Pfizer offers $106 billion to acquire AstraZeneca; U.K. pharma giant rejects overtures

Questions loom as to whether the deal is good for United Kingdom and if Pfizer’s motivations are largely tax-related

Jeffrey Bouley
NEW YORK & LONDON—At the risk of making what could be a trite comparison of romantic relationships and merger-and-acquisition deals, it really does seem as if, since late April, Pfizer has pretty much announced a wedding engagement to its entire family while its intended paramour, AstraZeneca, doesn’t seem keen to get into a relationship at all.
 
The U.K.-based pharma giant has rebuffed multiple unsolicited offers from U.S.-based Pfizer since April 28 to enter into any kind of negotiations about being acquired, including a recently sweetened proposal that increased its initial offer to $106 billion. AstraZeneca promptly rejected the latest offer on May 12, with an official statement that began, “Pfizer’s announcement contains no new proposal nor substantive new information” and continued with the sentiment that AstraZeneca’s board believes Pfizer is making an opportunistic attempt “to acquire a transformed AstraZeneca, without reflecting the value of its exciting pipeline. This value should accrue fully to AstraZeneca shareholders … The Board reiterates its confidence in AstraZeneca’s ability to deliver on its prospects as an independent, science-led business.”
 
Many market-watchers are excited about the prospect of such a deal, though, and some have remarked that Pfizer has painted itself into a corner by making its intentions and strong desire so public. As of the writing of this article on May 13, it was widely expected that Pfizer would be back with an even larger offer soon, possibly later in the week.
 
In outlining its own position on May 13, Pfizer noted “compelling strategic rationale” for the deal, such as noting, “Clinical, regulatory and reimbursement risks continue to increase the cost of drug development and the risk profile of the industry. Pfizer believes a combination of Pfizer and AstraZeneca would create an industry leader with the scale, operational efficiency, financial strength and breadth of portfolio to better address these challenges.”
 
Pfizer also maintained that combining the companies “would enhance the innovative and established portfolios of both businesses” and provide an “even more desirable product portfolio to enhance commercial position in key emerging markets and enhanced optionality to pursue future separation, though no decisions have been made.”
 
However, it isn’t just AstraZeneca that is skittish, and the U.K. government is split on the value of such a deal and what it might take away from the United Kingdom in terms of scientific advancement and statute in the pharmaceutical marketplace.
 
Attempting to allay these concerns and win both the government and the pharma over to its side, Pfizer submitted on May 12 assurances to two parliamentary committees that set out commitments to research and development. Pfizer pledged to  complete AstraZeneca’s research and development hub in Cambridge, as well as ensure that one-fifth of the company’s total R&D workforce would be based in the United Kingdom and promise to retain substantial manufacturing facilities in the country.
 
“To ensure our commitments are binding, we included them with our proposed offer announcement understanding fully that they would be binding as a matter of English law,” Pfizer said. Reportedly, though, while it may be “legally binding,” the Guardian noted in an article about the deal that it would only last for five years.
 
With more than one-quarter of all manufacturing R&D in the United Kingdom being represented by pharma and biotech, though, the stakes are high, and Pfizer has a track record to answer to that makes some hesitant to trust the company. Pfizer cut back research at a U.K.-based site in 2011, and Sweden’s finance minister, Anders Borg, actually warned members of the British parliament to be wary, saying that Pfizer went back on employment and R&D promises after it acquired Swedish company Pharmacia. Since that takeover in 2002, the number of employees there has dropped by 90 percent.
 
Many have noted that such a big acquisition flies in the face of Pfizer’s stated intentions to streamline, and Pfizer has made no secret that it might break up in the near future to make that happen. The idea of merging into a company only to be broken up relatively soon thereafter is one of the factors making AstraZeneca hesitate to jump at even $106 billion.
 
Moreover, speculation is high that Pfizer is looking less at AstraZeneca’s pipeline prospects than it is a better corporate tax position in the United Kingdom. As Deutsche Bank analyst Mark Clark wrote in an investor’s note in early May, the proposed acquisition “doesn’t work financially on most people’s calculations without the tax benefit … Without a doubt, tax is a major motivation.”
 
Clark’s calculations indicate that under the current offer to acquire AstraZeneca, if Pfizer can swap its 26-percent U.S.-based tax rate for a lower U.K. rate and subsequently cut $3 billion in costs from the combined company, it could see earnings per share rise 14 percent three years after closing the deal, compared to a rise of just 3 percent if it doesn’t get the better tax rate.
 
Although he has downplayed it somewhat, Pfizer CEO Ian Read doesn’t deny the tax implications. In a call with analysts May 5, he insisted there was a “fit on the portfolio” but admitted it wasn’t a “pipeline story per se” and, in reference to the three ideas of pipeline boosting, cost cutting and tax savings, he said, “You know, I’ve been asked, would you do it if you didn’t have this part or you didn’t have that part? I think the answer is I’m doing it because I have all three parts.”

Jeffrey Bouley

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