Pharmaceuticals

In the first of a new series, Abigail Townsend asks which type of firm is likely to get a significant share of the rich pickings that are on offer in the pharmaceuticals sector.

The new millennium got under way in style for the pharmaceuticals industry as two industry giants started work on one of the world's largest mergers and the wraps came off a second tie-up.

By the end of January, SmithKline Beecham and Glaxo Wellcome had set about arranging a £114bn merger.

The merger had the added impetus that after its initial failure in 1998 the drugs giants had to make this one work if they were to retain their City credibility.

But barely before the industry and its advisers – which are expecting their fees to run into hundreds of millions pounds – were able to draw breath, Pfizer and Warner-Lambert announced their £52.1bn merger.

In an industry that once needed firms predominantly for sector-specific patent protection and litigation, corporate and M&A lawyers are now equally as valued.

And there is more to come. One senior lawyer who worked on the SmithKline-Glaxo deal says: “America Home Products failed to merge with SmithKline Beecham two-and-a-half years ago. Discussions with Monsanto then followed, but they, too, fell apart, so everybody reckons that America Home Products is going to be taken over by somebody.

This move to consolidate is a big driver. It is what Pfizer and Warner-Lambert is about and it is part of the rationale behind SmithKline-Glaxo.”

A good relationship with a recognised City player is therefore of great importance to the big players in the pharmaceuticals and chemicals industry.

ICI deputy general counsel Bob Peters says the criteria most in-house counsel use to select their City firms is a simple one – reputation.

“A blue chip firm can lend itself to a deal, particularly large and complicated deals that involve yellow book stuff,” he says. “You cannot be criticised for using a blue chip firm.”

ICI has used Freshfields for high level acquisition and M&A work for several years.

Peters' sentiments are echoed by another head of legal at a rival company, one that is itself looking at consolidation.

He says: “Using a big City firm is fairly significant. They need to be able to operate in banking and financial circles. If they can get around then they are going to be known and that is going to advantageous for us.”

But it is not just the reputation of the firm that counts, individual lawyers carry weight with in-house counsel. Peters says his relationship with Freshfields is very dependent on its contact partners, Anthony Salz and Edward Braham, who are “well-known and liked”.

Pfizer senior legal counsel Victoria Kitcatt also places great importance on individual relationships, to the extent that she would change her firm if a partner left. “It is not the name of the firm that matters,” she says.

And a partner move could spark an examination of what core firms are being used and for what purposes.

Kitcatt says: “Sometimes we do use a partner move as an opportunity to review the external situation.”

Another source agrees that more often than not, it is the lawyer and not the firm that demands loyalty.

“There is no point going to one firm if it has got a high reputation but it has a complete nonce on it. That has happened to us a couple of times and I have gone elsewhere,” he says.

These individual relationships often come into play in the more sector-specific practice areas as once a company finds a lawyer who knows the industry well, it does not want to lose them.

Knowledge of the industry is another deciding factor for companies. The Cambridge Antibody Technology Group uses niche player 14-partner Mewborn Ellis. Vice-president of legal affairs and company secretary Diane Mellett says: “Patent work is extremely important for us and it has the expertise. It knows us and has worked for us for some time.”

And Kitcatt says Pfizer has used CMS Cameron McKenna for its patent and health care work for three years because it has “a reputation throughout the industry”.

That reputation predominantly comes from the fact that Camerons works for the sector body, the Association of British Pharmaceutical Industry.

Kitcatt says the relationship started slowly because no matter how good the firm's reputation, the people on the ground have to get on.

“We used them several times and we have built on that. The first time we used them was for some litigation and we knew it had done the same sort of work for another company.

“Many factors come into consideration when appointing a firm. Cost is an important one, but the most important is the necessary experience.”

Camerons did not have to go through a beauty parade. Indeed, some much-hyped methods of choosing firms do not come into play in this sector.

Smith & Nephew, for example, examined several firms when it was selecting its two core practices, Ashurst Morris Crisp and Pinsent Curtis. Although both were benchmarked against other firms, the entire process was an informal one, according to an insider.

Directories such as Chambers & Partners also tend to be used only occasionally for information on foreign firms.

One senior in-house lawyer says he has only used it once in the last year for this purpose and not for any other.

And Peters says: “I do not think it has got much value for ourselves. We occasionally use it to find an overseas jurisdiction where we do not have cover, but that is rare.”

Kitcatt is more interested in the sector-specific literature and online offerings that firms provide. She feels that this is a far more accurate way of gauging a firm's knowledge and experience.

Some of the newer marketing methods adopted by firms have been met with scorn. One in-house counsel tells the story of when a firm cold called the company asking it if it was aware of a particular topical issue. It was a tactic that backfired.

