the stages of

development, with Phase III failures more expensive than pre-clinical failures.

This has led to an overall increase in the cost of researching and developing

drugs, which is estimated to be around $800m (McKinsey, 2015). According

to Scannell et. al., (2012), the Eroom’s Law reflects that there are other

external forces that outweigh scientific and managerial improvements that

should have led to increased efficiency.

(Gleade et. al., 2014)

The increasing costs, and decline in productivity has severe implications in

the context of changing institutional structures, which include challenging

reimbursement environment (Shaywitz, 2015).

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Institutional Framework:

The increasing government concerns regarding healthcare costs have had

adverse effects on pharmaceutical prices. In the UK, public spending by NHS

and other government sectors has witnessed a steady increase. It increased

from £44.1bn in 1997 to £125.5bn in 2013 (Ons.gov.uk, 2015). As a result of

this, the Government would be forced to reduce public spending through price

and reimbursement controls (pwc). The healthcare system of UK is primarily

public, with most funding coming from taxation. Branded drug prices are

controlled through PPRS, an agreement between Department of Health and

Association of British Pharmaceutical Industry (Shkopiak and Epping, 2015).

In the US, the largest pharmaceutical market, there is no regulation of prices.

Financial protection to consumers is provided through insurance, which

enables manufacturers to set higher prices. Payers don’t have market power

to control prices, and is left to competition. However, the recent Affordable

Care Act implemented indicates an attempt to make affordable healthcare

more accessible to people. It includes reforms in terms of new benefits, taxes,

funding, spending etc. (Obamacare Facts, n.d.). Countries such as UK

respond to higher prices by regulating prices directly or making

reimbursement dependent on cost-effectiveness. Information on cost-

effectiveness as compared to alternatives as well as information on safety and

effectiveness of drugs is demanded (Danzon, 2014). Thus, companies are

required to demonstrate the value of its drugs or be forced into cutting the

prices of drugs. This environment has deterred pharmaceutical companies

from taking risks associated with developing innovative drugs.

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Source: Ons.gov.uk, 2015

To sum up, the pharmaceutical industry is faced with increasing political

pressure to reduce drug prices. There is heightened regulatory pressure to

show more than marginal efficacy improvement. At the same time decreasing

R&D productivity and patent expirations have led to increasing costs.

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Source: (Kpmg.com, 2014)

These issues have their consequences in terms of decreasing profitability in

the industry. The pharmaceutical industry delivered high returns, with an

annual ROE of over 20% during the period 1985-2000. It delivered new drugs,

and invested in R&D from earlier investments(Kaiser Health News, 2009).

Performance of Pharmaceutical Industry:

However, the situation has changed. An analysis of pharmaceutical

companies by Ernst & Young (2014) shows that sales have been declining.

Average turnover decreased by 21.28% in the time period 2008-2012. The

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operating profit (EBIT) of the top 20 pharmaceutical companies declined 6%

to EUR 112bn from 2012 to 2013. Operating profit margin also shows a

decrease from 25% to 24%, from 26% in 2011(Ernst & Young, 2014). The

annual report by Deloitte and Thomson Reuters (2013), revealed that

although there was about 30% increase in drug approvals, the revenue

doesn’t reflect the expected outcome. The Internal Rate of Return from R&D

was 7.2% in 2012, 7.7% in 2011 & 10.5% in 2010. This hardly covers the cost

of capital, which is approximately 7%. Furthermore, the return on R&D

expenditure has fallen from an industry average of 20% 20 years ago to 10%

now (Kpmg, 2014).

Financialisation and impact on business models:

“Since the 1980s the US business community, the Bio-Pharma industry

included, has embraced the ideology that the performance of their companies

and the economy are best served by the ‘maximization of shareholder

value’...” . (Andersson et al., 2010)

The role of shareholders in the economy is important and has been

increasing due to political and economic reasons. Shareholder value

maximization is important in determining the success or failure in gaining a

dominant position in the market. From 1993 to 2002, the percentage of

corporations issuing shares was 86% (Harvard Business Review, 2012). As

capital markets increasingly become global, there are more opportunities for

shareholders to invest in higher yielding investments. This has increased

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pressure for companies to provide better results and improve financial

performance. Executives are now required to justify their high compensation

levels and explain decreases in performance. Weak financial performance

can lead to loss of corporate control and therefore it is important to

understand and manage shareholder expectations.

