The ‘national interest’ test in the Pfizer – Astra Zeneca takeover bid
Patients and taxpayers should be central to any decision about the future of the pharmaceutical sector
Pfizer’s withdrawal of its offer to buy AstraZeneca on Monday 26th May brought to a close a highly-politicised takeover proposal that could have been the largest foreign takeover in British business history.
The political storm surrounding the bid was not surprising. Governments everywhere, even those nominally committed to the idea of the self-regulating market, routinely intervene in takeover processes. Given the nature of its product and the status of the pharmaceutical sector as a key driver of the UK’s knowledge economy – AstraZeneca alone accounts for around 10% of total UK business R&D spending – the question is not whether the government should engage in the Pfizer-AstraZeneca proposed takeover, but in whose interest it does so.
While the government oscillated between trying to appear ‘neutral’ and getting ‘stuck in’, the message that it tried to send publicly was that it was working to secure good British jobs and good British science. This message crystallised only after direct pressure was exerted against its usual ‘open for business’ approach, especially by scientists and unions to whom Pfizer’s assurances to protect jobs and R&D spending appeared worthless, and by others for whom the government was cheerleading the deal without a rigorous public interest test.
While the government mainly attempted to find a way to ‘lock in’ Pfizer’s promises, one prominent argument, most vocally made both by Ed Miliband and Vince Cable, involved the expansion of the ‘strategic national interest’ test in takeover rules to include other strategic sectors in addition to defence and banking and, specifically, to pharmaceuticals.
While attention has waned after the withdrawal, the question of how to define the ‘national interest’ in this context remains important and pressing. It’s important because ‘national interest’ is a vague concept all too easily appropriable to legitimise very different positions. It’s pressing because the question may re-emerge soon enough if AstraZeneca approaches Pfizer, or vice-versa, in three or six months respectively.
Talking about British jobs and British science is politically appealing at a time when most of the ills ailing the UK appear somehow to stem from ‘foreign’ sources, but it is not a sound criteria for assessing the ‘national interest’. Of course, there would have been cuts to both jobs and R&D levels in the UK, as Pfizer’s CEO admitted himself despite the ‘unprecedented commitment’ to Britain he made in a letter to the PM. Incidentally, it is not irrelevant that stressing this particular risk obscures the government’s own less-than-stellar record in promoting science, R&D and high quality jobs in the UK. Indeed, the UK is one of only four European countries whose R&D as percentage of GDP has weakened since 1995; its 1.77% R&D intensity also lags behind many European countries, including small ones like Slovenia, Estonia and the Czech Republic.
But jobs and R&D cuts would most likely have resulted even if the acquiring company was ‘British’, as often happens in M&As. An assessment of ‘national interest’ cannot merely be based on the nationality of the companies in question; in this particular case, it is perhaps even less convincing as a criterion, because all large pharmaceutical companies, including Pfizer and AstraZeneca, are multinationals. Indeed, ‘British’ AstraZeneca ranks 14th in the 100 most transnational (non-financial) companies in the world (Pfizer ranks 66th), according to UNCTAD’s transnationality index; 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) 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 the simple fact that its HQ is in London should not tempt us to make a facile link between its fate and the UK ‘national interest’.
If we are serious about applying the ‘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, overlapping groups: patients and taxpayers.
The proposed takeover was unlikely to be good news to patients and taxpayers in this country, or indeed elsewhere. Most likely, the only costs that would 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 much faster than inflation, and large pharmaceutical companies can boast a number of qualities, but not a dynamic new drugs 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 organisation 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.
Here are a few examples: taxpayers foot most or nearly all the bill through various public health schemes in the profitable markets of Western Europe, Japan and the US where ‘big pharma’ realises around 70-80% of its sales; in the UK, the NHS is the biggest buyer in the pharmaceutical ‘market’. Additionally, taxpayers in this country (and elsewhere) finance pharmaceutical R&D in a variety of ways: through public funding that goes to public research centres with which AstraZeneca and other companies collaborate and which are fundamental to new drug discovery; through governmental R&D funding that is handed out directly to private companies (in the UK, governmental R&D 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 a 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 totalled £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 powers to decide pricing strategies and levels that bear upon taxpayers and patients once again. At the very least, in light of the above, it should not be deemed a heresy to contemplate the possibility that the public might own major stakes in a pharmaceutical sector differently organised. This is the debate we must have, rather than merely the fate of AstraZeneca.
Articles and comments posted on this blog reflect the views of the author(s) and not the position of SPERI or the University of Sheffield.