The case for Pfizer's proposed takeover of AstraZeneca

Part 7
The case for Pfizer's proposed takeover of AstraZeneca (Part 7 of 9)

Why the proposed Pfizer-AstraZeneca deal could face challenges

Key challenges of the proposed deal

Pfizer’s (PFE) takeover of the Anglo-Swedish AstraZeneca (AZN) has seen backlash from politicians, trade unions, and scientific bodies on concerns of the impact on UK, U.S., and Swedish jobs and on AstraZeneca’s research and development base. AstraZeneca employs 6,700 people in the UK and 5,900 in Sweden. The opposition also centers on the belief that Pfizer’s acquisition is tax-driven. Both Pfizer and AstraZeneca will participate in UK parliamentary committee hearings this week.

Pfizer R&D spendingEnlarge Graph

A recent report from the Guardian said that Prime Minister David Cameron has demanded more security on UK jobs, investment, and science, with Deputy Prime Minister Nick Clegg adding the government was “focused” on getting “binding” commitments from the U.S. drug giant. With the UK general elections a year away, Cameron is facing pressure from the opposition on protecting jobs and the R&D (research and development) base. Labour leader Ed Miliband criticized Cameron for being a “cheerleader” for the deal and demanded a new public interest test to safeguard UK research and development. News reports said governors in Maryland and Delaware were also concerned about possible job cuts by Pfizer back home. The deal could also face delay due to Chinese antitrust concerns, media reports said. Both companies lead the prescription drug market in the country and could see increased scrutiny from  China’s Ministry of Commerce (MOFCOM) due to an earlier “bribery scandal that involved GlaxoSmithKline” (GSK).

British politicians have been skeptical of Pfizer’s track record, as three years back, the U.S. drug giant shut down its UK research laboratory in Sandwich, Kent, leading to more than 1,500 job losses. Chuka Umunna, the shadow business secretary, was cited as being apprehensive about Pfizer’s track record on acquisitions, commenting “Do we really want a jewel in the crown of British industry, our second biggest pharmaceutical firm, to basically be seen as an instrument in some tax-planning game?” Politicians also gave the example of U.S.-based Kraft (KRFT), which made a promise to keep a plant near Bristol open while acquiring confectionery group Cadbury in 2010 but shut down the factory immediately after the deal was closed.

Faced with the loss of patents, Pfizer has grown its drug portfolio in the recent past via acquisitions, but these takeovers have also been followed by huge spending cuts to gain “synergies.” Astra’s former CEO, Sir David Barnes, was cited as branding Pfizer as a “praying mantis” that “sucks the lifeblood out of their prey.”

In 2000, Pfizer paid $112 billion for the acquisition of Warner-Lambert, which included the successful anti-cholesterol drug Lipitor. This was followed by the 2003 purchase of Pharmacia, a Swedish biotech for $60 billion. In 2009, Pfizer took over Wyeth for $68 billion and added biotech drugs and vaccines to its drug portfolio. However, each of these acquisitions have sparked criticism due to resulting R&D plant shutdowns and job losses as Pfizer centralized its research. The acquisition of Wyeth led to 8,000 job cuts. Pfizer’s R&D spending (without Zoetis) has declined from $9 billion in 2010 to $6.6 billion in 2013, while AstraZeneca spent $4.8 billion on R&D last year. Pfizer has forecasted total R&D costs of $6.4 billion to $6.9 billion for 2014.

According to research, big pharma is spending less on innovation due to falling sales from the expiry of patents and instead focusing on acquisitions to boost its drug pipeline. Last year, Merck & Co (MRK) said it will cut 20% of its workforce in an aim to save $2.5 billion annually by 2015. According to Pharmabiz, during the 2007–2013 period, the total R&D expenditure incurred by 15 leading companies touched to $559 billion, with Roche spending over $66 billion, followed by Novartis’ (NVS) $58 billion, Pfizer’s $57 billion, Johnson & Johnson’s (JNJ) $53 billion, Merck’s $51 billion, Sanofi’s $45 billion, and GlaxoSmithKline’s (GSK) $44 billion.

Pharmaceutical R&D has seen challenges that include budget limitations, long approval times, and a high rate of attrition in drug discovery and development. A blog on cancer research noted that some 95% of drugs tested in Phase I clinical trials don’t reach the market. The blog added that “closer collaboration between scientists and clinicians can produce earlier ‘go-no-go decisions’, and reduce the failure rate of drugs or the drug attrition rate.”

Pfizer, for its part, has made several assurances to allay British concerns. In a letter to the British prime minister on May 2, Pfizer made the following commitments for a minimum of five years.

  1. To establish the combined company’s corporate and tax residence in England
  2. To complete the construction of the currently planned AstraZeneca Cambridge campus, creating a substantial R&D innovation hub in Cambridge and the wider scientific community, which will include core research units, laboratory-based scientific support lines, and European clinical development and regulatory functions
  3. Pfizer will base key scientific leadership in the UK that will lead all European and certain global R&D functions, based in Cambridge
  4. To integrate the operations of the combined company so as to employ a minimum of 20% of the combined company’s total R&D workforce in the UK going forward
  5. Pfizer will actively look to locate manufacturing operations of the combined company in the UK, subject to the timing of the UK Patent Box proposals, and will retain substantial commercial manufacturing facilities in Macclesfield
  6. To base the combined company’s European business HQ and EU Regulatory HQ in the UK
  7. To  invite at least two AstraZeneca board members to join the board of the new company
  8. To hold, as appropriate, board meetings in the UK and participate meaningfully in the UK commercial, economic, and social community

Although the opposition Labour Party has asked for an investigation into the deal, the government said the deal is a matter for both the companies’ boards and shareholders. A Reuters report said the European Commission could block the UK government’s efforts to intervene in the deal, as the takeover doesn’t fall under the existing takeover rules of impact on national or financial security and media mergers, and therefore doesn’t not warrant an intervention.

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