Wednesday, 20 July 2016

Redistribution of Wealth Through Giving and the Bayh-Dole Act

A couple of years or so ago, I wrote a post on philanthropy and its impact on the creation of intellectual property.  This appears to be an under-researched area and deserves some additional review. 

The Bayh-Dole Act (and general U.S. federal policy) operates to redistribute wealth from tax payers to universities, non-profits and companies through their ability to take title to government funded inventions.  Essentially, tax payers pay money to the government.  Instead of that money getting redistributed through social programs or other means, the money is distributed in the form of grants for research to universities, non-profits and companies.  The Bayh-Dole Act then allows those entities to take title to any inventions developed from that money.  Part of the rationale for the Bayh-Dole Act, along with the incentive to commercialize theory, is to ensure that private industry has the incentive to bring government funded technology to market--to cross the so-called "valley of death".  As the story goes, prior to passage of the Bayh-Dole Act, many government funded inventions "languished" on the shelf of the government. Many believe the Bayh-Dole Act is an inspired piece of legislation.  Indeed, many countries around the world have passed similar laws to harness the power of government funded invention. 

Interestingly, the Association of University Technology Managers (AUTM) pointed to a potential silver lining, of sorts, in the Great Recession.  Universities continued to spin out companies (and apparently create good paying jobs) based on university developed technology during the Great Recession.  If not for the Bayh-Dole Act, the Great Recession might have been much worse for the United States. 

I was listening to National Public Radio (NPR) the other day and noticed that the Lemelson Foundation was supporting NPR.  The Lemelson Foundation was started by Dorothy Lemelson, the famous inventor Jerry Lemelson's wife.  The Foundation supports invention and commercialization efforts primarily through education in the United States and in other countries.  Specifically, the Foundation appears to focus on college-aged possible inventors and addressing the needs of the poor through invention.  The Foundation reached its 20th anniversary this year and there is an interesting list of its achievements and activities, here

Notably, Jerry Lemelson was well-known for his patenting/invention activity--over 600 patents.  He was also well-known for his assertion of patents (submarine patents as they were known) against practicing companies, particularly for his "scanner" technology.  Interestingly, Wikipedia notes that he extracted about $1.3 billion in licenses from companies.  When examining the merits of a particular practice--let's say so-called patent trolling, perhaps we should also look to the uses that some monies made from that activity are used, including voluntary redistribution. 

Saturday, 9 July 2016

Sanofi and Boehringer Ingelheim swap units: a new model for pharma deals to come?

M&A activity in the pharma space has focused on seeking mega-mergers structured as a tax inversion, where the surviving company is domiciled in
the lower tax rate jurisdiction. This structure has come under vociferous criticism, especially in the U.S., where the claim has been made that U.S. companies are seeking to flee the US solely for achieve tax benefits. The poster child for this kind of transaction was the proposed $160 billion deal between Pfizer and Allergan, which called for Pfizer to relocate to Ireland and to reap tax benefits of $1 billion a year. The deal was scrapped in early April, after new tax regulations made the transaction less unattractive.

But if mega-deals with a sizeable tax consequence, such as the proposed Pfizer and Allergan merger, are now less likely to occur, this does not mean that pharma transaction activity will come to end. An illustrative example of what such future deals may look like can be found in the announcement at the end of June that the French pharma company, Sanofi, will hand-over its Merial animal medicines business (estimated to be worth $14.4 billion euros) to Boehringer Ingelheim, in exchange for the latter’s non-China over-the-counter medicines’ business (estimated to be worth 6.7 billion euros), plus the payment to Sanofi of $4.7 billion in cash. Stripped to its essentials, the deal harkens back to the most ancient form of transaction, namely barter. For those readers who seek a more contemporary analogy, view the deal as the exchange of one sports player for another, plus the payment of some cash by one of the teams. However one views this deal, it is far-removed from the world of mega-deal tax inversions.

A recent interview on Bloomberg radio suggested several advantages to this type of transaction:

First, there is less or no risk that the regulator will turn down the transaction. Not only is the mere risk of regulatory rejection deleterious to the business plans of the companies involved, but the failure to consummate the agreement may well obligate one company to pay the other a break-up fee.

Second, the challenges of integration, as each company seeks to absorb the unit acquired, should be significantly reduced in comparison with the full-fledged merger of companies, as in the current transaction, where only one dedicated unit from each company will be involved. Presumably, there will be less disruption to the activities of these units, each of which can continue to carry on as usual, Management teams will also largely be left intact, although not entirely, as Boehringer announced, only days after the deal had been announced, that it was cutting 50 positions at his headquarters in Ridgefield, Connecticut.

Third, tax consequences would appear to be taking a back seat to the issues of product strategy. Each company is presumably strengthening itself in an area what it hopes to reap competitive advantage. Here, as well, the risk of success or failure for each company in exiting one drug area while entering another is less cosmic than the ultimate risk of a full company merger gone bad. Indeed, the modularity of the transaction may portend a different focus for pharma companies. Big may be good for its own sake, but if the regulator puts its foot down on such moves, company management will need to find alternative forms of transactions to improve company performance.

One also wonders whether this kind of transaction will be better for the R&D and the IP position of the companies involved. Much has been written about the patent cliff facing pharma as block-buster drugs are coming off patent. The question is whether R&D can come up with replacements, even if this means more specialized drugs in place of these block-busters. From this perspective, the transactional focus on discrete units, rather than on entire companies, might assist pharma, especially Big Pharma, in coming up with a new generation of successful products.