Takeovers, restructurings and tougher regulation – lawyers working in the drugs industry are used to turbulent times. Alex Aldridge gets the perspective of the leading pharma clients facing up to major shifts within the industry

The pharmaceutical industry is going through a turbulent period. Patents protecting companies' blockbuster drugs are expiring – according to consultancy firm Evaluate Pharma, around half of the $383bn (£255bn)-worth of patented drugs sold worldwide last year will lose patent protection in the next five years – while barriers preventing makers of generic drugs from selling their own versions of leading products continue to fall.

During its recent investigation into the pharmaceutical industry, the European Commission (EC) questioned 'pay for delay' deals in which large pharmaceutical companies pay generic drugmakers to delay launching copies of drugs coming off patent. Across the Atlantic, the US Federal Trade Commission has called for such deals to be curbed.

The effect has been a dramatic lowering of drug prices worldwide, with less money available to spend on the development of new products as a result. Management consultant Bain & Co estimates that annual cashflow of about $30bn (£20bn) – roughly half of the $60bn (£40bn) spent annually on research and development (R&D) by the industry – will evaporate in the next four years as patents on blockbuster drugs expire.

Major pharmaceutical companies have responded with a wave of mega-mergers and restructurings as they bid to cut costs and bolster their R&D arms. First came Pfizer's $68bn (£45bn) acquisition of Wyeth last January, followed soon after by Merck's $41bn (£27bn) merger with Schering-Plough and Roche's $47bn (£31bn) tie-up with Genentech.

"Big snakes swallowing huge chunks of Edam" is how Karolyn Fletcher, UK legal chief at Bristol-Myers Squibb (BMS) and head of the Association of the British Pharmaceutical Industry, describes the deals. The mergers will see 20,000 jobs go across Pfizer and Wyeth (a total staff reduction of 15% of the combined company's workforce of 130,000) and 16,000 at Merck and Schering-Plough (which also represents 15% of total workforce). So far, 1,500 positions have been lost at Genentech. Meanwhile, AstraZeneca and GlaxoSmithKline (GSK) have both undergone major restructurings in recent years, with respective job losses of around 8,000 and 3,000 planned at each company.

Opinions are divided on what all this means for legal teams working in the industry. "In-house lawyers tend to be fairly safe in the initial post-merger phase thanks to their institutional knowledge and the amount of legal work reorganisations take, but they become vulnerable once rationalisation begins to kick in and a company finds itself with effectively two legal teams," says one partner who specialises in pharmaceutical work.

Set against that, the increasingly proactive regulatory environment the industry finds itself operating in means that pharmaceutical lawyers are more in demand than ever.

"The ever-increasing regulatory scrutiny of the sector, manifested recently in the EC inquiry, accentuates the need for continuous assessment in the areas of competition and regulatory compliance," says Astellas general counsel Jerry Temko (pictured). John Wilkinson, a London-based partner in Reed Smith's life sciences team, adds: "I've never seen a quiet in-house lawyer at a pharmaceutical company, and I see very little reason for that to change. In fact, with all the developments in the industry I would imagine they're going to be busier than ever."

Always churning

While recent mega-mergers and restructurings have caught the eye, upheaval within the pharmaceutical industry is nothing new. Indeed, the sector is characterised by regular acquisitions of smaller outfits by the larger players as part of an eternal quest to fill R&D pipelines.

High-profile purchases of this nature made during the last few years include AstraZeneca's acquisition of Cambridge Antibody Technology and Eli Lilly's purchase of biotechnology company ImClone. Again, these deals tend to mean job cuts – albeit on a smaller scale than their larger counterparts – with lawyers often affected.

John Murphy, general counsel at London-based drug company SkyePharma – one of a host of respected smaller players on the scene – says that relative job insecurity is one of the hazards for lawyers operating in this industry: "The constant acquisitions you have for R&D purposes is something that impacts on legal jobs. You have to be aware of it."