The pharmaceutical industry, like others, is not exempted from shareholder

pressures. In this context, it would be helpful to look into the concept of

financialisation in the pharmaceutical industry. Financialisation is concerned

with how strategic direction is directed by the demands of the capital market,

where shareholder value creation is of utmost importance (Froud et al., 2006).

According to Gleade et al. (2014), the reduction in clarity of “the relationship

between investment, innovation and return on capital” leads to

financialisation. This leads to a model where priority is given to generation of

higher and less risky returns on debt and equity without improving R&D

productivity. Financialisation requires management to improve returns, which

in turn implies greater benefits for executives through performance-related

pay. Here, Froud et al., (2006) refer to the role of the management as

maintaining shareholder confidence through narratives to improve firms’ stock

value.

Previously, the industry had done well and met shareholder expectation

through the blockbuster drugs model, which yielded high profits. In this model,

cost advantages were gained through economies of scale, in addition to

internal cash flows generated through sale of blockbuster drugs. From 1985-

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2000, shareholder returns were high, with an annual ROE of over 20%

(Gleade et.al., 2014).

However, it is clear from the previous discussion about the declining

profitability of the pharmaceutical industry that companies have failed to meet

shareholder expectations since 2000. The regulatory and institutional

framework that the pharmaceutical industry is embedded in is also

responsible for the declining profits that have led to shareholder pressures.

This results in the financial markets changing the strategic direction of

pharmaceutical industry towards a more financialised model, where R&D

productivity is no longer the sole reason for high returns.

The bio-pharma sector witnessed a lot of funding from venture capitalists and

private equity investors due to expected financial opportunity. An example of

this is in the case of GSK, described in an excerpt: “In July, Witty began

requiring drug-discovery divisions to compete for funding. He brought in an

investment board that included venture capitalists and biotechnology

executives to review researchers’ proposed projects. The board applies three-

year business plans to the scientific process, mimicking the do-or-die

environment in small, cash-strapped biotechnology companies. Previously, a

research unit’s funding wasn’t dependent on meeting deadlines and goals”

(Bloomberg.com, 2009). This reflects the increasing importance of

shareholder pressures.

An analysis of private equity (PE) and venture capital (VC) deals between

2010-2014 released by Frost & Sullivan (2015) shows a decline volume of

deals; 41.2% in VC deals and 23.4% in PE deals. According to Margaret

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Hamburg, commissioner of US FDA, “we are investing a lot, both public and

private, and not seeing a lot coming out” (Financial Times, 2012).

Source:(F&S, 2015)

This loss in faith by investors can be attributed to the changing environment,

which have led to an increase in costs and decrease in revenue and

profitability. The industry can deal with these dynamic conditions with support

of investors.

Shifting Paradigms>Mergers and Acquisitions:

Mergers and acquisitions are strategic options involving changes in control of

firms through combination of multiple entities into a single firm. A merger

involves combination of two separate firms to form a new firm, both being

more or less, equal partners. An acquisition involves one firm taking

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ownership or equity of another, also known as takeover (Johnson, Scholes

and Whittington, 2008). The main motives behind M&As can be categorized

into three, namely strategic, financial and managerial. M&As that involve

horizontal integration for increasing scale and market shares are usually

considered as strategic motives to attain cost synergies that leads to higher

profit margins. It is linked to competitive advantage. Financial motives usually

include increase in satisfactory rate of returns for investment and focus is on

capable use of financial resources. There has been a steady increase in PE

firms that don’t have strategic motives-they simply act as financial investors.

The key difference between strategic and financial motives is that financial

returns receive most focus and drives the deal. Managerial motives are based

on the self-interest of managers in terms of personal growth and financial

rewards and do not necessarily focus on shareholder interests.

