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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 12, 2014

Pfizer's Shareholders and AstraZeneca's

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Posted by Derek

The Financial Times is out with an editorial denouncing Pfizer's attempted takeover of AstraZeneca. It's definitely worth a read for the case it makes. What's a drug company supposed to be doing, anyway?

But (the effect on British research) is not the only big question requiring discussion. Another is the extent to which the board of AstraZeneca – as it decides how to respond to the US group’s overtures – should be driven by the desires of its own shareholders.

One of the most troubling aspects of Pfizer’s bid is its lack of evident commercial logic. The choice of target and the form of consideration seem to be driven principally by the US group’s desire to re-domicile itself in the UK and shrug off certain burdensome American tax liabilities.

The deal will not obviously strengthen AstraZeneca in its pursuit of drug discoveries, or its ability to bring new life-saving compounds to market. Nor will it increase competition or sharpen innovation across the sector.

Pfizer’s dealmaking history is moreover a deeply dispiriting one. The group has a reputation for delivering returns to its investors not through creative management and groundbreaking research, but by the frequent execution of accountant-led, cost-crunching acquisitions.

Comments here to past posts on this deal have raised the same question, and it's a tough one. If the purpose of AstraZeneca (and Pfizer) is to deliver money to their shareholders, full stop, then the deal makes sense. It will deliver money - of that there seems little doubt. It will deliver that to Pfizer through finagling the tax laws (which the British government has written in the hopes that just these sorts of deals would happen, one would think), and it will deliver it to AstraZeneca's shareholders by paying them more than their stock was worth a few weeks ago. Money is money, and pecunia presumably non olet. If the discussion is supposed to end there, then there's not much to discuss.

Is that where it's supposed to end, though? The FT editorialists, not exactly a bunch that are unfamiliar with capitalism, don't think so:

The prevailing wisdom in the Anglo-Saxon world over the past 35 years has been that boards should simply respond to what they perceive their shareholders’ wishes to be. But this is incorrect.

Directors have wider responsibilities on which they should reflect before making any recommendation about a company’s future. Legally, their duties under the Companies Act are not simply to snap to attention when shareholders whistle. They are to advance the interest of the business as a whole over the long term.

Just as surely as it is in Pfizer's financial interest to swallow AstraZeneca, it would seem to be in AstraZeneca's long-term interests not to be swallowed by Pfizer. They are most certainly not the greatest drug company around, but they deserve a chance to see if they can work out of the pit that time, circumstance, and some of their own decisions have put them into. On a larger scale, Pfizer's history of acquisition has damaged the entire pharmaceutical industry's store of R&D ability and intellectual capital.

Some AZ shareholders may well decide that taking Pfizer's money and running is the right decision - after all, who's to say if the company is going to make any sort of comeback at all? Better to take the sure thing - many of these investors are managing funds themselves, and they have responsibilities to their own shareholders and customers. But at some point this reasoning breaks down, or at least reveals its limitations. If we're always going to take the sure thing, the money that can be realized right now, then most startup companies (to pick an extreme example) have no reason to exist. After all, they're just promising and hoping to deliver something eventually. Better to just close up shop, sell what's sellable, and return the money to the shareholders, right? Screw the future.

Somewhere in between these extremes lies the "right" answer, and we're all still figuring it out. It's not just the drug industry - you can see the same issues playing out with Amazon - the company barely makes any actual profit, and its investors are getting increasingly restless about that. Shareholders have rights, for sure - but do they have all the rights?

Comments (44) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. DCRogers on May 12, 2014 10:17 AM writes...

The UK should be ashamed of its role in facilitating this - not only by creating this incentive for "noncreative destruction" of R&D, but then trying to externalize the costs to other countries by extracting promises the pain will be felt elsewhere.

Permalink to Comment

2. Anon on May 12, 2014 10:33 AM writes...

It's a nice editorial but does it really say anything that's not been said before? When stock price becomes the short-term means and end to everything and the only thing that matters, then what we are looking at is the assured destruction of innovation and capitalism. Congratulations to Pfizer, its shareholders and the UK for enabling this.

