Now that Pfizer ($PFE) has gone ahead with its $100 billion bid for AstraZeneca ($AZN), the big question on everyone's mind is, why would they do it?
The pipeline couldn't be the main attraction. AstraZeneca is still scrambling to repair years of damage from having the weakest R&D group in Big Pharma. Its latest reorganization is still far from complete. And while there's talk of immuno-oncology, a lottery ticket for Alzheimer's and more, there's none of the big late-stage buzz associated with sure blockbusters. By his own admission, CEO Pascal Soriot will take years to position AstraZeneca so it can start winning the kind of approvals that will allow the numbers to start climbing again. And other big biotechs--such as Gilead ($GILD) and Bristol-Myers Squibb ($BMY)--have had a far more successful track record for drug development.
Pfizer's own weak performance at R&D in recent years--highlighted by a pair of approvals for Xeljanz and Eliquis that hasn't yet panned out--only underscored its own inability to add value when it comes to experimental meds. Pfizer has successfully lowered spending on research, eliminating a large part of the R&D organization obtained in the big Wyeth buyout, without impressing anyone that their narrower focus could really pay off with a string of major approvals, with the possible exception of palbociclib.
The prospect of Pfizer coming in at this stage with its legendary budget ax in hand would likely even further demoralize an R&D group which has been put through the wringer several times, probably eliminating a big rebirthing move to a new $500 million headquarters/R&D campus in Cambridge. And at best there would be lengthy delays as Pfizer examined each of the programs in development.
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| Pfizer CEO Ian Read |
So if Pfizer CEO Ian Read is spinning fancifully when he talks about the bright potential for cancer combos and complementary research programs, why buy AstraZeneca?
There's one short, simple answer that has nothing to do with drug development: taxes.
Pfizer has built a large stockpile of cash outside the U.S., unwilling to repatriate money subject to U.S. taxes. By establishing a holding company in the U.K., without even moving its headquarters, Pfizer/AstraZeneca would be subjected to a tax rate of 21%, soon to be cut to 20%. And then there's the patent incentive, where profits coming from U.K. patents are subjected to a rate of only 10%. The U.K. government passed that hoping to inspire more research, not a global end run around the U.S. Treasury.
"This is basically an opportunity to go outside the U.S. and still sell in the U.S. and strip the tax base," H. David Rosenbloom, an attorney at Caplin & Drysdale, tells Bloomberg. "If we ever had a legislature in the United States, we could do something about this, but I don't expect to live that long."
Bloomberg's insightful report also notes that companies based in the U.K. aren't required to pay taxes on the money brought back from tax havens, a favorite tactic of Pfizer's. And the Wall Street Journal did the math as well, outlining some blockbuster annual tax savings if Pfizer can cut its tax rate from the 27.4% rate paid last year to the 20% rate now looming in the U.K. The Journal notes that Barclays estimates that every one-point reduction in Pfizer's tax rate would amount to $200 million in savings. Add it up and the lower rate would amount to more than $1.4 billion in potential annual savings.
Pfizer, for its part, frankly acknowledges the tax factor in its decision, but also says it's operating well within the law.
A high-profile tax maneuver like this could well grab the attention of lawmakers on both sides of the Atlantic. The U.S. won't want to lose Pfizer, and with unions and AstraZeneca itself fighting off the proposed megamerger, the U.K. may not be so welcoming.
But this train could be very hard to stop now, especially with the resources Pfizer has at hand. The market is looking for Pfizer to add more cash and sweeten its bid to around the $105 billion to $110 billion mark if it plans to complete the deal, reports Reuters. Few possible white knights are on the horizon and there's every indication that Pfizer intends to see this acquisition through to the end.
- here's the Reuters report
- here's the Bloomberg report
- here's the Wall Street Journal report