Pretzeled Peristalsis

The current spasm of M&A peristalsis just keeps yielding more data about the twisted logic so popular these days within the pharma industry and its institutional investors.Today’s sampling comes from, a piece written by Hallam and Kitamura, where they cited analyst comments that Pfizer might have to cut at least $2 billion in annual costs, perhaps as much as $3.5 billion, in order for the acquisition of Astra Zeneca to end up accretive to earnings. That concept in itself is fundamentally insane, like a marathon runner amputating his arms to cut down on excess weight. But then the discussion turns to which limbs are optimal for removal:

<<Pfizer may be more likely to cut its own R&D operations than eliminate jobs in the U.K. because of tax benefits, said Fabian Wenner, an analyst at Kepler Cheuvreux in Zurich. Keeping research operations in Britain enables Pfizer to say that products were invented in the U.K., and use the country’s lower tax rate, Wenner said. Pfizer’s tax rate is 27.4 percent, while AstraZeneca’s is 21.3 percent, according to Fazeli. “They want to lower the tax rate for the overall group by implementing transfer pricing, which you can only get when you have sufficient R&D in the lower tax regime,” Wenner said. “It would make more sense to save 15 to 20 percent of Pfizer R&D. It would make sense from a both a political point of view and a tax point of view.”>> (bolding courtesy of NIR)

Just to recap: To keep the British government happy, and to ensure application of the lower UK tax rate, keep R&D in the UK, while cutting it elsewhere–either in Sweden, who has no tax or political leverage in this situation, or within Pfizer itself.

What’s missing from this discussion? There is absolutely no mention of the scientific merit and prospects for any of this R&D, which in this context, is not considered a resource, a corporate asset, but simply as a line item and bargaining chip. Science is nothing more than dollars to be subtracted from someone, somewhere. Besides the unavoidable shot to morale within Pfizer (it’s not how well you do your job, it’s the tax rate we have to pay on it), it is diagnostic of an industry that has lost its way, and now takes guidance from people whose longterm perspective is limited to what they can garner in their year-end bonus.

To AstraZeneca’s credit, they are not rolling over and playing dead, nor do they seem (not that we have any insider knowledge whatsoever) to be simply aiming to get Pfizer’s bid pumped up as high as possible. They have responded to Pfizer’s increased offer by providing their own forecast of how they can grow if they remain independent. We hope they have the opportunity to try.



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2 Responses to Pretzeled Peristalsis

  1. PorkPieHat says:

    Apparently, from a 2013 link on which looked at Pfizer’s tax situation, it is insanely complicated. However, it appears that PFE is willing to spend over $100 billion, and cause massive disruptions to its structure and employees, not to mention AZ’s, merely to save 5-15B in taxes at the end of the day, no? Its not like they’re NOT getting taxed in the UK (still 20%). It just doesn’t make sense to my naive eyes. Maybe you have to be an accountant to understand this all. Regardless, how good can it be that instead of an industry fixing its inefficiency at what it does, we are simply cannibalizing ourselves?

  2. Michael says:

    It seems the way to profits in pharma is through financial engineering not drug discovery. J. Michael Pearson of Valeant has achieved 800% growth in the share price and become a billionaire in the process by DESTROYING research. Little wonder everyone wants to get in on his game. Until the rules are changed, what hope is there that the industry will return to productivity?

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