“It is ridiculous to think that a big company needs to be called to be woken up to a big issue,” he says.

The US market is important for the sector. As one private practice lawyer says: “It is this market that they need to protect because it is the biggest one in terms of sales.”

The pharmaceuticals and chemicals sector produces products that are sold worldwide but which must satisfy local regulations. As a result, a variety of US firms are used for patent and class action litigation. These range from the larger New York practices to boutique firms across the country. The majority are chosen for either previous work or by reputation of specialisation.

One source says that he is always careful not to select a US firm with a UK operation because he believes fees will be inflated to pay for the presence. “I would not want a firm if it had a London office because I do not want to pay twice,” he says.

Yet despite the importance of the US market and international industry consolidation, global firms are not high on the agenda when it comes to choosing external advisers.

One source at a company that operates across North America and Europe says global firms do not pay enough attention to their clients. “We used one large law firm in the UK which had juniors on the case. It got things wrong and I fired them. We were very small at the time and the firm was not prepared to invest the time,” he says.

The industry, like any other, also uses firms for a variety of non-sector specific work, such as property and employment.

Smith & Nephew selected Pinsent Curtis for its regional offices, while Kent-based Pfizer uses 21-partner Canterbury firm Girlings for its employment work.

Kitcatt says: “We have used Allen & Overy for our corporate work, but we also use firms in Kent for employment and property. Being local it knows us well and it provides a good value service. A City reputation is just not necessary.”

Mellett says that while The Cambridge Antibody Technology Group uses Camerons and Mewborn Ellis for sector-specific and corporate work, local firm Mills & Reeve is used for employment.

Mills & Reeve was taken on 18 months ago following an informal beauty parade. Mellett says: “We wanted a link with someone in the community. We have got a good relationship with them.”

So the specialist regional and City firms are assured of their panel places. The lower costs of the regional firms and the blue chip reputation of their London counterparts make them an easy choice once in-house counsel have established who they are able to build a relationship with.

The losers in this sector are the global players. And with the continuing international growth and vast sums of dollars tied up in the market, this could become a problem.

As one private practice lawyer says: “There is a lot of corporate activity going on in this sector at the moment. I think we will end up with a handful of mega-companies and then a few niche players who will concentrate on particular areas such as diabetes. The space in the middle is going to get much smaller.”

COMPANIES IN SECTOR

Alliance UniChem

Pan-European pharmaceuticals distributor and retailer serving seven countries. Formed in 1997 through merger of UniChem and European distributor Alliance Sante SA. In 1998 the company had a turnover of £6.3bn, representing a 16 per cent market share. Market capitalisation: £1.2bn

AstraZeneca

Created out of the marriage of Astra AB and Zeneca Group. Develops and sells drugs aimed at combating diseases in a range of areas, including cancer and cardiovascular. Operates an international network of research units and production facilities. Market capitalisation: £40.3bn

CellTech Group

Created in January 2000 from the merger of Celltech and Medeva. The biopharmaceutical group concentrates on developing and selling therapeutic products, drugs and vaccines. Market capitalisation: £2.2bn

Glaxo Wellcome

Currently finalising a £114bn merger with SmithKline Beecham (see below). Headquartered in London, the group employs 59,000 people worldwide. Products include drugs for influenza, AIDS, migraines and asthma. Market capitalisation: £57.7bn

Imperial Chemical Industries (ICI)

International company involved in a variety of areas including industrial adhesives and chemicals, food ingredients, architectural and decorative paints (owns the Dulux brand) and speciality starches. The group is currently in the process of a restructure that will refocus its core activities on perfumes, cosmetics and paints. Market capitalisation: £3.5bn

Nycomed Amersham

Global company listed on the London, Oslo, New York and Copenhagen stock exchanges. Develops and distributes in-vivo diagnostic imaging equipment to the pharmaceuticals industry and academia. It also researches, develops and sells life sciences drugs. Market capitalisation: £2.4bn

Reckitt & Coleman

Merged in 1999 with Dutch-based Benckiser to create the world's largest household cleaning products company. Employs 16,500 people worldwide with 5000 of them based in Europe. Market capitalisation: £3.8bn

Smith & Nephew

Global health care company employing 12,000 people and operating in 36 countries. Researches, develops, manufactures and sells medical devices principally in orthopaedics, endoscopy and wound management. Market capitalisation: £2.03bn

SmithKline Beecham

Produces and distributes a range of drugs and consumer products, including treatments for depression, antibiotics, Tums indigestion tablets and Aquafresh toothpaste. Global workforce of 47,000. Market capitalisation: £41.5bn