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3. David Borhani on May 12, 2014 10:34 AM writes...

Interesting editorial, especially given the source.

I see two arguments against the acquisition of Astra Zeneca by Pfizer. The first is financial:
Its financial record is questionable. Despite having spent some $240bn on three big acquisitions since 2000, its market capitalisation is just $185bn today. Meanwhile the Dow Jones index is more than 40 per cent higher.

The second could be phrased as "What is the purpose of a publicly held corporation?" Return to shareholders & investors is, of course, important: the company must, in the end, possibly in the long term, make a profit, or else it will not survive and prosper. Investors share in those returns, yet amazingly enough are not liable for losses (other than, possibly, of their own initial investment).

Not a bad deal at all. What's the quid pro quo? There has to be a catch, right?

The catch is that, crucially, public charters have always, in addition, placed a value on other, broader societal goals: providing products or services of use to the populace; providing a fair and equitable living and work environment for employees; and providing otherwise (through charity) for the public good.

Although these latter attributes of a public corporation have been more, or regrettably often less, realized though the years, they form the bedrock of the contract between the State (populace) and the Corporation that is supposed to be acting, ultimately, in the public interest.

On a related note, I have tried, unsuccessfully, to track down a quotation of, I think, Paul Janssen (though it may have been Robert Wood Johnson II): The essence is that the [drug] company should focus on the medicines, on the patients; if they do this, diligently, the profits always follow.

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4. A Nonny Mouse on May 12, 2014 10:38 AM writes...

#1

To be clear, many European countries have corporation tax in the 20-30% range. Ireland is 13% and is a major hub for tax manipulation by having subsidiaries there. I'm sure that Pfizer would be there is there was any real research going on.

The major tax incentive is due to the "double taxation" which the US has in place- you are taxed where you sell the goods and then taxed again at 35% in the US when to repatriate the profit. This is why companies such as Pfizer and Apple have lots of cash abroad (Apple borrowed money for a share buy-back as it was cheaper than bringing money back into the country). Surprisingly, this also applies to US citizens working abroad which is why some high wealth US citizens revoke it if living abroad (the only other country in the world that had a similar dual taxation law was/is Libya).

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5. Wavefunction on May 12, 2014 10:39 AM writes...

#3: I always saw that quote attributed to George Merck, although I have no problem seeing both Janssen and Johnson saying the same thing.

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6. David Borhani on May 12, 2014 10:41 AM writes...

Oops, need to learn my HTML:


Its financial record is questionable. Despite having spent some $240bn on three big acquisitions since 2000, its market capitalisation is just $185bn today. Meanwhile the Dow Jones index is more than 40 per cent higher.

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7. Anon on May 12, 2014 10:54 AM writes...

Seeing as the US subsidizes most of the world's scientific research, and the UK is trying to get Pfizer to promise all of its citizens will keep their jobs (thereby shifting the layoffs back to the US) does this mean a response for reduced NIH funding would be justified? Not saying it should happen, but would this be justified by an amoral organization (and one with debt at that)? A tax payer could also be seen as a shareholder. Should this amoral organization choose to purchase less of the products of this company that is leaving?

Obviously this would be horrible for patients and I'm not suggesting it be done. However, why would one organization be allowed to be amoral and not the other?

If everyone was a shareholder in both Pfizer and AZN...absolutely nobody would let the deal go through. However, this is not the case and we are now in a situation where the system (govt spending on healthcare & research, tax laws, etc.) start to fall apart. The acquisition isn't based on one company charging forward and gobbling up resources of a second to push their march forward (with the outcome as more treatments to patients). That would be evolution/selection system that we would all allow. Instead it is a poor swimmer, using a drowning swimmer as a lifesaver. One guy can float a little longer but after a few more minutes no one will be better off.
Well, except for the guys on shore placing short term bets.

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8. Brett on May 12, 2014 10:59 AM writes...