The dynamic conditions in the global pharmaceutical markets led to

shareholder pressures to maximize shareholder value. It is in response to this

that the pharmaceutical industry has focused on restructuring activity such as

mergers and acquisitions (Gleade et al, 2014). Mergers and acquisitions are

also considered an exit strategy for private equity and venture capital

investors (F&S, 2015). The business model that results from this involves

constant reorganization of the parent as well as acquisition of smaller firms in

order to maintain shareholder value and provide enough capital and flexibility

to take advantage of expanding markets for healthcare. M&As in the

pharmaceutical industry can be understood to have financial motives.

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Recently, the pharmaceutical industry has been characterized by M&As.

According to a McKinsey report (2014), the companies that managed to retain

dominant positions between 1995 and 2005 have all been involved in

megamergers, deals that cross $10bn and where the target company holds at

least 20% of acquirers market capitalization 10% of sales. In 2014 alone,

there have been deals worth more than $200bn, and there has been an

increase in the number of deals-from 10 in 2013 to at least 14 deals in 2014.

Source: McKinsey, 2014

This is indicative of the restructuring of the industry and increasing M&A

trends. It falls in line with the statement made by Froud et al., (2006):” pharma

business model has less to do with R&D and product innovation and more to

do with defensive mergers, corporate restructuring and narratives promising

research productivity that ‘has not yet come through in the numbers’”.

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However, the prominent question here is whether the business model based

on M&As actually contributes to shareholder wealth and if it has indeed

delivered the expected outcomes.

1In order to understand this, several empirical studies have been analyzed.

According to analyst report by McKinsey (2014), merged firms witnessed

increase in EBITDA by 4% points after 2 years and the ROIC increased by

14%. Larger revenue bases and leaner cost structure were seen in the

acquired firms. It was also found that the consolidation deals during time

period mid-late 1990s created cost synergies and revenue growth. The Pfizer-

Warner-Lambert deal in 1999 raised EBITDA margins by 10%, creating

shareholder wealth. However, in contrast to this success, the Pfizer-Wyeth

deal resulted in decreased economic profit for Pfizer, with only 1% increase in

EBITDA margin. Economic profit for the merged company declined by 26%

(McKinsey, 2014).

A recent analysis by Gleade et. al (2014) on GSK showed similar results.

GSKs debt-financed acquisitions showed initial success in ROCE; however

this was not accompanied by increased R&D productivity. It gradually led to

increased long-term debt; share buybacks multiplied leverage and reduced

ROCE. Although R&D increased with sales, the decline in productivity led to

decline in ROCE. GSKs new strategic direction of R&D externalization from

2008 was at the same time it committed to increased shareholder wealth. This

in turn led to conditions where increase R&D spending was difficult.

A case study of pharmaceutical companies pre-M&A (1995-1999) and post-

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M&A (2000-2004) conducted by Demirbag et. al (2007), reveals that changes

in cost-based and revenue-based synergies lead to value creation in M&A. He

concluded that R&D productivity pre-M&A was in fact higher than at 78.7 than

post-M&A at 12. Another study by Hassan et.al (2007) analysed M&As in the

US pharmaceutical industry in the time period 1981-2004 and found that

although ROA ratios and operating cash flows improved, ROE was

insignificant, indicating that large mergers may not create value. Analysis

conducted by Danzon et. al (2004) showed that companies having higher

tendency to merge had lower internal R&D growth. It was also found that

mergers have negative effect on R&D growth.

Thus, in conclusion, it can be seen that restructuring is on the rise in the

pharmaceutical industry. It is evident that the shareholder pressure due to

changing environment has pushed the pharmaceutical industry towards a

financialised model with emphasis on shareholder value maximization through

mergers and acquisitions. The discussion on pre- and post-M&As shows that

though M&A activity might lead to increases in profitability, it has no

significance for ROE and therefore doesn’t contribute much to shareholder

wealth maximization. However M&As still do contribute to performance

through synergies and growth. The pressures from shareholders, high

uncertainty in terms of R&D productivity and increasing costs does make M&A

attractive in short-term. However, in long term it might have adverse effects in

terms of lower productivity. In this context, as Froud et. al (2006) suggests,

M&As seem to be part of the narrative that is provided to maintain

shareholder confidence. The industry still remains in a uncertain and

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vulnerable position with regards to future growth.

