The recent AstraZeneca takeover bid from Pfizer puts pharmaceutical R&D once again on the public agenda. Three pertinent questions are (a) what can be expected from this acquisition, (b) what are the implications for the UK economy and science base, and (c) whether such a deal should go ahead. Although the key driver behind this acquisition would be an improvement in company performance and shareholder value, past evidence suggests that mergers and acquisitions (M&A) of large pharmaceutical companies imply a neutral net effect on productivity, if not a decline, with employment decreasing and R&D spend following a similar trend. Similarities between the two companies include dropping sales; however, relative to its size, AstraZeneca has a more promising R&D pipeline, especially in therapeutic areas where Pfizer’s strength is currently limited (e.g. oncology). Ensuring a portfolio diversification would make Pfizer’s takeover proposal a knight’s one, but history points towards a knave-like behavior

Angelis, Aris

Kanavos, Panos

Pharmaceutical Medicine

PubMed

Panos Kanavos

Aris Angelis

Crossref

Acquiring Pharmaceutical Industry Assets in the UK: 1 + 1 = 1?

LSE Research Online

  Panos Kanavos, Aris Angelis Acquiring pharmaceutical industry assets in the UK: 1 + 1 = 1?  Article (Published version) (Refereed)     Original citation: Kanavos, Panos and Angelis, Aris (2014) Acquiring pharmaceutical industry assets in the UK: 1 + 1 = 1? Pharmaceutical Medicine, online. ISSN 1178-2595   DOI: 10.1007/s40290-014-0066-2   © 2014 The Authors  This version available at: http://eprints.lse.ac.uk/59771/  Available in LSE Research Online: October 2014  LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.  CURRENT OPINIONAcquiring Pharmaceutical Industry Assets in the UK: 1 + 1 5 1?Panos Kanavos • Aris Angelis The Author(s) 2014. This article is published with open access at Springerlink.comAbstract The recent AstraZeneca takeover bid fromPfizer puts pharmaceutical R&D once again on the publicagenda. Three pertinent questions are (a) what can beexpected from this acquisition, (b) what are the implica-tions for the UK economy and science base, and(c) whether such a deal should go ahead. Although the keydriver behind this acquisition would be an improvement incompany performance and shareholder value, past evi-dence suggests that mergers and acquisitions (M&A) oflarge pharmaceutical companies imply a neutral net effecton productivity, if not a decline, with employmentdecreasing and R&D spend following a similar trend.Similarities between the two companies include droppingsales; however, relative to its size, AstraZeneca has a morepromising R&D pipeline, especially in therapeutic areaswhere Pfizer’s strength is currently limited (e.g. oncology).Ensuring a portfolio diversification would make Pfizer’stakeover proposal a knight’s one, but history pointstowards a knave-like behavior.1 IntroductionThe recent debate about Pfizer’s proposed takeover of theUK-based AstraZeneca felt like history repeating itself: inlate January 2009 Pfizer acquired Wyeth to create one ofthe leading global pharmaceutical conglomerates and a fewyears before that, it also acquired Pharmacia (2003) andWarner Lambert (2000). The combined company thatwould emerge would be the largest pharmaceutical in termsof sales revenue and R&D budget. A number of questionsarise however, about the value of such a merger and itsimpact both in corporate, but, more importantly, in socialterms: the first relates to the expectations from and thewider implications of such a takeover, should it happen inthe future; as a result of these, the second question relatesto whether it should be allowed to go ahead. In the sectionsthat follow we discuss the above questions and outline ourrationale for the takeover not necessarily being in the UKeconomy’s best interests.2 Expectations from a Likely Takeover of AstraZenecafrom PfizerAs things currently stand, both Pfizer and AstraZenecahave similarities: total sales in both have declined by abouta quarter (24 and 23 % for Pfizer and AstraZenecarespectively) since 2010 (Table 1) [1, 2]; R&D budgetshave also suffered as a result, showing a declining trend;but profits have been resilient in both cases. The two firmsalso have differences; among them an