The ‘national interest’ test in the Pfizer – Astra Zeneca takeover bid
As the deadline under the new ‘put up or shut up’ rules of the UK Takeover Panel came to a close on Monday 26 May, Pfizer admitted defeat in its bid to buy AstraZeneca. Pfizer’s withdrawal brought to a close four months of wooing that, had it been successful, would have been the largest foreign takeover in recent British business history. The controversial and complex nature of the proposed takeover drew into its orbit various groups on both sides of the Atlantic, including scientists, unions, investors, senators, governors, parliamentarians and the British PM himself.
The involvement of politicians in this takeover battle should not be surprising – governments everywhere, even those nominally committed to the idea of the self-regulating market, routinely intervene in the takeover process, at the very least through setting the rules through which Mergers and Acquisitions (M&As) can take place. Beyond this kind of intervention, governments everywhere have historically sought to support through various means business sectors that appear capable of delivering economic growth, even if their commitment to and success in this task have obviously varied.
Given the inseparability of economics and politics, and the status of the pharmaceutical sector as a key driver of the UK’s knowledge economy –AstraZeneca alone accounts for around 10% of the total UK business R&D spending–the question we should ask is not whether the government should engage in the Pfizer-AstraZeneca takeover process, but how it does so and in whose interest.
While the government oscillated between trying to appear ‘neutral’ and getting ‘stuck in’ adopting a ‘hard nosed’ approach, the message that it tried to send publically was that its efforts were focused on securing good British jobs and good British science.This message appeared to have crystallised only as direct pressure was exerted against its all too prevalent ‘open for business’/’all is for sale’ approach, most notably by scientists and unions who argued Pfizer’s assurances to protect jobs and R&D spending in the UK were worthless, and others who criticized the government was ‘cheerleading’ the deal without a rigorous ‘public interest’ test.
Amongst the cacophony of arguments made during the most intense period (2-19May), two main overlapping arguments became more visible: the first,largely pursed by the government, endeavouring to find a way to ‘lock in’ Pfizer’s promises regarding R&D levels and jobs in the UK, and the second,made most vocally both by Ed Miliband and Vince Cable, involving the expansion of the ‘strategic national interest’ test in takeover rules concerning sectors such as defense and banking into other strategic ones, such as pharmaceuticals.
Despite the fact that M&As in the pharmaceutical sector have been raging ever since the ‘drying pipeline’ problem became more prevalent during the 1990s, and despite the fact that authorities have rarely intervened to halt the increasing concentration in the sector, concerns were raised that the EU competition authorities may inhibit the takeover or, on the contrary, inhibit the UK government from extending the ‘national interest’ test in its own efforts to stop it. A delegation was promptly sent to Brussels to explore the compatibility of the test with EU competition rules, but the current withdrawal of Pfizer’s offer seems to have drawn attention away from this issue.
But it is precisely this issue of ‘national interest’ that is at the heart of arguments presented in public by critics and supporters of the deal alike. Even if the outcome of this affair is the extension of the ‘national interest’ test to foreign takeovers, the problem of how to define national interest in a particular case remains.
How are we to think about ‘national interest’ in this takeover bid, especially as it may reemerge soon enough if AstraZeneca approaches Pfizer, or vice-versa, in three or six months respectively? Talking about British jobs and British science may be politically appealing at a time when most of the ills ailing Britain appear to somehow stem from a ‘foreign’ source, but, in this case at least, it will not do.
All large pharmaceutical companies, including Pfizer and AstraZeneca, are multinational companies with complex relationships with the countries in which they are headquartered. Indeed, ‘British’ AstraZeneca ranks 14thin the 100 most transnational (non-financial) companies in the world (Pfizer ranks 66th) according to UNCTAD’s transnationality index; in more concrete terms, 77% of its assets and 86% of its workforce are not employed in Britain. All of its large shareholders (e.g. BlackRock, Vanguard, Investor AB, Fidelity etc) are without exception global investment companies. None of this is to say that AstraZeneca is footloose or that it does not matter to the British economy, but merely that its HQ in London should not easily be equated with British ‘national interest’.
