AstraZeneca – Pfizer, cutting costs or leading the way in British Science? by Harry Archer @harryarch_

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The proposed merger of US drug giant, Pfizer and UK/Swedish pharmaceutical company AstraZeneca is one that has been met with a plethora of reactions. Some have argued that it will improve the way that drug companies deliver value for their shareholders. Other, more speculative views, have suggested that Pfizer is only interested in the merger to cut costs and to use the UK as a tax base to increase its profits.
Firstly, lets take a more optimistic view of the effect that this proposed mega-merger will have on the economy. The primary factor to consider is the jobs that will be created in the UK science and research sectors. This will provide employment opportunities for UK residents in highly skilled and well paid roles, which will reduce unemployment and possibly increase the long term productive potential of the economy. Increased investment in research and development can only be a positive for the economy as advances in pharmaceuticals will attract greater investment from other economies helping the UK to grow both quicker and more sustainably. This benefit is unfortunately overshadowed by the notion that the merger of the companies would result in cutting costs and ultimately a reduction of top class UK research and development jobs. This is reflected in the merger that Pfizer made with US pharmaceutical company Wyeth in 2009, where the total combined workforce was reduced from 129,226 to 77,700 – a major loss in US pharmaceutical jobs. Unfortunately this was not a unique case as with many of Pfizer’s recent mergers, most noticeably Warner-Lambert in 2000 and Pharmacia in 2003 both resulted in sharp jobs cuts and great reduction in research and development budgets.
Another issue surrounding the merger of AstraZeneca and Pfizer is the suspicion that Pfizer will use the merger to change their tax base to the UK. Currently corporation tax rate in the United States stands at 40%, whereas the UK corporation tax rate is almost half that amount at 21%. This will provide a major advantage for Pfizer, as they will be able to source their profit to the UK and get taxed 19% less than they would in the US. This comes as a result from proceedings in Washington where senator Carl Levin is acting to prevent US companies from moving their tax domicile abroad. Senator Levin aims to enact legislation that allows US companies to use a loophole, known as ‘inversion’ allowing them to evade the United States 40% corporation tax. If he is successful in this, it would remove a large motivator for Pfizer which could be highly damaging to the merger if it is passed before the deal is done.
A key factor to consider is the efficiency of AstraZeneca itself. Casting our minds back to 1993 when the UK division of AstraZeneca, formerly Zeneca group was forced to demerge from parent company Imperial Chemical Industry (ICI) due to increasing complexity in the business. As ICI grew the complexity of running both medical science sectors alongside paints and speciality products caused the company to experience diseconomies of scale, a situation where increasing the output of the company led to decreasing returns. So how does this relate to the merger of Pfizer and AstraZeneca? Well, shortly after the demerger of ICI and Zeneca, swedish firm Astra ZB merger with Zeneca to form a larger, yet more manageable company AstraZeneca. The merging of Pfizer and AstraZeneca would result in the largest pharmaceutical company in the world. This may lead them to suffer the same issues of ICI in 1993.
One interesting point to note is the effect that this has had on the British Science community. Many big names in the industry have emerged in order to express their concern over the merger. Many have referred to Pfizer’s track record with it’s previous mergers and suggest that the proposed takeover could have a harrowing effect on drug research, especially the UK science base. Pfizer’s boss, Ian Read has been reported to have compared both Pfizer’s and AstraZeneca’s Cambridge research centre’s as having “Great Similarities” and that he has praised the science research that is being done in the UK. However critics have warned that Pfizer has moved further from research and development, highlighting concerns that their main motivation lies within profit generation rather than the future of UK science.
The combined merger of these two firms would create the largest Pharmaceutical company in the world which may lead the way in drug research and development. The merger has generated a wealth of opinions both for and against the argument and is a serious opportunity for UK science. The main factor that must be considered is the intentions of Ian Read and Pfizer.

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