Why AstraZeneca should reject Pfizer’s takeover bid

Pfizer: looking to avoid tax

“I am not in favour of the takeover of excellent and strategically important British companies by struggling foreign firms whose actions are fuelled by tax avoidance, and who want to asset-strip the intellectual property of the British company and then dismember it.”

These harsh words recently appeared in a Guardian article written by former science minister Lord Sainsbury. His blistering attack is aimed at Pfizer’s very public attempt to woo both AstraZeneca’s (AZN) shareholders and the government.

So far, AstraZeneca has rejected Pfizer’s takeover approaches. But Lord Sainsbury still raises some very valid points – AZN is the second largest UK company by R&D (research and development), after GlaxoSmithKline, and accounts for almost 9% of all UK investment in R&D and 2% of all exports. And it is being targeted by a US company with a very poor record in R&D.

So today I want to comment on why this takeover is so detrimental to British research and development – and why Pfizer can’t be trusted.

Pfizer’s assurances mean nothing

I should declare an interest in that I hold AstraZeneca shares but not Pfizer shares, and I would not want to exchange the former for the latter. I have also interviewed the excellent Pfizer team that discovered and developed Viagra at Pfizer’s large UK R&D centre in Kent. Unfortunately, Pfizer closed that centre about three years ago. The MP for Macclesfield (where AZN has a large facility) said “Pfizer’s record in the UK is one of moving from a business that employs 6,500 to one that employs 2,500″.

First we need to dispose of Pfizer’s ‘assurances’ given to the prime minister about going ahead with AZN’s £330m new Cambridge R&D campus and “retaining substantial commercial manufacturing facilities” at Macclesfield. Not only are these ‘assurances’ only valid for five years, but Pfizer carefully adds a caveat saying they would be “adjusted should circumstances significantly change”. And Aberdeen Asset Management boss, Martin Gilbert, says that AZN “has a perfectly viable future” as an independent company, and that Pfizer “have not adhered to a number of promises they made in previous takeovers”. We can take it that Pfizer’s assurances are worth very little.

Just one example of how Pfizer could use the caveat to its ‘assurances’ is its current plans to split its business into three parts so AZN is also likely to be split to fit into the three new parts and one or more of the new parts could well be spun off to form separate companies. Either of those outcomes would certainly be a “significant change”. We should also remember the assurances given by Kraft about Cadbury – they were broken as soon as the acquisition was complete.

Pfizer is just trying to avoid paying taxes

The reasons Pfizer wants AZN are firstly to gain substantial tax savings and secondly because of the weakness of Pfizer’s own pipeline. The tax savings arise from Pfizer’s massive cash pile held outside the US which would attract a 39.5% tax bill if repatriated. By spending part of this on AZN and becoming a UK headquartered company for tax purposes, it avoids this, secures a lower UK tax rate and strengthens its pipeline. Those are two powerful reasons which make me expect that Pfizer will come back with an improved offer for AZN. Let’s now take a look at Pfizer’s R&D record:

• It has reduced total R&D from $9.4bn in 2010 to between $6.4bn and $6.9bn this year despite patent expiries which require a bulging pipeline of new drugs to replace them. In 2013 Pfizer invested only 12.9% of sales in R&D – low for a big pharma company.

• It has a record as one of the least effective companies at generating new drug sales from its R&D investment. Although there could be other reasons, that is likely to reflect top management’s culture – an obsession with acquisitions, cost cutting in R&D and reorganisations.

• It slashed R&D at its UK R&D centre in Kent with up to 2,400 job losses despite that centre’s record of discovering Viagra and other drugs.

• Many of Pfizer’s best drugs have been acquired rather than developed in-house. Examples include the world’s best-selling drug, Lipitor (acquired with Warner Lambert in 1999 but now out of patent), Celebrex (from Pharmacia in 2001), Enbrel & Prevnar (from Wyeth which was acquired in 2009).

One of the UK’s best fund managers opposes this takeover

AZN is vulnerable at the moment since it has entered a difficult period from 2014 to 2017, just after some patent expires and before some of its new late stage pipeline drugs can be launched. But it said on Tuesday that it expects its five new growth platforms to give strong growth from 2017 to 2023, leading to annual revenues above $45bn by 2023 (compared to £15.6m in 2013) and with earnings growing faster than revenue.

That contrasts with Pfizer whose sales fell 16% between 2010 and 2013. And the Q1 2014 results suggest that sales will be down again this year. Pfizer’s share price was up over 70% from the end of 2010 to the end of 2013 as sales fell – no wonder it wants to make acquisitions using as high a proportion of its shares as possible.

Fortunately Neil Woodford, one of the UK’s best fund managers, has come out strongly against the takeover. So let us hope that other fund managers listen carefully to his arguments. Personally, I will be happy not to take a short-term profit on my own AZN shares, but fear that Pfizer will come back with an improved offer before the 26 May deadline.

• Dr Mike Tubbs’ writes the Research Investments newsletter. In it, he and his team combine an insider’s knowledge of high-level R&D with expert stock recommendations.

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