What is the risk to ‘British jobs’ and ‘British science’ in the proposed takeover? Most definitely cuts to both, as Pfizer’s CEO admitted himself despite his‘unprecedented commitment’ to Britain made in a letter to the PM in early May. Anyone who knows even a little about Pfizer’s history of acquisitions (or M&As in general) knows that this will be the case. But stressing this particular risk obscures government’s own less-than-stellar recordin promoting science, R&D and high quality jobs in the UK. Indeed, according to a recent National Audit Office report, UK is one of only four European countries whose R&D as a percentage of GDP has weakened since 1995; its 1.77% R&D intensity (R&D/GDP) also lags behind many European countries, including smaller ones such as Slovenia, Estonia and the Czech Republic.
More importantly, the national interest test in this particular case cannot merely weigh the economic importance of the company in question, not even the number of jobs at risk or loss in R&D spending, important as these undoubtedly are. Indeed, apart from shareholders who have been making their arguments behind the scenes, all other parties involved have largely couched their public arguments in support or against the deal in terms of benefits to the society. But, like ‘national interest’, society’s interest is too vague and easily appropriable by any group in order to legitimize very different positions.
If we are serious about applying the social benefit (or national interest) test, the consideration of a takeover of this kind has to probe carefully its consequences for two rather large and, in the long-run, largely overlapping sections of the society: patients and taxpayers. The proposed takeover is unlikely to be good news to patients and taxpayers in this country, and, indeed, around the world. Most likely, the only costs that will be reduced by a possible merger are marketing and operational costs and the tax bill (the benefit of which will accrue largely to shareholders via higher dividends); drug prices will not be reduced, nor will more drugs be invented as a result. Proprietary drug prices increase over time, often faster than inflation, and large pharmaceutical companies can boast a number of qualities, but not that of their new drug pipeline.
It is primarily for these reasons that the deal should not be supported, but it is for the very same reasons that business-as-usual should not either. The organization of the current pharmaceutical sector is not necessarily the best way of securing or enhancing social benefit, in this country and elsewhere. It is a highly concentrated sector whose largest companies – Pfizer is the 2nd and AstraZeneca the 7th largest in the world – accrue generous benefits at the expense of patients and taxpayers who keep them floating in profitable waters in a myriad of ways. Only a few examples will suffice here: taxpayers foot most or nearly all of the bill through various public health schemes in the profitable markets of Western Europe, Japan and US where big pharma realises around 70-80% of its sales; in the UK, the NHS is the biggest buyer in the pharmaceutical ‘market’. Moreover, taxpayers in this country (and elsewhere) finance the pharmaceutical R&D in variety of ways: through public funding that goes to public research centres with which AstraZeneca and other companies collaborate and are fundamental to new drug discovery; through governmental funding that is handed out directly to private companies (in the UK, governmental funding to private business has increased by 19% in real terms since 1995, most of which goes to the largest companies, including AstraZeneca); and, finally, through higher tax burden or reduced public services to make up for the annual cost to governments as a result of R&D tax cuts and incentives (in 2011 this totaled £1.1 billion in the UK, one of the highest amongst OECD countries).
In return, most if not all new drugs are patented, giving pharmaceutical companies not inconsiderable powers to decide pricing strategies and levels that bear upon the taxpayers/patients once again. At the very least, in light of the above, it should not be deemed a heresy to contemplate that the public should own major stakes in a pharmaceutical sector differently organized. This, rather than merely the fate of AstraZeneca, is the more important debate we must have.
Pfizer hopes that the cooling off period will give AstraZeneca’s shareholders time to push the company’s board to come to the table. Among other benefits, Pfizer had hoped to change its domicile through the acquisition in an attempt to save on taxes. AstraZeneca, on the other hand, is now going to be under immense pressure to deliver on its promises as regards the results of its experimental drugs currently in various phases of testing.
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