That's the problem with any publicly-held company, isn't it? They may have greater obligations than the shareholders in theory and law, but in practice the shareholders are the only ones who can fire them all and so they're pulling the strings.

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10. David Borhani on May 12, 2014 11:15 AM writes...

@4, re: double taxation. I think the situation is not (as simple) as you describe. My (possibly flawed) understanding of the horrendously complex US corporate taxation structure is that:

1. Foreign profits of US corporations are not taxed by the US at all, unless they bring those profits back to the US. Hence, the incentive to keep that money offshore.
2. Those foreign profits may be taxed by the countries in which they are earned; depends on the country whether, and at what rate.
3. A very large percentage of foreign profits of US corporations are "made,", and taxed, in a very small number of small countries:


For example, American companies reported earning 43% of overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland in 2008, while hiring 4% of their foreign workforce and making 7% of their foreign investments in those economies. In comparison, the traditional economies of Australia, Canada, Germany, Mexico and the United Kingdom accounted for 14% of American MNCs overseas’ profits, but 40% of foreign hired labor and 34% of foreign investment.
Congressional Research Service, An Analysis of Where American Companies Report Profits: Indications of Profit Shifting

The "double taxation" you refer to is, I think, that corporations pay taxes, and then their shareholders and employees and customers also pay taxes --- on dividends earned and salaries earned (income tax), and on purchases made (sales tax and/or VAT). So? If the government (i.e., the people) decide that they need a certain level of tax revenues to support public projects, the tax laws will be jiggered (I use that word intentionally) to garner the requisite revenue. Should those tax laws be rewritten, made simpler, made more fair? Yes, IMHO, but that's a whole other discussion... Should taxes be lower, so that public spending can be lower? Yet another discussion...

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11. David Borhani on May 12, 2014 11:26 AM writes...

Interestingly, however, when it comes to financial acumen, Pfizer seems not as good (tax-wise) as J&J, according to Forbes:

What America's 15 Most Profitable Companies Pay In Taxes

4.
Pfizer
Revenue: $52.7 billion
Net income: $22 billion
Provision for income taxes: $4.36 billion
Effective tax rate: 27.4%

12.
Johnson & Johnson
Revenue: $71 billion
Net income: $13.8 billion
Provision for income taxes: $1.6 billion
Effective tax rate: 10.6%

Pfizer seems to make more money selling fewer products, but J&J seems to better at shielding its profits from the taxman!

@9: Beautiful, thank you! And that's what this debate should really be about: how to make these companies better discoverers of drugs, not financial wizards.

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12. Anonymous on May 12, 2014 11:58 AM writes...

These companies should be better discoverers of drugs! But what is their incentive to do so? Especially in the age of short-sided maximize profit, minimize time/effort era we live in. Financial wizardy is much, much easier than drug discovery/development. And there are plenty more industries/companies, after the pharma industry dwindles down to a handful of companies, where this wizardy could be applied.

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13. Sharp Tool on May 12, 2014 12:07 PM writes...

I would recommend that the relationship between shareholders and organisation be redefined when it comes to decisions over takeovers/ownership. Rather than shareholders have 100% of the voting rights, I suggest collective stakeholders take the decision, where 'stakeholder' is defined on a relative basis but the following offers up an example scenario:

STAKEHOLDER VOTING SHARE
a) All Shareholders 55%
b) Company Board 10%
c) All employees (excl. a) 15%
d) Government(s) 15%
e) Public vote 5%

One can argue about the relativities of this sort of thing, but surely it would be a step forward from the current scenario where the lucre of the dollar is king?

Can we pass the legislation on this suggestion this week or next?

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14. rico on May 12, 2014 12:28 PM writes...

165 years ago, Charles Pfizer and Charles Erhart started Pfizer with the aim of making chemicals to benefit human health for a profit. Today, they are a tax-minimizing powerhouse for profit-making via financial engineering, not chemical. Do you think Charles and Charles are resting peacefully?

