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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