Politics and Pharma M&A in Argentina
The COVID-19 pandemic has caused economic and social disruption and affected the behaviour of both consumers and producers in Argentina, with an important impact on Argentine currency (ARS) devaluation and inflation, among others. We are not yet able to measure the real impact of the uncertainty the world is currently facing and its impact on the country.
In December 2019, President Macri ended his term and Alberto Fernandez took office with Cristina Kirchner as vice president, after having promised to help the vulnerable population, aid the local industry and blue-collar workers, and put an end to the external debt and economic crisis. In a short time, the Fernandez administration implemented agreements with key sectors, such as that with the local pharma association, and enacted emergency legislation such as Law No. 27,541, which declared, prior to the pandemic, a public state of emergency in economic, financial, fiscal, administrative, pension, tariff, energy, health, and social matters.
Although emergency measures tightened once the lockdown was ordered, it is safe to say that the set of policies that characterizes the current government include price controls, significant capital transfers from the public sector to individuals and certain companies, restrictions in the currency market, and tax increases. Some government actions affecting the pharmaceutical industry have included setting maximum prices for certain innovative drugs which is unprecedented.
With regards to M&A activity, the pharmaceutical industry has managed to thrive in Argentina during the current crisis, with some relevant deals that took place, even, during the full lockdown, and other ongoing projects. Big global pharmaceutical companies are facing the re-structure of their mature and/or OTC portfolios in the LatAm region during this time, which has had interesting results for the local pharma industry in terms of regionally expanding their business portfolio. Other global pharma companies are restructuring their business model oriented to having a local footprint in the country. According to the Industrial Production Index, measured by the Argentine Institute of Statistics and Censuses (INDEC, after its acronym in Spanish), pharmaceutical products registered a year-on-year increase of 25.4 percent in the reference month (December 2020). That encouraging outcome has been possible in large part because of the COVID-19 pandemic, but also because of certain features that make the Argentine pharma market attractive and profitable.
Moreover, new opportunities are developing in areas such as clinical trials, gene therapy, medicinal cannabis, and telemedicine, due to recent changes in regulations. For instance, in January 2021, the Argentine Executive Branch finally implemented Law No. 27,506, which provides for a promotional tax regime for innovative companies related to the biotechnology, neurotechnology and genetic engineering, nanotechnology, and nanoscience industries.
Against this backdrop, while some companies are divesting (often as a result of global policies regarding their mature products and to focus product pipeline on complex drugs), others have expanded their business by switching from a third-party full distributor model to a hybrid or even to a full affiliate model, by taking advantage of the reduced costs derived from the context, basically resulting from the economic crisis due to the devaluation of the national currency and continuous high inflation. This specific local dynamic calls for innovative buyers and sellers, who need tailored and well defined legal and regulatory strategies for navigating this process in a successful manner.
Under Argentine law, the buyer is responsible for auditing the target company and assumes all liability once the transaction is closed. Hence, the ability of specialists to forecast future scenarios is of utmost importance, and due diligence processes must be conducted without losing sight of political and economic factors, as well as the legislative activity relevant to the target (like the bill that is currently in Congress that would modify the Argentine Antitrust Law). Additionally, the same skills are required if we refer to US-based SPAs (often used for agreements celebrated in Argentina), since this pandemic has evidenced how difficult it is for standard clauses (i.e., material adverse change and earn-out clauses) to overcome uncertainty and solve different issues such as large distortions in the valuation of assets. In consequence, change is needed in the way we draft certain provisions like reps and warranties, material adverse change or indemnity clauses, and how we define the procedures used to assess the value of the target, or what the parties will consider as the ordinary course of business, to name a few.
In conclusion, rapid fluctuations in several economic indicators, and the frequency of contractions of the business cycle have induced some companies to pull out of the country, but that volatility has also created incentives for other companies to stay or decided to have a local footprint and even to further invest by taking advantage of the current juncture. In that sense, the expertise of the pharma specialists involved in M&A operations is crucial in terms of timing, cost, and quality of the final transaction (especially when dealing with highly regulated industries such as pharma).