important differenceis that, relative to its size, AstraZeneca has a more prom-ising R&D pipeline than Pfizer with several molecules inlate stage development—particularly in oncology—andmore drugs at registration phase (Table 2) [1, 2]. If apromising R&D pipeline is a signal towards future marketstrength and sustainable profitability over the long term,then AstraZeneca is certainly a good bargain for theAmerican conglomerate.In light of the above, what can one expect from thisdeal? Again, history offers interesting insights. First, thekey driving force for this acquisition appears to beimprovements in company performance and shareholderP. Kanavos  A. Angelis (&)Medical Technology Research Group, LSE Health, Departmentof Social Policy, London School of Economics and PoliticalScience, Houghton Street, London WC2A 2AE, UKe-mail: a.n.angelis@lse.ac.ukPharm MedDOI 10.1007/s40290-014-0066-2value, mainly through economies of scale, removal ofduplication in R&D, cost optimisation or reduction,increased tax efficiency and leveraging synergies, poten-tially leading to higher sales and greater market shares inthe global pharmaceutical marketplace. However, evidencesuggests that, for large companies, acquisitions in thepharmaceutical industry lead predominantly to an outputdecline of new molecular entities (NME) and, for mergersand acquisitions (M&A) overall there does not appear to bea net effect on productivity [3], in other words value isneither created nor destroyed [4]. Second, employment islikely to decline and R&D spend could also suffer as aresult. After acquiring Wyeth in 2009, Pfizer reduced itstotal workforce at the end of 2013 by 36 % to a total ofabout 77,700 [1]. This was accompanied by a 41 %reduction in overall R&D spend: from a combined spend-ing of $11.3 billion at the end of 2008 before the acqui-sition, to $6.7 billion at the end of 2013. Declining R&Dspend is not always the case post-M&A, but Pfizer’sdirection of travel seems to be going in the same direction:following its three largest acquisitions (Warner-Lambert,Pharmacia, and Wyeth), numerous R&D sites were shutdown and the decrease in R&D spend could explain thereduced output observed post-M&A. In the case of Phar-macia, the Swedish Prime Minister referred to his country’s‘‘negative experience’’ when Pfizer failed to honour itscommitments following Pharmacia’s takeover [5],although much of that could be attributed to failure to bringnew products to market.3 Implications for the UK EconomyThe acquisition of AstraZeneca will ensure the sustain-ability of Pfizer’s current business model, including agreater portfolio diversification in areas where Pfizer’sstrength is currently limited, e.g. in oncology. But there ismuch in Pfizer’s takeover proposal pointing to a knave-likebehaviour. For one, history is not on its side: the closure ofthe R&D plant in Sandwich in the UK 3 years ago is still afresh—and for many, painful—memory. This took place atthe time when UK health and industrial policy for thepharmaceutical sector was ambivalent about the future ofthe Pharmaceutical Price Regulation Scheme (PPRS),predicting its abolition over the mid- to long-term.Table 1 Total sales, total R&D expenses and total workforce2008–2013Year 2008 2009 2010 2011 2012 2013Total sales ($ billion)Pfizer 48.3 50 67.8 61 54.7 51.6AstraZeneca 31.6 32.8 33.3 33.6 28 25.7Total R&D expenses ($ billion)Pfizer 7.9 7.8 9.4 8.7 7.5 6.7AstraZeneca 5.2 4.4 5.3 5.5 5.2 4.8Total R&D spending (% revenues)Pfizer 16.5 15.7 13.9 14.2 13.7 12.9AstraZeneca 16.5 13.4 15.9 16.4 18.6 18.7Workforce (total, 1000 s)Pfizer 81.8 116.5 110.6 103.7 91.5 77.7AstraZeneca 66.1 63.9 61.0 57.2 51.7 51.5Source: Company financial and annual reports [1, 2]Table 2 R&D pipelines ofPfizer and AstraZeneca, 2014Source: Company financial andannual reports [1, 2]a Other areas mainly includerare diseases, vaccines andbiosimilars in the Pfizerpipeline, and infection in theAstraZeneca pipelineAllareasCardiovascularand metabolismOncology Neuroscienceand painRespiratory,inflammation,immunologyOtherareasaPhase IPfizer 35 3 6 8 6 12AstraZeneca 32 2 14 2 8 6Phase IIPfizer 23 4 4 4 8 3AstraZeneca 28 3 9 2 12 2Phase IIIPfizer 20 2 8 4 3 3AstraZeneca 16 0 8 0 6 2RegistrationPfizer 6 1 0 2 0 3AstraZeneca 8 4 2 1 0 1TotalPfizer 84 10 18 18 17 21AstraZeneca 