The flipside to the uncertainty is the dynamism and intellectual challenge of pharmaceutical companies – making the sector an exciting place to work. "It's just so fascinating," says George Pickering, senior counsel at GSK and formerly a member of the life sciences team at Reed Smith and the intellectual property (IP) group at Bird & Bird. "Things are always changing so there is great variety. I could be liaising with academics on a drug discovery collaboration, meeting with our partners at other organisations to discuss the neglected tropical diseases knowledge pool, right through to in-licensing new medicines that are ready for the market."

Alasdair Moodie, international legal affairs director at Gilead, adds: "The sense of flux and change makes the pharmaceutical sector a really interesting place to work, with all these constantly moving parts to think about."

Perversely perhaps, there is an allure to working in an environment where slip-ups tend to have serious consequences; pharma lawyers play for higher stakes than some of their colleagues in other industries. Sheila Hopkins, head of legal at mid-sized European pharmaceutical company Norgine, comments: "Because healthcare is a universal concern, if something goes wrong it hits the news. That gives the job an added edge."

Another draw of the job, say lawyers, is the sense of satisfaction at being part of an industry that, despite the negative perceptions often associated with drug companies, generally has a positive impact on people's lives. "It's easy to throw mud at the pharmaceutical industry, but a lot of people go into it because they are inspired by a personal wish to improve health in some way – often because they have lost a family member to illness," says BMS' Fletcher.

"[One of the reasons I was] attracted by the sector was that it contributes significantly to the betterment of human health and quality of life outcomes," says Astellas' Temko.

There is also a kudos within the field attached to working in-house – with many of the leading lawyers in this area employed by pharmaceutical companies. In the UK, these include Fletcher, Pickering, Murphy, Moodie, Hopkins and Temko, alongside the likes of Richard Robinski at Merck/Schering-Plough, Liam McIlveen at AstraZeneca and Simon Harper at Eli Lilly.

"With a few outstanding private practice exceptions, there's no doubt that the real expertise in this area is in-house," says Fox Rodney's Michael Ellenhorn, a recruitment consultant specialising in placing lawyers with expertise in the pharmaceutical sector.

The work

Regulatory and licensing forms the core area of legal work generated by pharmaceutical companies, with fluency required in European pharmaceutical law, alongside a solid understanding of the science behind it. "Excellent black-letter legal skills are a must for those with in-house roles, as is knowledge of what goes into developing products," says Hopkins.

Accordingly, it is not uncommon for lawyers in this area to have educational backgrounds in the sciences. Nevertheless, many do manage to pick up the sector knowledge on the job. Pickering explains: "I did a straight law degree at university, then just learned things as I went along. It's amazing how all these pockets of knowledge come together over a period of time. Some are gleaned from private practice, others in-house and a few things from elsewhere altogether, such as chemistry classes at school."

Levels of specialisation vary, with the majority of lawyers falling into the generalist category. "There are some in-house lawyers in the sector who spend their time looking at European pharmaceutical law line by line, detail by detail," says Fletcher. "But most of us are more generalist."

She says that the regulation around the industry is "the wallpaper" to the various commercial projects she tends to handle. "You need to be comfortable with the regulatory background in order to be able to make the most of business opportunities, whether by finding new business models and methods or by challenging your competitors' and regulators' activities when you think they are unfair."

Gilead's Moodie expresses similar sentiments: "In order to put together the often highly complex commercial collaborations between pharma companies and biotechs, lawyers need a thorough understanding of the sector."

This principle also applies to litigation – something that pharmaceutical companies get their fair share of. Indeed, disputes represent well over a quarter of the work handled by legal teams at the main drugs players. They come in three broad categories: IP litigation, product liability-related law suits and government investigations. Cases of the former rumble on nearly non-stop, largely handled by the patent attorneys who typically make up a significant proportion of pharmaceutical companies' legal teams.

Product liability suits and government investigations are not as constant but still occur on a regular basis. "At any one time we have at least one major piece of litigation ongoing," says one pharmaceutical company general counsel. Headline-grabbing recent cases involving pharmaceutical companies include the class action claim resulting from Merck's recall of its anti-arthritis drug Vioxx after it was linked to cardiac problems, and the investigation of Pfizer's unauthorised promotion of its anti-inflammatory pain-killer Bextra, which led to a $2.3bn (£1.5bn) fine.

