Why Pfizer Really Wants to Acquire AstraZeneca

Pfizer looks to AstraZeneca acquisition to bolster its drug pipeline and reap tax savings.

Pfizer’s $119 billion bid for AstraZenca indicates a change in strategy for the company. According to the Wall Street Journal  “A big deal, potentially worth $100 billion, would mean Pfizer is shifting from its steady diet of cost-cutting and reorganizations over the past few years.”

Pfizer, like much of corporate America, has focused on becoming “leaner” and more efficient by cutting costs such as R&D, which dropped from $9,074 million in 2011 to $6,554 million in 2013. The company also divested of noncore businesses like Capsugel, its nutritional business, and its animal health unit to realigned its strategy around profitable core categories like cancer, immune disorders like rheumatoid arthritis, and emerging markets.

While becoming “lean” increases margins and adds to the bottom line, there are only so many businesses to shed or costs that can be cut. When growth stall, businesses must re-evaluate their current strategy and consider more creative options to find growth. Often businesses turn to acquisition to achieve this growth quickly. By acquiring AstraZeneca, Pfizer hopes to add $45 billion in annual sales by 2023 to its pipeline. Pfizer had $44.3 billion in sales in 2013.

Another significant driver for this deal is the tax savings. Last month I wrote about the rise in corporate tax inversions with companies like Chiquita, Perrigo, Actavis, and Applied Materials reincorporating overseas to obtain significant tax advantages. If the deal is completed, New York-based Pfizer would benefit from $ 1 billion or more in tax savings a year.  The company would also be able to use some of its $70 billion of overseas cash. Pfizer and other companies have been keeping significant amounts of cash overseas to avoid paying U.S. taxes; for example Apple has about $150 billion overseas. These financial engineering trends have caught the attention of lawmakers and Congress has proposed revisions to tax laws to make inversions more difficult.

Before the deal can be completed, Pfizer must face regulators and convince them the deal is driven by strategy – not tax advantages.

“Investing in the U.K. is attractive to Pfizer for a variety of reasons, including the strong skills base of researchers, clinicians and technicians and the strong track record of innovative research, and thriving biomedical environment that encourages connectivity between academics, industry, investors, clinicians and the government,” Pfizer said.

Whether or not regulators will agree with Pfizer’s statement has yet to be decided.

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