BUSINESS

CONNAUGHT’S FOREIGN SALE

POLITICAL CRITICISM IS RISING OVER THE SALE OF CANADA’S FAMOUS VACCINE-MAKER TO FRANCE’S INSTITUT MERIEUX

ANN WALMSLEY December 25 1989
BUSINESS

CONNAUGHT’S FOREIGN SALE

POLITICAL CRITICISM IS RISING OVER THE SALE OF CANADA’S FAMOUS VACCINE-MAKER TO FRANCE’S INSTITUT MERIEUX

ANN WALMSLEY December 25 1989

CONNAUGHT’S FOREIGN SALE

BUSINESS

POLITICAL CRITICISM IS RISING OVER THE SALE OF CANADA’S FAMOUS VACCINE-MAKER TO FRANCE’S INSTITUT MERIEUX

For many Canadians, the sale amounted to a devastating attack on Canada’s struggling high-technology sector. But for others, including the more market-oriented, the sale of historic Connaught BioSciences Inc. of Toronto to the French-owned serum-maker Institut Mérieux SA was a timely rescue of a storied but financially troubled vaccine manufacturer. Last week, after lengthy delays, when Investment Canada finally approved the successful $942million Mérieux bid for Connaught, along with a second $746-million rival bid from the SwissU.S. consortium of Ciba-Geigy Ltd. and Chiron Corp., it ended one of the most contentious episodes in Canadian takeover history. Still, the issues raised by the Mérieux takeover are not likely to die quietly. Declared Liberal industry critic James Peterson in a heated Commons debate last week: “What Canadian industries is [Prime Minister Brian Mulroney] not prepared to sacrifice?” Mulroney replied that protectionism “puts a Wall of China around Canada.” Nationalistic sentiment supporting the 75year-old Connaught Laboratories runs deep, because it became one of the world’s main producers of insulin following Frederick Banting and Charles Best’s discovery of insulin in Toronto in 1921. Connaught is also one of the few large Canadian biotechnology companies in an industry that has much potential for job and wealth creation in the future. But in the end, because of Mérieux’s numerous concessions and the failure of two Canadian bidders to secure financing, many analysts said that Investment Canada had no choice but to approve the sale. After the federal agency turned down Mérieux’s first takeover proposal last October because it did not provide a “net benefit to Canada,” Mérieux responded with a series of new commitments to safeguard Canadianbased research and development.

According to Industry, Science and Technology Minister Harvie Andre, who is responsible for Investment Canada, the government was also guided by a report from the U.S.-based Boston Consulting Group, which stated that Connaught could not sustain the level of spending required to remain competitive in the pharmaceutical industry. Meanwhile, the Ontario government claims that any future re-

search funding it provides to Connaught will be conditional on Mérieux’s maintaining Canadian content in the company. Said Andrew McCreath, a biotechnology analyst with Bums Fry Ltd.: “Connaught’s management had sacrificed research and development programs for short-term profits, and the strategy was not working.”

The cabinet’s approval of the decision by Investment Canada was a difficult one, according to officials involved in the process, because the government was wrestling with two conflicting policies—one that promotes Canada as open for business and another that seeks to

foster development of Canadian-based technology companies. That conflict centred on Industry Minister Harvie Andre, because Investment Canada is intended to protect Canadian industry from foreign takeovers that are not beneficial to the country. Andre said that he would have preferred a Canadian purchaser, but none came forward. He denied that he faced conflicting policies and told Maclean’s that he delayed his decision because “I wanted to prove to myself that Connaught needed a suitor.”

For Connaught chairman Brian King, who has been trying to find a partner for the company since 1987, there was no doubt that the sale was necessary. Said King: “Heritage is

great stuff, but it does not put meals on the table for employees.” Many investors seemed to agree with King. Within 24 hours of the government’s decision, most shareholders had rejected the Ciba-Geigy-led bid and tendered their stock to Mérieux’s richer offer. By week’s end, Mérieux owned 99.4 per cent of outstanding Connaught shares, creating the world’s largest vaccine producer but bringing the company under the indirect control of the French government, which owns about 51 per cent of Mérieux’s parent company.

King said Connaught will benefit from the sale because of access to Mérieux’s European markets. Connaught was also rapidly losing market share on a number of fronts, and although it is the leading seller of pediatric drugs in North America, Connaught is now losing its critical meningitis markets to a cheaper U.S. product. And it is experiencing technical problems in the commercial production of its new, more potent polio vaccine.

In addition to technical problems, morale is also low at Connaught. Many of its 1,219 employees, who are working in areas of research where the two companies overlap, say that they fear they will lose their jobs because of the merger. Said one vice-president in the company last week, who asked to remain anonymous: “The department Christmas parties have been pretty gloomy.” But, while others are clearly worried, King said that his position is not threatened. Even if he does lose his job, a so-called golden parachute, consisting of cash, stock options and benefits, will provide him with a cushion worth more than $2 million.

Meanwhile, economic nationalists are monitoring Mérieux’s progress in meeting its obligations to Investment Canada. After Investment Canada’s initial rejection of the takeover, Mérieux improved its offer by promising to enhance its original proposal for research spending at Connaught. It also pledged to build a new $30-million biotechnology centre in Willowdale, Ont. As well, it pledged to earmark 25 per cent of Connaught’s spending on advanced biotechnologies and to guarantee that in the event of a vaccine shortage, Canadians would get first access to existing supplies. And Monte Kwinter, Ontario’s industry, trade and technology minister, told Maclean’s that he intends to make any future funding to Connaught conditional on Mérieux’s fulfilling its commitments to the laboratory.

According to Mérieux’s chief operating officer, Jacques-François Martin, Mérieux has guaranteed Investment Canada that the company will remain Canadian in many ways. The § new board of 10 directors will have I five resident Canadians independent I of Mérieux and five Mérieux nomi| nees, some of whom will also be Cana“ dian. Although the chairman will be a

Mérieux representative, the company

has pledged that any decision affecting

“the essential Canadian identity” of Connaught

would require approval from two-thirds of the

board.

Company executives have also undertaken to safeguard Canadian interests in Connaught through a share offering. In the spring, Mérieux will offer Canadian institutional investors, such as pension funds, any Connaught shares that it owns above the 50 per cent it needs to retain voting control. And within 18 months, it has agreed to sell up to 49 per cent of Mérieux stock to Canadian investors.

Still, some analysts, such as McCreath, said that Mérieux’s offer to sell shares to Canadians is simply a public relations exercise because no astute investor would pay a takeover-inflated $37 per share for Connaught.

But, according to government officials, the investment and political review process that led to deciding Connaught’s future has its own benefits. They describe it as a useful test case that can be applied when the ownership of other advanced-technology companies is contested. And Dr. Jonas Salk, developer of the Salk vaccine and now professor in international sciences at the Salk Institute in La Jolla, Calif., said that the added research strength in the marriage of Mérieux and Connaught would lead to the production of an inexpensive diphtheria-pertussis-tetanus-polio vaccine and help rid the world of the deadly diseases. From that perspective, the loss of Connaught may be an easier pill for some Canadians to swallow.

ANN WALMSLEY