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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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May 7, 2014

Pfizer-AZ: Politics and Press Releases

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Posted by Derek

This saga is going to be running for a while; we might as well all resign ourselves to it. The latest seems to be that the British government is getting more visibly into the act. The Business Secretary, Vince Cable, has said that he's not going to let Pfizer use the UK as a tax haven. But why did the country's corporate tax laws change so favorably if they didn't want companies to use the place as a tax haven? Instead of this being a statement against the deal, I take this one as mere public relations. He has also promised to protect jobs in the country, and there the government has some leverage (since they're the ones who set those tax rates, and can set them again should they choose).

At the Prime Minister level, David Cameron has said that he's seeking more assurances from Pfizer. As Monday's post said, though, any new PfizerAstraZeneca, which would actually use the new name "Pfizer", as has been the custom, can make these promises by slashing jobs in the US and and Sweden. You'll note that the Swedish government is getting no assurances from Pfizer at all. They have no leverage, as far as I know: Sweden's corporate tax rate is 22% as opposed to the UK's 20%, and I believe that other costs are higher as well. If Pfizer repatriated its foreign earnings to the US, they'd pay even more (here's an excellent look at the company's complex tax situation, and its analysis fits the company's current moves perfectly:

Pfizer needs cash to pay dividends, pay down debt incurred for the Wyeth acquisition, buy back shares, and perhaps acquire more U.S. companies. At the same time, it is under pressure to shore up its after-tax earnings as patents on profitable drugs expire faster than they can be replaced. If there was ever a company that could use another tax holiday -- or generous transition rules to a territorial system -- Pfizer is it.

All of the talk from Pfizer's management about R&D this and synergy that is window dressing. It's taxes. Depressingly, this fits my oft-stated rule that most questions that are phrased in the form "I wonder how come they. . .?" turn out to be answered with the word "money". If you'd like to experience some of that managerial window dressing first hand, though, take yourself to PfizerUpdate.com, where the company has set up a handy web portal for all its press releases on the subject. You can even have them email you when a new one is posted. Or you can just bang yourself on the head with a hammer every so often, and eliminate the middleman. Your call.

Comments (33) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. watcher on May 7, 2014 7:54 AM writes...

To DL: Why so indignant? You very well know that the business of Pharma and biotechs too is the business of making money. Full stop.

Silly person if you (still) believe that the purpose of a drug company is to make new drugs.

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2. fourtytwo on May 7, 2014 8:01 AM writes...

Re #1.

I imagine the reason Derek is so 'indignant' is that M&A tend to be short-term 'fixes' that make a CEO look good for a few years. However, R&D of the merged organisation doesn't equal the sum of the two parts, largely because companies tend to cut lowly science dobs and close R&D. Therefore, long term, the company may lose out, and the scientists and other workers axed will almost certainly lose out. The CEO doesn't care though, as he's got his big bonus and pension sorted.

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3. johnnyboy on May 7, 2014 8:03 AM writes...

lol on the hammer thing, derek.

I'm no accountant, and evidently from that paper, Pfizer's tax situation is insanely complicated. But still, this looks to me like PFE is willing to spend over $100 billion, and cause massive disruptions to its structure and employees, just to save what - 5, 10 billions in US taxes ? And the UK is hardly the Cayman islands; a 20% tax rate may be lower than the US', but it's still 20%. Frankly I just don't get. I guess it makes sense to accountants only.

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4. Hap on May 7, 2014 8:12 AM writes...

From the link:

It [Pfizer] is cutting costs. It is eliminating thousands of jobs. It wants to focus on its risky, core business of developing and marketing new drugs. But at the same time, it is dramatically cutting research spending.

This fits with @1 above, alas. Their policies seem to lead one to think that their new drugs will be coming from the imaginary plane, or another round (or more) of binge-and-purge.

Also, the article is pretty good about describing Pfizer's not telling its investors exactly how much tax arbitrage they're engaging in. It seems unlikely, but the possibility of Pfizer having to explain to Congress why 40% of their sales, most of their R+D, and none of their profits are in the US warms the cockles of my heart. I'm sure that possibility is why Pfizer doesn't want to explain its real tax rates to its investors. Who's this deal about making money for, again?