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15. Barry on May 12, 2014 12:54 PM writes...

even David Brooks, who comes from far, far to the Right of me is on record: "capitalism doesn't really work when it relies on the profit motive alone. If everybody is just chasing material self-interest, the invisible hand won't lead to well-functioning markets. Capitalism requires the full range of motivation, including the intrinsic drive for knowledge and fairness."

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16. Anonymous on May 12, 2014 12:55 PM writes...

AZ did not need PFE to axe jobs in the UK or elsewhere. This is about the AZ executives keeping there sweet deals and nothing else.

10MM-the dollars AstraZeneca is investing in an R&D facility in India

220MM-the dollar deal AstraZeneca is giving Indian CRO, Jubilant

100MM-the dollars AstraZeneca is investing in R&D in China

500-the number of R&D jobs AstraZeneca is creating in China

700-the number of US/EU R&D jobs AstraZeneca is eliminating

1600-the number of US/EU R&D jobs AstraZeneca is eliminating part 2

3500-the number of US/EU R&D jobs AstraZeneca is eliminating part 3

2200-the number of US/CA/EU R&D jobs AstraZeneca is eliminating part 4

14MM-the dollars AstraZeneca is spending procuring chemistry in China

100MM-the dollar amount AstraZeneca will spend procuring API's in China as it moves all manufacturing to China and India

200MM-the dollar amount AstraZeneca is investing in a new drug manufacturing plant in China

7-the number of R&D sites AstraZeneca closed including Delaware, the EU and elsewhere

As a AZ stockholder, I want my money out of this also-ran pharmaceutical company whose only real claim to fame in its existence was the purple pill.

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17. alex on May 12, 2014 12:57 PM writes...

There is absolutely no incentive for corporations currently to invest in anything in the long term. Everything is invested In short term attempts to raise the stock price and therefore executive compensation. eg dtc advertising, tax evasion,acquisitions. At the expense of investments with returns coming years later eg r&d, new infrastructure. It is not just pharma but in engineering and electronics. Industries. Pharma feels it more acutely as it is more dependent on r&d than most industries. The question is how can the situation be changed to encourage r&d other than by better tax enforcement?

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18. Marie on May 12, 2014 1:33 PM writes...

PFE SHAREHOLDER TAX HIT: Last weeks WSJ article stated that PFE shareholders holding shares in taxable accounts would face a capital gains tax hit on unrealized appreciation if AstraZeneca merger is completed. If true, it is hard to understand how this transaction increases shareholder value for PFE shareholders. Long time PFE shareholders (many retirees) with significant unrealized stock appreciation would face an immediate major tax hit when merger is completed. I hope the WSJ article is not accuarate. I hope someone from PFE management will explain the tax impact of this transaction on PFE shareholders. I have contacted PFE but have been told by a spokesperson that they cannot comment. I hope someone will confirm, correct or clarify last weeks WSJ article. Marie

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19. David Borhani on May 12, 2014 1:40 PM writes...

@18: There is a simple solution to your troubles: sell your AZ stock (now).

@13: Interesting idea. I personally think your percentages are too heavily weighted toward maintaining the status quo. Maybe something more like: 25, 10, 25, 20, 20%?

This is edging toward Socialism, of course, with all its attendant ills (and benefits). But, Barry's point (@17) is a good one: unfettered capitalism does not increase the overall common weal; rather, it only concentrates wealth in fewer and fewer hands.

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20. David Borhani on May 12, 2014 1:52 PM writes...

Oops again: @16, not @18.

@18: If the merger goes through, then the corporate structure is changing, so it would seem to make sense that this would be a taxable event: you're exchanging PFE shares for shares in a new company, and gains are indeed realized at that point. (There may be some fancy accounting footwork to get around that.)

Such are the troubles of us shareholders: we have to pay taxes when we realize capital gains. Life's tough, isn't it? (i.e., when did you plan on paying your CG taxes?)

Alternatives: (1) Gift your shares to someone else, or to a charity (and take a tax deduction!). (2) Make the shares part of an (ir)revocable estate trust...then they can in certain circumstances be passed on without being taxed, I think.

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21. Anonymous on May 12, 2014 2:18 PM writes...