84 9 33 5 26 11P. Kanavos, A. AngelisBeyond operational efficiency and the long term sus-tainability of Pfizer’s business model, two additionalarguments make a deal attractive for Pfizer: first, taxoptimisation and efficiency and, second, the additionalfinancial incentives provided by the new PPRS.It is unsurprising that achieving greater efficiency inmanaging its tax obligations, through tax or corporateinversion, must have been a key consideration in Pfizer’spursuits to acquire assets outside the United States, where itis tax-resident. For sure, Pfizer has accumulated significantreserves from its international business over the past5 years, which, if re-patriated to the US, will be taxed atthe going rate (35 %). A likely acquisition of AstraZenecacould signal the movement of Pfizer’s headquarters to theUK, where the corporate tax rate is significantly lower thanthe one the company faces in the US. Additionally, the UStax code, perhaps uniquely among developed nations, seeksto impose income tax on profits earned abroad by Ameri-can corporations. Companies with strong internationalorientation, such as Pfizer, have a strong incentive to re-classify themselves as ‘foreign’ in order to avoid the bur-den of double taxation and return some of the profits totheir investors. One can hardly blame Pfizer for thisinconsistency in the US tax code. In fact, several othercompanies have strived to do the same in recent months oryears, for example, Medtronic (acquiring Ireland-basedCovidien) and Abbvie (acquiring UK-based Shire) and theonly way for the practice to stop would be to either reformthe US tax code or altogether disallow tax inversions. Afavourable reform of the US tax code appears unlikely asthe US authorities continue to push for legislation thatcould retroactively strip the tax advantages achieved bycompanies in some of the 2014 deals [6]. In the meantime,no direct pecuniary benefit to the UK economy is likely toemerge from a likely deal with AstraZeneca, althoughshareholders (in the UK and elsewhere) and large (mostlyprivate and some public) institutional investors will realisea short-term benefit equal to the difference in the shareprice, discounting AstraZeneca’s portfolio and futurelaunches.Considering the wider economic and social impact ofsuch an important deal, it should be expected that the UKgovernment’s involvement will be substantive and focus onmaximising the likely benefits to UK PLC. While freemarket economics, backed by acquiescing politics, usuallydetermine the outcome of M&A, the UK government, as aguardian of health and industrial policy for the pharma-ceutical sector has a legitimate right to become involved indiscussions aiming to secure a better deal for long-termemployment, research, production and exports. As a resultsuch an involvement is in the public interest. After all, inthe wake of the recent financial crisis, there is great interestin holding banking executives to account for messed-upmergers and unfulfilled commitments. In preventing simi-lar blunders by pharmaceutical industry executives, thescope and extent of likely commitments could be definedex ante and monitored after they have taken place.In a likely future takeover proposal, investors willdemand a leaner organization post-takeover in order toretain and possibly enhance profitability and sustain this fora few more years until new products emerge to replenish anageing product portfolio. Whereas human capital mightsuffer for the sake of improving operational efficiency,physical capital might not, at least in the short term. Thenew PPRS, which became operational on January 1st,2014, allows a 21 % rate of return on capital employed(ROCE) on sales to the UK NHS. Scheme members will beable to retain profits of up to 150 % of this target and mayeven be able to apply for price increases if they forecastprofits less than 50 % of this target [7]. As a result, acombined company with a broader physical capital basemay be able to make more flexible use of capital, as per thecurrent PPRS arrangements, allowing an additional taxoptimization up to a point. But a rationalization of salesforces and, potentially, R&D activities is also a strongpossibility, implying losses in different parts of the world.It is highly unlikely that the UK R&D operations willescape