Maybe Pfizer should just get itself reincorporated as a bank. It much better fits with its purpose and methods. Given the permissive support of bankers' suicidal investments, it might lead Pfizer back to the US where they can enjoy the benefits of "too big to fail".

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5. Anonymous on May 7, 2014 8:22 AM writes...

Vince cable is a liberal democrat, not conservative. He was all talk before the election and has spent the entire duration of his 'power' doing nothing of note. Which is interesting as he had genuine business experience while osbourne had none.

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6. Miramon on May 7, 2014 8:41 AM writes...

Maybe Pfizer should just move their HQ mailing address to Tuvalu or some other little country that would be willing to negotiate a tax break down to 1% or so. Can't they do that without buying AZ?

Also: re 5: liberal democrats and conservatives -- how can you tell the difference anymore?

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7. Anonymous on May 7, 2014 8:44 AM writes...

As George W. Merck once said:

"We try never to forget that medicine is for the profits, and avoiding taxes. It is not for the people. The people will just have to follow us, and if we have remembered that, they never fail to appear and tag along behind like sad pathetic little sheep."

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8. NMH on May 7, 2014 8:48 AM writes...

All this Pfizer-slasher behavior does, IMO, is drive the growing difference between rich and poor. You want to make money in science? Then you better be smart enough to come up with the ideas and products that can be sold to Pfizer, because if you dont own the company and IP you will most certainly lose your job. This behavior really does not lead to the stability of a culture.

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9. Anonymous on May 7, 2014 8:55 AM writes...

"All this Pfizer-slasher behavior does, IMO, is drive the growing difference between rich and poor".

Welcome to capitalism - the idea that making money by taking value from others (and destroying value in the process) is as good as, or better than the idea of making money by creating value through innovation.

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10. annonie on May 7, 2014 9:09 AM writes...

A former head of R&D of one of the major drug companies used to say that the future would only have a few (say, about half a dozen) major Pharma companies, not the dozens that once were independent. It's coming true, with Pfizer wanting its name to be one of the survivors.

The cost and frequency of finding new drugs simply can't support the economics of maintaining smallish msjor independent drug companies cannot be supported any longer with the inevitable changes coming to health care, including cost containment.

I know this is not a favored position to express on this site, but it is the evolution of the industry presently in-play, and reality can be a tough pill to swallow.

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11. Hap on May 7, 2014 9:46 AM writes...

Consolidation never works out well for the rank-and-file, but it could in theory work out for a company in the long run. It always decreases competition, which gives the new company more marketing and pricing leverage. It could make a better R+D organization, but history says that it usually ends up with the historically productive sites shuttered, and research concentrated at unproductive legacy sites in the acquirer, which doesn't seem to end up well for R+D at the merged company. But, there are financial reasons to consolidate, so you keep consolidating, and not only do you lay off lots of people, but you don't find drugs well enough to use the marketing pull you got by merging. The only way left to go is to depend on other to find your drugs in low-cost environments (start-ups or other countries). I hope that that is unsustainable, but it certainly could go on for awhile. Unfortunately, that model favors paying off lots of snake oil salesmen at small pharmas, because they can sell their "products" most attractively to big pharmas with little or unproductive R+D (which probably wasn't helped by all the hacking and slashing). Again, we don't get much in the way of drugs out of this method.

Consolidation currently doesn't look like "merge, use your size to find drugs better and cheaper and marketing power to price them accordingly, and make money". It looks more like "merge, pay off lots of M+A people, liquidate the assets of the bought company for the benefit of a few, lay off lots of R+D and sales people, slide on for a few years, wonder where your products are going to come from, repeat". If consolidating led to something good, even requiring layoffs to enable it, it might be OK; however, it mostly sees like "slash-and-burn" agriculture that doesn't grow anything. I'm not sure why accepting that as normal and good should be a reasonable position.

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12. A Nonny Mouse on May 7, 2014 9:53 AM writes...

#3

While the tax in the UK may be 20%, there is no tax on overseas earnings, which means that any profits can be brought back to the UK while, in the US, they would have to pay 35% (even if they had paid local taxes.

