A potential raised bid for AstraZeneca Plc (AZN) means that Pfizer Inc. (PFE) would have to generate more than $2 billion in annual savings from the deal, and that job cuts are more likely to happen outside the U.K.
AstraZeneca, the U.K.’s second-biggest drugmaker, rejected Pfizer’s offer last week of more than $106 billion, about 50 pounds a share, some 32 percent of which is in cash. At that price, Pfizer would have to save at least $2 billion for the bid to add to earnings in 2014 and 2015, according to an analysis by Bloomberg Industries.
That amount would rise to at least $3 billion if the New York-based company raised its bid to 55 pounds a share, and Pfizer may need to increase the cash portion to 40 percent, Bloomberg Industries analyst Sam Fazeli said. If Pfizer sticks to the current cash offer, the savings may have to exceed $3.5 billion, “approaching a prohibitive level” in terms of U.K. job reductions, he wrote.
“Any cost savings are likely to come partly from R&D in Sweden and the U.S., as well as the global commercial infrastructure,” Fazeli wrote. Pfizer’s pledge to Prime Minister David Cameron suggests AstraZeneca’s 2,000 U.K. research and development jobs should be “safe from cuts if a deal goes ahead.”
The largest U.S. drugmaker told Cameron last week that it would keep at least 20 percent of the combined company’s research and development workforce in the U.K. for at least five years and retain “substantial” manufacturing facilities at AstraZeneca’s site south of Manchester.
Pfizer’s global R&D workforce totals about 10,880 and AstraZeneca’s about 9,000, according to estimates by Bloomberg Industries. With fewer than 20 percent of those jobs in the U.K., job cuts may occur outside Britain, said Asthika Goonewardene, a London-based analyst at Bloomberg Industries.
AstraZeneca employs about 5,900 people in Sweden, home of predecessor company Astra AB. Sweden, unlike the U.K., hasn’t received any promises on jobs from Pfizer.
Pfizer may be more likely to cut its own R&D operations than eliminate jobs in the U.K. because of tax benefits, said Fabian Wenner, an analyst at Kepler Cheuvreux in Zurich. Keeping research operations in Britain enables Pfizer to say that products were invented in the U.K., and use the country’s lower tax rate, Wenner said. Pfizer’s tax rate is 27.4 percent, while AstraZeneca’s is 21.3 percent, according to Fazeli.
“They want to lower the tax rate for the overall group by implementing transfer pricing, which you can only get when you have sufficient R&D in the lower tax regime,” Wenner said. “It would make more sense to save 15 to 20 percent of Pfizer R&D. It would make sense from a both a political point of view and a tax point of view.”
Manufacturing jobs in Britain could also be preserved in this way, Wenner said. The most probable positions to be eliminated would be in sales and administration, he said.
Typically, a merger results in cost reductions equivalent to about 10 percent of the target’s global sales, Wenner said. In this case, Pfizer may cut $3.3 billion in costs, which include a 10 percent decrease in cost of goods sold, 20 percent of sales and administrative costs and 20 percent of research and development costs.