Going external

While outside counsel are frequently called upon to assist with corporate finance and acquisitions, it is in the resource-intensive area of litigation where they are most often used. "Product liability cases and government investigations can be huge, particularly in the US. As these are constantly occurring, we have experienced lawyers in both these areas on our in-house teams, but often we need back-up from law firms," says Novartis general counsel Thomas Werlen.

When it comes to managing external lawyers, the same rules apply as to any company-law firm relationship, say in-house pharmaceutical lawyers. And given the difficulties the sector is facing at the moment, it is no surprise that keeping costs down is at the top of the agenda of most chief legal officers at major pharma companies.

Indeed, with their large legal expenditure, the major pharmaceutical companies are proving to be trailblazers in this area as they push more strongly for alternative billing arrangements. Last year, for example, Pfizer announced its 'Pfizer Legal Alliance', under which the company's 19 core panel law firms are paid an annual flat fee for all of the work they do during the year. The fee includes everything from phonecalls to product liability suits.

Commenting on the arrangement, Pfizer general counsel Amy Schulman (pictured) said last year: "I really believe that if you are going to try to do something that is fundamentally not based on the billable hour, you can't do it in baby steps."

Novartis is another pharma company eager to expand on fixed-fee arrangements – with a firm's ability to offer alternative billing options a key part of the criteria for the panel review it conducted last year. During the process, Werlen told Legal Week: "Cravath [Swaine & Moore] senior partner Evan Chesler recently told The New York Times that the billable hour is over – I'll be holding him to that!"

The company has also ventured into the outsourcing field as it looks at ways of making its legal expenditure more efficient, conducting a pilot agreement that sees certain tasks sent out to legal outsourcing provider CPA Global in India. "The arrangement is still in a very early phase," says Werlen. "But when positioning ourselves effectively for the future, it is important to look at all the options available, and outsourcing is one of those options."

In terms of the future for the industry as a whole, there is a feeling that the wave of mega-mergers is probably over for now, although reports of future tie-ups continue to float around. Instead, lawyers are predicting a round of more innovative deals between the various players in a market where boundaries are becoming increasingly blurred.

GSK's agreement with Indian generic drug manufacturer Dr Reddy's, which will see drugs made by Dr Reddy's sold under the GSK brand, is frequently cited as an example of the direction the market is heading. As is GSK's recent joint venture with Pfizer, which saw the two companies pool their HIV-drug assets. Pickering comments: "Five years ago this kind of collaboration was probably inconceivable. But not now." However the next few years pan out, lawyers working in the sector will need to be as adaptable and ready for change as ever.

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Wellcome Trust – bridging the gap

The Wellcome Trust is a global charity dedicated to achieving improvements in human and animal health. Established in 1936 and with an endowment of around £13bn, it is the UK's largest non-governmental source of funding for biomedical research.

The Transfer Technology Division (TTD) – one of the Trust's main areas of funding – aims to bridge the gap between fundamental research and commercial application by funding applied research and development (R&D) projects to a stage where they are attractive to follow-on funders, such as venture capital firms, industry and public-private partnerships.

According to Daniel Nelki, head of legal and operations in the TTD, acquiring smaller companies to 'feed the pipeline' has become ever more crucial for pharmaceutical companies, as they are predicted to transition over a 'patent cliff' in 2010-11 when many of their most valuable patents expire. "The big companies are looking for opportunities, and are coming up with varying different models. We help to de-risk the project for prospective follow-on funders, especially those in neglected disease areas."

The TTD recently launched a joint venture with Merck to launch a vaccine development unit in India with a not-for-profit mission that focuses on developing affordable vaccines to prevent diseases that commonly affect low-income countries. "This is interesting because it shows the pharmaceutical industry is prepared to work within emerging markets – arguably in quite a philanthropic way," says Nelki.