In recent weeks, much attention has been focused on the news that U.S. drug giant Pfizer is in discussions with Irish firm Allergan about a potential merger and tax-inversion deal. Media comment suggests its main aim is to enable Pfizer to relocate to Ireland to escape U.S. taxation.
Of course, Pfizer’s CEO has every right to call attention to the illogicality of U.S. corporate taxation policy. But I worry that pursuing the Allergan deal, after being rebuffed in its attempts to achieve a similar deal with the U.K.’s AstraZeneca, is distracting the company from pursuing its core mission (as highlighted on its website) of “applying science to discover therapies that significantly improve and extend people's lives.”
This concern is heightened by my own experience working for ICI in the 1980s and 1990s, then the second-largest chemical company in the world. ICI had built up its pharmaceuticals business over decades by employing brilliant researchers such as Sir James Black, who invented beta-blockers. As the Financial Times noted last year*:
ICI’s visionary investment in pharmaceuticals did not just pay off for the company itself. It laid the foundations of what is today one of Britain’s most successful industries…James Black almost certainly created more shareholder value than any financier or chief executive in the history of British business.
ICI’s fate is a terrible warning to Pfizer. The ICI Board’s decision in the 1990s to effectively pursue shareholder value at the expense of its core businesses eventually ended with the complete disappearance of the company as an independent entity.
Unsurprisingly, others have also expressed their concern about a potential Pfizer-Allergan deal. John LaMattina, Pfizer’s former head of R&D, has highlighted the potential for Allergan’s CEO to take charge of new drug research and development. Allergan, after all, is not a typical pharma company focused on discovering and developing new treatments for the benefit of patients. The bulk of Allergan’s expenditures are not on innovative new research and technologies, or clinical trials, but on finding new uses for existing drugs such as Botox. As LaMattina noted:
It is hard to believe that Pfizer, a company with a long history of discovering many of its own products, would put someone in charge with an avowed distaste for the challenges of drug research.
I also share LaMattina’s fear that the end result of any deal could well be to reduce Pfizer’s R&D spending – Allergan, after all, spends just 7% of its revenues on R&D compared to Pfizer’s current 15%. This approach, if adopted by Pfizer as part of a merger, could have major implications for Pfizer’s highly talented U.S. research base.
That research base could also be impacted, if under a Pfizer-Allergan merger deal, Pfizer closed some of its U.S. R&D and manufacturing facilities and laid off many chemists and other scientists. One of the early signs of ICI’s eventual demise was the closure of its world-leading Corporate Laboratory in the U.K. for cost-saving reasons. This boosted the share price in the short-term, but effectively destroyed seed corn for future earnings.
A consolidation strategy of the type being considered by Pfizer with Allergan would be understandable if the pharma market was coming to the end of its lifecycle. Cost-cutting makes perfect sense when you have few opportunities to grow. But that is hardly Pfizer’s situation today. Major new opportunities are available for the industry in areas such as the development of low-cost treatments. These will be vital if healthcare is to remain affordable, in a world where value-for-money is fast becoming the critical driver for the future.
We simply cannot afford to weaken the drug development capabilities of companies such as Pfizer that have the global scale and financial resources required for success. Black’s warning* back in 2009, a year before his death, seems worryingly prophetic today:
There is no shortage of scientific talent. But I am much less optimistic about the managerial vision of the pharmaceutical industry to catalyse these talents to deliver the results we all want.2
Pfizer’s board contains a number of eminent scientists who, like Sir James Black, have helped to create the value contained in today’s pharmaceutical industry. One can only hope they will resist the siren calls that – whether intended or not – could otherwise result in the destruction of one of the world’s most valuable scientific resources.
Paul Hodges is chairman of International eChem (www.iec.eu.com), trusted advisers to the chemical industry and its investment community. He is a member of the World Economic Forum’s Industrial Council on chemicals, advanced materials and biotechnology, and presents the ACS ‘Chemistry & the Economy’ webinars.
*These two links may be blocked on some browsers. The articles they are citing are as follows:
1. Kay, J. (2014, May 6). Drug companies are built in labs, not boardrooms. Financial Times.
2. Jack, A. (2009, February 9). An acute talent for innovation. Financial Times.
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