Buying a tax break

By Ben Walsh
May 8, 2014

The UK tax rate on profits made from UK patents is just 10%. The nominal US corporate tax rate is 35%. Because of that, US pharmaceutical company Pfizer has spent the last four months trying to acquire London-based AstraZeneca, the maker of heartburn drug Nexium and cholesterol-lowering Crestor. The problem, of course, is that neither AstraZeneca’s board nor the British government seems particularly fond of the tax-avoidance play.

AstraZeneca seems to have the upper hand in negotiations. Pfizer’s drug pipeline is weak and has been for sometime: its two latest cancer drugs debuted to lackluster sales, and it hasn’t had a significant new drug released in a decade. To make matters worse, the patents on some of its biggest drugs are about to expire. The company also just reported a 15% drop in quarterly profits, which is never good, but is particularly bad in the middle of a partially stock-based acquisition attempt. Breakingviews’ Neil Unmackthinks that Pfizer will have to “further loosen the purse strings” in order for its offer to be accepted by AstraZeneca.

Indeed, this deal has been in the hopper for months, with Pfizer slowly increasing its offer. The first whiff of the plan was in January, when Pfizer says it submitted a “preliminary, non-binding indication of interest”, but AstraZeneca broke off talks. At the end of April, Pfizer tried again, and AstraZeneca rejected a new $98.9 billion offer. On Friday, AstraZeneca rejected an improved $106 billion bid. Now Pfizer is rumored to be preparing a new offer worth $113 billion, Reuters’ Sudip Kar-Gupta and Ben Hirschler report.

Victor Fleischer writes that the transaction is just the latest proposed inversion, where “a multinational company like Pfizer, based in New York, becomes an expatriate by acquiring a smaller foreign target”. FT Alphaville’s James Mackintosh says that “the deal only makes sense with the benefit of the UK tax regime”. UK politicians are trying their best to sound displeased with the idea of a putting a massive British (well, half Swedish) company, into foreign, tax-optimizing hands. However, they aren’t really taking concrete steps to stop the deal from happening, either.

Pfizer makes the case that the combined company will pay taxes in the UK and pledges to keep 20% of the combined company’s R&D force in the country. The company is, in essence, pitching itself to the UK as a corporate, taxpaying citizen as prepares to toss out its US passport. Britons, however, are less convinced. David Sainsbury says, Pfizer’s plan “would involve the closure of many of its operations and a substantial reduction of its research and development” in the UK, costing British pharma a lot of jobs. — Ben Walsh

On to today’s links:

Right On
Fighting blight by charging for it - Marketplace

Data Points
150 US workers die each day due to working conditions - Bryce Covert

Servicey
How Americans get to work (hint: cars, cars, cars, and some work from home) - Derek Thompson

Study Says
Surprise! The unemployment rate is an inadequate measure of labor force slack -Jared Bernstein
Journalists are miserable, liberal, over-educated, under-paid, middle-aged men - Derek Thompson

Hilarious
What happens at an investment bank when don’t lock your computer - Dealbreaker

Tech
Is the FCC’s moves on net neutrality already stifling innovation in video and mobile payments startups? - MIT Technology Review
Somewhat related: An explainer on the Internet of Things - Vox

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