It will take more than tax breaks to make PfizerZeneca work
It needs cost cuts and firing research scientists is politically contentious
Six months ago, hardly a single analyst had anything positive to say about AstraZeneca. The company had no ideas worth pursuing, its existing drugs were running out of patent protection, and profits were falling.
There was the added risk that the beleaguered management would panic and squander the company’s cash on an ill-judged acquisition. The shares were not worth buying at £30 apiece.
Now Pfizer believes they are worth more than half as much again, and suddenly the scales have fallen from the experts’ eyes. Those drugs for cancer and diabetes are so valuable that a bidder will have to pay even more than the $100bn that Pfizer appears to be offering to win control of a British national treasure.
This is not quite fair to the analysts. Pfizer’s maths is driven as much by tax considerations as an appreciation of Astra’s drugs. Like dozens of other US companies, Pfizer has money offshore - $30bn which will be taxed at 38 per cent if it is taken back home - while new rules dictate that profits from patents here are taxed at just 10 per cent. This combination transforms the bid sums, and this week the analysts have been applying the new maths to all sorts of fantasy combinations of drug companies.
However, it will take more than tax maths to make PfizerZeneca work. It needs cost cuts, and while few would weep at the loss of jobs in sales and marketing, firing the scientists who do the research is politically contentious. It is only two years since Pfizer shut its British research facility in Kent, and Astra itself has just sold its Cheshire research centre.
Across the industry, research is producing results; the 10-year survival rate for cancer in Britain has doubled to 50 per cent in the past 20 years. But much of the progress comes from smaller companies, which appear to be more productive. Big pharma, for all its billions of resources, is not that good at finding new treatments, as Astra’s chairman almost admitted this week.
It is good at finding ways to protect and extend patents. Yet a 2012 study for the Federal Reserve Bank of St Louis found that patents retard innovation and productivity. This is unlikely to bother the UK government, but should PfizerZeneca actually happen, re-domiciled and expanding in Britain, it will face growing hostility back where it used to call home.
Skip off
So farewell, then, Hugh “Skip” McGee III. He has left Barclays, prompting some to worry that his departure might trigger an exodus of other former Lehman Brothers executives. Well, perhaps, always assuming there are some left. Larry Weiseneck, co-head of securities, has already gone, along with Jerry Donini, “who left after he was promoted to chief operating officer of the investment banking unit”, as my colleagues Camilla Hall and Tom Braithwaite so elegantly put it.
Mr McGee has a record best described as mixed, at least as far as his employers are concerned. He is said to be “hard-driving” and “intense”, with an appetite for high-risk mega-deals and a demand that subordinates arrive early enough to brief him over breakfast. In short, he is the New York investment banker’s investment banker.
He was never going to get CEO Antony Jenkins’ new holier-than-thou Barclays. Yet last year he was promoted to head of the bank in America, a move that a cursory reading of his CV might have suggested would end in tears. And so it has, for Mr Jenkins. It is particularly unfortunate so soon after his chairman made such an effort to explain to the shareholders last week how necessary it was to force-feed such people with gold to prevent them jumping ship.
Mr McGee was Barclays’ highest-paid executive last year, collecting $15m in shares from deferred bonus schemes, and now he has demonstrated his loyalty in the only way these bankers know.
Robert Pickering, who as the one-time head of JP Morgan Cazenove has some experience in dealing with the oversized egos of dealmakers, wrote a letter to the FT this week: “It is possible that Mr Jenkins will prove his doubters wrong and come out on top, but from my armchair it looks an unequal fight and my money would be on the investment bankers.”