unscathed as both companies have research facili-ties in the Cambridge area.4 Long-Term ConcernsDespite the obvious tax advantages for Pfizer and theincentives provided by the UK institutional framework,becoming part of a corporate global empire could havenegative implications for creativity and entrepreneurship.While scale effects are usually a key driver of corporateM&A, it is doubtful that the same argument holds inresearch activities, where individuality and small teamspirit often drive innovation and discovery. This givescredence to the ‘small is beautiful’ argument [8] asopposed to ‘big is better’. Consequently, it is not neces-sarily the case that merging the activities of two largepharmaceutical manufacturers such as Pfizer and Astra-Zeneca will create additional value and greater impactfurther down the line.Whereas it is obvious why AstraZeneca may be a goodbargain for Pfizer, it is unclear how the UK economy andits science base may benefit and what the implications arefor overall industrial policy. When listening to Pfizer’sCEO before the House of Commons Business, Innovationand Skills (BIS) Select Committee, one cannot help butshare MPs’ worries. For sure, Pfizer cannot promise muchabout its UK presence over the long-term unless somespecific targets are put forward and discussed upfront inAcquiring Pharmaceutical Industry Assets in the UK: 1 ? 1 = 1?order to create a win-win scenario for all stakeholders.Such targets could embrace new products, new researchlines of investigation based on research priorities and,potentially, new markets.5 ConclusionIn a globalized economy, conglomerates such as Pfizer canalmost free-ride on the back of successful governmentpolicies and incentives for biomedical innovation. Forventures like this not to end up being a zero-sum game, onecan only hope that the scientific excellence the UK pro-duces and the incentives provided for this purpose willcontinue to deliver first class research outcomes in thefuture. Additionally, governments (particularly the UKgovernment) as sponsors of policies promoting research,innovation and entrepreneurship, have a legitimate right tohave some say on the terms of M&A taking place in theirterritory and ensure that the benefits from such deals dif-fuse more widely in society.Conflicts of interest Panos Kanavos has no conflicts of interest todeclare that are directly relevant to the content of this article. ArisAngelis has no conflicts of interest to declare that are directly relevantto the content of this article. No funding was received to assist in thepreparation of this article.Open Access This article is distributed under the terms of theCreative Commons Attribution Noncommercial License which per-mits any noncommercial use, distribution, and reproduction in anymedium, provided the original author(s) and the source are credited.References1. Pfizer Financial Reports. http://www.pfizer.com/investors/financial_reports/financial_reports. Accessed 14 May 2014.2. AstraZeneca Annual Reports. http://www.astrazeneca.com/Investors/Annual-reports. Accessed 15 May 2014.3. Munos B. Lessons from 60 years of pharmaceutical innovation.Nat Rev Drug Discov. 2009;8:959–68.4. Grabowski H, Kyle M. Mergers and alliances in pharmaceuticals:effects on innovation and R&D productivity. In: Gugler K,Yurtoglu B, editors. The economics and corporate governance ofmergers. Northampton, MA: Edward Elgar Publishing; 2008.p. 262–87.5. Reuters. http://www.reuters.com/article/2014/05/09/astrazeneca-pfizer-idUSL6N0NV1NQ20140509. Accessed 24 August 2014.6. New York Times. http://dealbook.nytimes.com/2014/07/24/obama-administration-presses-for-retroactive-inversion-legislation/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1. Accessed 28August 2014.7. Department of Health. The pharmaceutical price regulationscheme 2014. London: DH; 2013.8. Schumacher EF. Small is beautiful: a study of economics as ifpeople mattered. Oxford: Blond and Briggs; 1973.P. Kanavos, A. Angelis

Acquiring pharmaceutical industry assets in the UK: 1 + 1 = 1?

Springer - Publisher Connector

http://dx.doi.org/10.1007/s40290-014-0066-2

Acquiring pharmaceutical industry assets in the UK: 1 + 1 = 1?

Abstract

Similar works

Full text

Available Versions

Crossref

LSE Research Online

Springer - Publisher Connector