Interestingly it appears that, over the last 3 years, Pfizer has paid about £112m in taxes in the UK but had received £184m in R&D tax credits!

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13. The Fat Layer on May 7, 2014 9:57 AM writes...

@1 and 3: Actions speak for themselves. Here it's all about money. Make and save money first, the rest... well... tough.

@8: Culture? How can any corporation build, keep, and nurture culture when there are so many M&As, restructuring, and turnover? I guess culture is one of casualties in the M&A world.

It remains to be seen the impact and ripple effect this M&A will have in pharma business and drug development.

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14. Wavefunction on May 7, 2014 10:25 AM writes...

#1: "You very well know that the business of Pharma and biotechs too is the business of making money."

Sorry, I thought the purpose of drug companies was to, you know, discover drugs.

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15. money money money on May 7, 2014 1:22 PM writes...

@14 If the purpose of drug companies was to discover drugs, they would also focus on the "neglected diseases."

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16. Helical Investor on May 7, 2014 1:23 PM writes...

which would actually use the new name "Pfizer", as has been the custom

Meh, change a letter already.

PfAZer

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17. MDACC Grad on May 7, 2014 1:35 PM writes...

It is apparent that AZN will go down with a fight, which means a high cash hostile takeover. What AZN sense is there in spending 100bil and change to get a few billion in savings?
Especially, when us on the science side know that a scientific asset loses value upon being acquired...after all, a significant percent of AZN's current valuation represents their ability to exist independently....

Permalink to Comment

18. Anonymous on May 7, 2014 1:49 PM writes...

@14, Wavefunction: Do you really believe what you said after seeing what has happened in the past 10+ years in pharma? Apologies, but anybody who still believes that executives and board members of pharma companies are in the business of discovering drugs is completely out of touch with the unfortunate profit-driven reality we live in.

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20. a on May 7, 2014 2:27 PM writes...

A general rule for British politics is to disregard anything that Vince Cable says.

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21. Ex-Merckoid on May 7, 2014 2:38 PM writes...

To Dr. Anonymous.#7
Somehow, then, I had the feeling that the Merck propaganda machine was serving us the reverse proposition.That the focus must be on patients and that profit never fails to follow.
Did I err?

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22. Chrispy on May 7, 2014 3:00 PM writes...

@21 Ex-Merckoid --

That's a play on the real saying, as you have probably heard a million times:

“We try never to forget that medicine
is for the people. It is not for the profits.
The profits follow, and if we have
remembered that, they have never
failed to appear. How can we bring the
best of medicine to each and every
person? We cannot rest until the way
has been found with our help to bring
our finest achievements to everyone.”
– George W. Merck

Must have been nice, back in the day...

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23. disgruntled on May 7, 2014 3:45 PM writes...

What I find really sad is that the UK government is claiming that it wants to protect jobs by protecting AZ.

Didnt see them take an interest as AZ slashed jobs and closed sites before forcing its staff to move 250miles

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24. watcher on May 7, 2014 4:50 PM writes...

22: Yup. Unfortunate. Back in the day.

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25. Lunar landing on May 7, 2014 9:15 PM writes...

Can someone please make the business case against what PFE is doing here. In my mind it is not good for jobs, employment or science. But it is good for the business? Please make the business argument against this. I know this is heresy on this site but small molecule drug discovery may no longer be the best business to be in, perhaps the industry needs to re-focus and consolidate to survive. Pharma stocks have gone from good money making investments to value investments. For the most part big pharma CEOs are in the mode of doing whatever is needed in order to protect their dividends. Small molecules will always have a place in medicine but the cost and business dictates that they will not have the primacy they once did moving forward. Businesses change - adjust to survive. In the end it is all about the business....not the science. Sorry.

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26. Crocodile Chuck on May 7, 2014 9:23 PM writes...

The history of Pharma in terms of provenance of its CEO's:

- in the '70's, they came up through R&D
- in the '80's & '90's they came up through Marketing

Today: they come up through Corporate Legal.

Permalink to Comment

27. Gil gundersen on May 8, 2014 7:28 AM writes...

@19 re: LaMattina's shark analogy.