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MERGERS AND ACQUISITIONS: IMPLICATIONS FOR LABOUR IN THE UK

“Bio-pharmacology is a prime example of the sort of knowledge-driven

industry that the UK government has been so keen to encourage and the

lessons drawn here will be relevant to other high-technology industries

making products with long gestation periods”

(Andersson et al., 2010)

Contribution of Pharmaceutical Industry to UK economy and labor:

UK’s pharmaceutical market share in terms of new medicines is placed 10th

in the world (Abpi.org.uk, 2015). The UK economy is supported massively by

the pharmaceutical industry, with a trade surplus of £2.8bn in 2013. Figures

show that in 2013 the value of UK pharmaceutical exports was £21.3bn.

Pharmaceutical companies make a higher contribution to the economy, and

the sector’s relevance become more apparent when taking into consideration

the productivity measured as Gross Value Added (GVA), i.e. the value added

to inputs by a process. Production of pharmaceutical products amounted up to

£13.34bn of current price GVA in 2013, which accounts for 0.8% of the total

economy (Ons.gov.uk, 2014). These figures show that the pharmaceutical

industry contributes significantly to the economic value in the UK. As such, the

pharmaceutical industry has grown to become one of UK’s most successful

industries.

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Figure – The economic value of the pharmaceutical industry, 2008–2013

source: (Abpi.org.uk, 2015).

The commercial and policy environment in the UK has fostered this growth.

R&D is a major element of the pharmaceutical industry, contributing to the

collective scientific knowledge. Approximately £11.5m is invested everyday as

R&D expenditure in the UK. In 2012, 25% of all R&D expenses were in the

pharmaceutical industry. With this strong science base as well as partnership

with the NHS, academia and research community, UK continues to be ahead

in terms of developing and producing innovative drugs (ABPI, 2014). In

addition to this, knowledge generated in one company can flow between

companies in the same sector, creating a spillover effect, which has benefits

for other academic, public and charitable organizations. It could also

encourage innovation in other sectors. These partnerships and collaborations

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have therefore encouraged R&D, production and marketing of drugs in the

UK, which significantly contributed to the economy. This, in turn leads to

production of jobs in pharmaceutical as well as related industries such as

biotechnology, medical technology and diagnostics industries.

Employment in the pharmaceutical industry:

The pharmaceutical industry is one of the most significant when measuring

productivity per employee: figures released by ONS reveal that £128,000 is

the GVA generated per employee in 2013, which is higher that other

comparable manufacturing sectors.

Figure – GVA per head for high and medium-high tech sectors (£000s) 2013

Source: (Ons.gov.uk, 2014)

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Analysis by the Office for National Statistics UK reveals that the

pharmaceutical industry employs 73,000 people directly, out of which those

employed in R&D alone is 23,000. The graph below represents the

employment rates in the pharmaceutical industry in the UK.

Figure – Pharmaceutical industry employment in the UK, 1995–2013

Source: (Ons.gov.uk, 2014)

Thus, it is evident that the pharmaceutical industry in terms of employment

earns more income for the UK economy than many other sectors. It therefore

becomes a priority for the Government of UK to protect these high-skilled jobs

in the pharmaceutical industry.

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Restructuring in Pharmaceutical Industry: Implications for Labor

As examined in the previous section, the pharmaceutical industry is

undergoing major structural changes, moving away from the traditional

blockbuster model towards a more financialised model based on M&As. This

has wide reaching consequences, especially for employment. An accounting

analysis on the impacts of restructuring on labor conducted by Froud et. al

(2000), provides evidence that attempting to meet shareholder expectations

through restructuring can be at the cost of labor, especially in the case of low

product market growth. They explain that when cost savings cannot be

achieved through pressures on suppliers, then labor becomes the target, as it

is the major controllable factor. This is relevant especially in the context of

horizontal mergers of similar companies when there is removal of duplicated

functions and overlapping activities, which creates scope for reduction in

labor. They explain restructuring as a defensive strategy, which brings about

short-term results for shareholder value, through the interaction of product,

labor and capital markets (Froud et al., 2000).