The FT piece is an excellent editorial, and timely given some of the rubbish written in many of the newspapers here in the UK over the last couple of weeks.

I agree with it all, in principle. However the fact of the matter is the enormous R&D spending across the industry in the last 10 - 15 years has produced far too few drugs, and this is now biting. The industry needs to contract to survive, and however it happens, whether that be Pfizer assimilation or otherwise, it will be ugly.

The sudden near beatification of AZ by the press, particularly in this country, is also pretty pathetic. Their layoffs and closures have been as brutal as anyone's, as #16 describes

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22. Biotechtranslated on May 12, 2014 2:19 PM writes...

I'm not sure I understand the fuss about Pfizer acquiring AZ.

Without this acquisition taking place, does anyone really expect Pfizer or AZ to really drive innovation over the next decade or so? Are there drugs in either company's pipeline that only they can bring to make. I don't think so.

I see this acquisition as one old dinosaur eating another old dinosaur. Both dinosaurs are dying, but one will live a little longer if it eats the other.

Permalink to Comment

23. Anonymous on May 12, 2014 2:31 PM writes...

@22: So true, like drowning rats clambering over each other to stay afloat, as the tide continues to sweep in.

Permalink to Comment

24. alex on May 12, 2014 2:48 PM writes...

There is absolutely no incentive for corporations currently to invest in anything in the long term. Everything is invested In short term attempts to raise the stock price and therefore executive compensation. eg dtc advertising, tax evasion,acquisitions. At the expense of investments with returns coming years later eg r&d, new infrastructure. It is not just pharma but in engineering and electronics. Industries. Pharma feels it more acutely as it is more dependent on r&d than most industries. The question is how can the situation be changed to encourage r&d other than by better tax enforcement?

Permalink to Comment

25. Joe on May 12, 2014 6:11 PM writes...

Maybe AstraZeneca and Pfizer board members could watch Nicky Gumbel's lecture on "How Can I Make the Most of the Rest of My Life?"

Permalink to Comment

26. Joe on May 12, 2014 6:11 PM writes...

Maybe AstraZeneca and Pfizer board members could watch Nicky Gumbel's lecture on "How Can I Make the Most of the Rest of My Life?"

Permalink to Comment

27. Matthew Herper on May 12, 2014 7:11 PM writes...

It's nice to say that the board should stand up and not sell. But at the end of the day the shareholders do own AstraZeneca. If they all want to sell their shares, then AstraZeneca becomes Pfizer. If we don't like that, we have a problem with publicly traded companies. This is why Google has voting shares.

Permalink to Comment

28. a. nonymaus on May 12, 2014 7:29 PM writes...

Re: 27
If it really is about AZ continuing to employ scientists that do drug discovery, production, and so on over the desire of their shareholders for another few pounds per share, perhaps it's time for the workers at AZ to seize the means of production from those who have nothing to contribute to drug discovery except their money.

Permalink to Comment

29. Nick K on May 12, 2014 7:45 PM writes...

Here is an excellent comment from an earlier post about the PFE/AZ saga, which says it all:

"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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30. Anonymous on May 12, 2014 7:53 PM writes...

How did the workers' paradise work out following 1917? After 40,000,000-60,000,000 murdered workers, Gulags galore and 8 decades worker suffering in the great gray USSR, then capitalism and good times returned. The workers can always do a leverage buyout, I would be happy to sell my AZ shares if the workers just match the PFE bid.

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31. aa3 on May 12, 2014 11:22 PM writes...

Britain can't easily complain about elimination of R&D jobs in pharmaceutical research in Britain. As the government has reduced spending on branded drugs from something like 25 billion pounds a few years back to 12 billion pounds today.

The end result of that decision was always going to be a severe reduction in R&D spending in Britain. The industry attempts to spend in nations relative to the business revenues in each nation. Eg.. the US market is around half of global branded pharmaceutical spending, and is around half of research spending.

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32. Insilicoconsulting on May 12, 2014 11:47 PM writes...