In nature, at least one shark doesn't need to keep "going forward" to survive and thrive- ironically it's called a nurse shark.

Maybe he's referring to cardsharks?


Permalink to Comment

28. Hap on May 8, 2014 8:57 AM writes...

@25: "perhaps the industry needs to re-focus and consolidate to survive"

The problem is, what they're focusing on isn't drug development of any sort, but financial engineering. This is anti-drug-development, where you swallow companies that actually develop drugs, destroy that ability, take the money, and leave the husk on the side of the road. I don't think this is the kind of "survival" anyone is talking about.

As for the general idea that this won't work out financially, start with this. The gist is, you can't get big enough to derisk drug development. The cash they've saved up, well, that's going to AZ, who hasn't been exactly adept at anything, and to M+A people (who are the only guaranteed winners, and Pfizer upper management). In the long run, as LaMattina's Forbes post notes, they're going to have to keep gorging and purging to survive, which will drive up the price of assets. (It will in some term increase the cost of labor, as well, since the uncertainty will likely drive able people from drug development; in the short term, there are lots of available employees, but with no jobs, there won't be so many people behind them clamoring for drug industry jobs, since there won't be much of one.) Of course, their overselling problems and their tax avoidance strategies will likely make it harder for them to get drugs out and make countries more likely to squeeze them on drug costs when they do. (Having no employees in the countries where you sell your drugs is a good recipe for that.)

Pfizer's strategy of "binge and purge" hasn't done that well for its stockholders (the alleged beneficiaries of this gambit) and it hasn't produced drugs. They've been doing it long enough to bear fruit. Why would one assume it will bear fruit this time when it hasn't before?

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29. Nigel on May 8, 2014 9:02 AM writes...

Re #3

The UK's 'Patent Box' needs to be considered in assessing the tax advantages of relocating...

http://en.wikipedia.org/wiki/Patent_Box

Permalink to Comment

30. Wavefunction on May 8, 2014 9:15 AM writes...

#18: That was sarcasm, by the way. You know, the kind of sarcasm that hints at a dark, dystopian reality.

Permalink to Comment

31. The Joker on May 8, 2014 2:28 PM writes...

A 1982 british television advertisement for the soft Tizer drink featured dwarf actor David Rappaport wearing star-shaped sunglasses at a disco, the advert finishing with the slogan "You can tell it's Tizer when your eyes are shut".

Perhaps the updated version could feature a down trodden scientist wearing a white coat finishing with the slogan "You can tell it's Pfizer when your site gets shut!".

Permalink to Comment

32. Anonymous on May 8, 2014 3:10 PM writes...

@28: Hap, you seem to have hit the nail on the head with this post. But you haven't quite driven it in all the way...

Pfizer = financial engineering = survival for people running the show. Financial engineering is extremely profitable for a select group of individuals if it's done "well." Executives, M&A specialists, certain law firms, indirectly to board members. These megamergers are for these people and these people alone.

PFE/AZN executives/board members will gain highly sought-after "value creation" experience if the PFE/AZN deal goes through. These individuals may wind up becoming board members of other large cap companies, they may wind up at specialists at Wall St M&A firms, they may become executives at other companies. If you were an executive whose sole purpose in life is profit, why do not try to "binge and purge" anything and everything in sight? They could care less the state of PFE/AZN 5 years down the road.

As for PFE stock... what would the price be if PFE wasn't involved in huge M&A deals for the past 20+ years? Trading at cash value? They did hand out ~$6B in dividends in 2013. Funds that are required to hold income stocks are probaby quite pleased with that.

(Disclosure - I'm disgusted with the management and boards of pharma companies, but fear it's too late and too difficult to change any time soon)

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33. petros on May 14, 2014 7:11 AM writes...

David Cameron has asked the Cabinet Secretary to lead the British Government's negotiations with Pfizer.

The latter's wife authored this McKinsey report
http://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Pharma%20and%20Medical%20Products/PMP%20NEW/PDFs/777096_Rapid_Restructuring_in_pharma_to_navigate_turbulent_times.aspx while Sir Jeremy did a 3 year stint in a merchant bank!

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