This impact of restructuring can be witnessed in the pharmaceutical industry.

According to report published by Department of Business, Innovation and

Skills (2015), restructuring in the pharmaceutical industry led to a reduction in

employment, which subsequently resulted in productivity growth, as observed

in the graph below.

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Source: (Dept. of Business, Innovation and Skills, 2015)

The case of Pfizer-AstraZeneca Deal: Implications for UK employment

Pfizer: A threat

The negative impact of M&As on labor became a matter of public interest

when Pfizer Inc. made a bid for AstraZeneca Plc. in January 2014, and then

subsequently in April and May 2014. The initial offer was for £59bn, 1.758

shares plus £13.98 cash/AstraZeneca share; 70pc/30pc split. AstraZeneca

rejected the offer on the grounds that it undervalues the company’s prospects

and that the cash offered was not substantial. The following deals increased

the offer to £69bn. These were also rejected by AstraZeneca. The offers

sparked concerns and debates among politicians and the public over job and

corporate tax maneuvers (Reuters, 2014). These concerns were raised when

Ian Read, CEO of Pfizer Inc. admitted that there would be reductions in jobs

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and refused to give guarantees apart from a commitment to base 20% of its

global R&D in the UK, but only for 5 years (Guardian, 2014).

However these reassurances cannot be considered valid due to Pfizer’s

history of job reductions. Pfizer Inc. eradicated more than 56,000 jobs

worldwide since 2005 (WSJ, 2014). Pfizer’s closure of research site at

Sandwich in Kent in 2012 created ripples in the industry. It was one of

Europe’s largest R&D facilities, birthplace of some of world’s blockbusters

such as Viagra. At its peak, it employed more than 5000 people and was one

of Kent’s largest private sector employers for years. The closure led to the

loss of 2,400 jobs, leaving few private sector jobs (Financial Times, 2014).

Another example is the acquisition of Wyeth in 2009, where the R&D budget

was reduced from $11bn to $7bn a year. Pfizer’s employees reduced from

129,226 to 116, 500 in the space of one year (Telegraph.co.uk, 2014).

Source: WSJ, 2014

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A Survation poll conducted by the Unite union revealed fears of job cuts, with

only 14% agreeing that the takeover is in UK’s national interest

(Telegraph.co.uk, 2014).

Therefore, it can be determined Pfizer Inc. poses a substantial threat to the

labor market in the pharmaceutical industry in UK.

AstraZeneca: A defender

AstraZeneca Plc. is one of the few pharmaceutical companies in the UK that

is spread along the value chain, from discovery and development to

commercialization of drugs. Company figures show that it contributed an

equivalent of £3bn GVA to the UK economy, and accounted for almost 2% of

total UK export of goods. It has partnerships with major academic, research

and charitable organizations and offers educational opportunities to scientists.

The company is an essential part of the UK scientific community and focuses

on high value R&D activities (AstraZeneca, 2015). AstraZeneca employs

more than 6,700 people in the UK-13% of its entire workforce

(Telegraph.co.uk, 2014). In March 2013 it proposed an investment of £330m

in an R&D center and corporate HQ in Cambridge. In November 2013, it

proposed to invest £120m in a new facility in the manufacturing center at

Cheshire (AstraZeneca, 2015). In written evidence submitted to the

Parliament, AstraZeneca emphasizes its commitment to the UK economy

“through employment, investment in the business and innovation in the life

sciences” (parliament.uk, 2014).

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Therefore, it is evident that AstraZeneca plays a crucial role and contributes

significantly to the Life Sciences sector in the UK as well as to the economy

as whole. UK’s biggest union, Unite stated that “AstraZeneca is strategically

significant for the U.K. economy. We expect the U.K. government to pay

special attention to this bid and do everything possible to protect jobs and to

support the U.K.'s knowledge base” (WSJ, 2014).