@16 AZ is eliminating jobs in India and stopping outsourcing, not increasing it. Everytime US sneezes we get pneumonia not schadenfreude..

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33. Rich Rostrom on May 13, 2014 1:19 AM writes...

If Pfizer could get the same tax benefits without acquiring AZ, would they do it?

ISTM the real blame is on governments which create convoluted tax structures that reward this kind of manipulation.

Incidentally - if Pfizer has $70B offshore, which they don't want to pay 35% US tax on, only 20% British tax, that would save them about $10B, but they have to pay $100B for AZ.

Another question is how this will return any value besides tax avoidance to Pfizer's shareholders. AZ earnings are priced 5 times more than Pfizer's.

Permalink to Comment

34. Anonymous on May 13, 2014 5:44 AM writes...

From BBC coverage of MP committee meeting:

Mr Read said he was "very proud" of his 35 years at the firm, describing it as a "company of high integrity focused on patients and delivering drugs to patients".

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35. Anonymous on May 13, 2014 9:12 AM writes...

#28, you must still be a hold-out, hoping that science is still done to produce effective medicines. Admirable, but naive.

It's not about AZ employing scientists to do drug discovery. At all. It's about money. Plain and simple. Nothing less, nothing more. It's not easy to understand/stomach this fact, but it's the truth. It's about making the rich richer no matter what.

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36. PharmaHeretic on May 13, 2014 10:03 AM writes...

Pascal: Hi Ian, Pascal here…I have an idea…
Ian: Let’s hear it !
Pascal: Well, I have been thinking of this deal, sort of, and it occurred to me that we could do this another way…
Ian: Huh…?
Pascal: We (AZ) buy you (Pfizer) ! This way, the tax thingy gets sorted, we keep the politico’s happy and all the rest. What do you think ?
Ian: Hmm…let’s think, this is so stupid it might actually work…but only if I get to be CEO of the new company !
Pascal: OK, but then I get to decide the new name…how about…AstraZeneca ?

Permalink to Comment

37. Observer on May 14, 2014 6:13 AM writes...

I agree with the column and most of the comments: I would prefer that the two corporations stay separate. That said, most of the companies I deal with are small or were small sometime in the last 10 years before their drug discovery paid off. With few exceptions, I am dealing with people who spent years at big drug companies that have merged. If the Pfizer purchase goes through, dozens, maybe even hundreds of companies will be created or made stronger by the AZ personnel who will become available. I don't argue that this justifies the merger, only that it isn't the end of research or drug development. Who knows, but maybe collectively, the AZ refugees might create more than they are do now. Creative destruction will occur. The aftermath may or may not be wonderful, but it isn't a zero.

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38. Observer on May 14, 2014 6:16 AM writes...

I agree with the column and most of the comments: I would prefer that the two corporations stay separate. That said, most of the companies I deal with are small or were small sometime in the last 10 years before their drug discovery paid off. With few exceptions, I am dealing with people who spent years at big drug companies that have merged. If the Pfizer purchase goes through, dozens, maybe even hundreds of companies will be created or made stronger by the AZ personnel who will become available. I don't argue that this justifies the merger, only that it isn't the end of research or drug development. Who knows, but maybe collectively, the AZ refugees might create more than they are do now. Creative destruction will occur. The aftermath may or may not be wonderful, but it isn't a zero.

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39. Hap on May 14, 2014 7:39 AM writes...

@37: People have been waiting for a while for the "creative" part of "creative destruction" to come out of Pfizer's philosophy and actions. We're still waiting.

When a company or a field has no use, then its destruction makes sense, to free up resources for other activities. Finding drugs still seems to have use, though, and mergeritis doesn't seem to lead to anything to help that along. It puts lots of money in the hands of short-term investors, and encourages people who work in pharma (and in other fields that depend on the long-term) to do other things. Even if money does trickle down to other drug discovery methods, the same short-term motivations will make it difficult for them to function as well.

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40. foreign on May 14, 2014 10:06 AM writes...

