The public interest argument on AstraZeneca is overdone
While the case against a Pfizer deal is weak, the tax case for it is compelling, says Tony Jackson
It is unsurprising that Pfizer’s takeover offer for the UK drug company AstraZeneca has raised a political storm. These are not the best of times, after all, for red-toothed capitalism. The trouble is that in this specific case, the arguments for the public interest are mainly misdirected.
Let us take as our opening text a recent statement on the bid from the UK prime minister David Cameron. “The most important intervention we can make,” he said, “is to back British jobs, British science [and] British research.”
In the matter of jobs, it seems a little late. AstraZeneca employs 6,700 people in the UK, 13 per cent of its global workforce. This compares with 11,000 five years ago.
And science? In its preliminary bid defence, AstraZeneca named 13 drugs as central to its development pipeline. Only two were conceived in the UK. The rest came from the US, mainly from Medimmune, a biotech company AstraZeneca bought for $16bn seven years ago.
This recalls another aspect of the debate. As with Kraft’s bid for Cadbury five years ago, there have been assertions from UK politicians of all stripes that the US would never allow its companies to be taken over in this manner.
The Medimmune example suggests otherwise. As for Cadbury, its various US acquisitions included America’s second-biggest maker of chewing gum – bought, as chance would have it, from Pfizer.
What we have here are not plucky British champions being picked off but aggressive US-focused multinationals falling prey to others of their kind.
But AstraZeneca, some would say, differs from Cadbury in one vital respect. It supplies the National Health Service, which is funded by the British taxpayer. And it exploits tax-funded research in government laboratories and universities.
True enough; but a little context is in order. Of AstraZeneca’s global sales, only 7 per cent are in the UK, against 40 per cent in the US. Pfizer has the same percentage of its sales in the US; and while it does not disclose a UK figure, I would bet it is similar to AstraZeneca’s.
That is how global drug companies work; efficacious drugs are sold everywhere, so the pattern of each company’s sales tends to mirror that of world drug markets.
How much extra revenue the UK might get from Pfizer is anyone’s guess; but the fact that its global tax provision last year was $4.3bn suggests it might not be trivial
So from a strict NHS perspective, there is no logical reason to worry more about AstraZeneca than any other global supplier. As for licensing the discoveries of state-funded laboratories, I am not aware that UK drug companies are given preferential terms over foreign ones. If they were, I would, as a taxpayer, be faintly concerned.
Speaking of taxpayers, an explicit motive for Pfizer’s bid is its intention to move to the UK for tax purposes. This reminds us of an awkward truth: that behind the recent outcry over global companies avoiding UK tax, UK government policy is aimed at minimising the amount of corporate tax pinched by other countries, while maximising the amount pinched from them. How much extra revenue the UK might get from Pfizer is anyone’s guess; but the fact that its global tax provision last year was $4.3bn suggests it might not be trivial.
One final point. It is evident that Big Pharma globally has become progressively worse at finding new drugs, so revenues shrink as old drugs come off patent.
The pace is startling: over the past three years Pfizer’s global revenues in dollar terms have fallen 16 per cent and AstraZeneca’s 23 per cent.
In any other industry this would be a death spiral. Perhaps Big Pharma can reverse the trend but it would not do to count on it.
The time-honoured response for industries in this plight is amalgamation, if only to cut costs. It thus seems likely that AstraZeneca will have to merge eventually, whether as acquirer or acquiree. So UK jobs and science are liable to take a hit either way.
But let us not end too negatively. If the UK is blessed with top-flight drug researchers, they would be far better employed not in the barren fields of Big Pharma but in the small outfits where the breakthroughs are being made.
In other words, the government should abandon vain attempts to stop the clock, and concentrate instead on fostering the drug industry of the future. That is not going to be easy but it may in the end be the only way.