However, in the recent turmoil over the Pfizer-AstraZeneca deal, several key

factors have been overlooked. AstraZeneca itself has eliminated jobs in the

past as part of restructuring. The company announced job cuts of over 5,000

employees by 2016 (Financial Times, 2013). As part of its relocation to

Cambridge, it shut down its R&D facility in Alderly Park, leading to loss or

relocation of approximately 2,000 jobs. Unite union protested against this

stating that it would have negative consequences for the North West of UK,

creating a skill crisis for the local economy (The Guardian, 2013). It should be

highlighted here that this reduction in jobs followed a £5m grant secured with

support George Osbourne for AstraZeneca for development (The Guardian,

2013).

This questions AstraZeneca’s role as a protector of high-skilled jobs in the

UK, as implied by media reports, Government and the company itself. It can

indeed be suggested that AstraZeneca is also only another fatality caught up

in the increasingly severe and transitory regulatory and institutional

environment of pharmaceutical industry.

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Role of State:

In this context, it falls back to the Government to play a key role in protecting

the national interests of the country. According to a report published by

Department of Business, Skills and Innovations, the Government has set out

4 ambitions to facilitate economic growth, one of them being encouraging FDI

as well as to create a competitive tax system in the G20 to make it good

location for corporate headquarters. It has already set up Enterprise Zones,

which are boosting the pharmaceutical industry and attracting FDI (gov.uk,

2014). The life science sector in particular is expected to benefit from

establishment of a new regulatory agency that will enhance regulatory

processes and cost efficiency (gov.uk, 2011). These measures are expected

to contribute significantly to the economy and create employment. At the

same time, it gives increased incentives for foreign companies to look into the

UK for mergers and acquisitions.

In order to deal with these, the Government can make further improvements

in formal assessment of mergers and acquisitions to study the impact on

employment in sectors of key economic value such as the pharmaceutical

industry.

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CONCLUSION

This report first examined the changing conditions in the global

pharmaceutical industry and how these factors led to shareholder pressures

which in led to an overall trend of restructuring in the industry. The industry

initially operated on a ‘blockbuster model’, which produced branded patented

drugs, which resulted in high returns and profitability. Internal cash flows,

innovative in-house R&D, extensive distribution and physician arrangements

and strong brand name supported its growth. These factors resulted in a

highly productive and profitable industry.

However, increasingly dynamic conditions in the industry forced a change in

management strategy, moving the industry towards an era of restructuring

from the 1990s. Patent cliffs, with a large number of companies facing patent

expirations of blockbuster drugs along with regulatory changes, which

occurred in the form of stringent drug approval processes and increasing

costs of drug development led to removal of competitive advantages of

companies. In addition, the new institutional arrangements, price and

reimbursement controls made drug development efficient but at the same

time, expensive.

The consequences of these factors are evident in the declining profitability

and returns. While previously the industry had annual returns of over 20%

between 1985-2000, it has now decreased significantly despite increases in

sales and R&D. These trends in decrease in profitability and returns resulted

Student ID: 9564014

31

in shareholder pressures and companies are now forced to rethink business

models to maximize shareholder value. This led to increased shareholder

pressures in the capital market, which led to a financialised model based on

mergers and acquisitions. However, analysis of M&As shows contribution to

profits in the short-term, with no significant or adverse effects on R&D

productivity. The pharmaceutical industry still remains in a transient state.

The second part of the report examines the impact of financialisation based

on M&As on labor and unemployment. It evaluates the reason behind

industry’s role in the economy due to high productivity and employment. It

was found that the proposed merger between Pfizer and AstraZeneca would

impact high-skilled jobs in a negative manner. Pfizer presents a significant

threat to employment with no assurance that jobs will be guaranteed.

However, at the same time, AstraZeneca’s role as a defender of jobs has

been questioned due to its history of job cuts. It was understood that it is, as

any other company, susceptible to the dynamic conditions in the industry.

Thus, considering pharmaceutical industry’s relative importance to the UK

economy, the Government has an obligation to defend high-skilled jobs,

especially in a context that aims to make UK more attractive for investments

through various measures.

Student ID: 9564014

32

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