@10 - unfortunately, you are not entirely correct, but you do lay out the actual reality, which is triple taxation before any monies reach shareholders in the form of dividends from profits. A company that makes a profit overseas will pay the local tax rate on those profits. Tax #1. If that company chooses to invest the remaining profits anywhere in the world, they can do so without further tax liability. If they choose to repatriate those funds into the US for any purpose (such as capital investment), the US essentially "penalizes" them by taxing those profits a second time. The US is only of the only countries that creates this perverse disincentive to invest in the US (as they also do for companies to hire US citizens as employees oversees - see other posts on this) Tax #2. If thereafter, the US company wishes to return the remaining, double taxed profits to the shareholders in the form of a dividend, those shareholders are taxed in the form of dividend income/capital gain. Tax #3. I don't take a political stance on this or wish to waste text blaming political parties, but the facts themselves sure do provide a very strong incentive for global US companies to (i) hire foreign employees for ex-US responsibilities, rather than US citizens, (ii) keep profits earned oversees outside the US, rather then invest them at home, and (iii) invest foreign profits anywhere in the world other than the US. The incentive is so strong that inversions to domicile outside the US are becoming the norm, but the PFE example is now large enough to reach the press. Unfortunately, the seeming response from our political representatives is to "punish" or prevent companies from inversion, rather than fix the tax incentives/penalties (term varies depending on which political party is speaking) that are actually driving this behavior. Sometimes I feel a bit anxious for the employment opportunities of my children.

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41. Duane Schulthess on May 14, 2014 11:19 AM writes...

" if Pfizer has $70B offshore, which they don't want to pay 35% US tax on, only 20% British tax, that would save them about $10B, but they have to pay $100B for AZ."

They won't pay the 20% tax on the $70 bil as in Europe that money is already taxed. They will only pay tax on it if they decide to bring it back into the US. This is a big problem for many US companies (and individuals too), and why Pfizer is hording so much cash abroad. The US tax code is woefully incompatible with that of many other countries internationally, and getting increasingly so.

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42. Wile E Coyote, Genius on May 14, 2014 12:58 PM writes...

The $70B offshore has already been taxed at the 20% rate (assuming it is all in UK) - it is net of Ex-US taxes (UK, France, Germany, and anywhere else they realize profits). To bring it back to the US, they must also pay US corporate taxes on it. If it is at the full rate (no deductions/credits), then it is at the rate of 35% or about $24.5B (which is the world's highest corporate tax rate). If it is at the approximately 25% rate reported in another comment that Pfizer paid as it's tax rate in the US, then it would be approximately $17.5B - but that is assuming that they can use all the deductions/credits on this ex-US money as what they can use on their other, US-based taxable income. It may or may not apply.

This is part of the law of unintended consequences. I have no doubt that the UK wants to attract new businesses that want to establish themselves there by having a tax rate lower than competing economies (US). The US is less competitive due to corporate tax rates (but more competitive in other areas, such as energy costs). However, I doubt that the UK government intended that by having lower tax rates that they wanted predatory companies to come in, buy existing UK companies, slash and burn, and benefit from lower tax rates, too, by establishing corporate HQ residence there.

If you believe that Pfizer should stay in the US and not seek the purchase of AZ as a tax haven, then one simple solution to make this less appealing to the executive suite sharks is to change US tax law to lower or eliminate corporate income taxes. Then you'd see a flood of businesses leaving places like the UK, France, Germany, Italy, etc for the US.

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43. exchemist on May 14, 2014 1:20 PM writes...

@37, I wish I shared your rosy view of creative destruction, but from what I've seen when big companies merge for every researcher liberated to be creative at another company there are five more who duck out of creative science altogether to become teachers, prematurely retired or unemployed.

@22/23, please could you post a list of all the successful and dynamic young companies eager to pick up the skilled scientists who may soon be freed from these "dinosaurs"? Unless of course such places aren't as plentiful as all that.

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44. Feebs on May 15, 2014 10:07 AM writes...

In my opinion, all the scientists should get together, resign start their own business with new government issued grants. At lease one of them should have good business acumen to take future ideas forward.

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