May 14, 2014 by Paul Goldsmith
When AstraZeneca Chief Executive Pascal Soriot needs to raise money for investment in new drug development, something he would have to do often, he must be glad to have the option of being able to raise money via a rights issue (selling shares) on the stock market. For those companies that need to raise a lot of money fast it is a very useful thing to have available, which is why most large Pharmaceutical companies are public limited companies (PLC).
When Soriot wants to raise money for his own personal use he has the ability to sell the shares he has most probably been paid in on the stock market, often making a lot more money than they were worth when he earned them. For those Chief Executives who like to be incentivised for their success by being paid in share options it is very useful to have the ability to sell those shares, which is why many people like Soriot probably aimed to be the Chief Executive of a PLC. The benefits can be huge.
But there is a key word here – that of “public”. Once shares in the company have been sold and are out on the open market, anyone can buy them, hence the name “public”. That is why Pfizer, who want to expand the size of their company, enter new markets, gain access to the R&D expertise to develop blockbuster drugs, and yes, reduce their tax bill, are trying to takeover Astrazeneca. Because they can, because whilst there are benefits of being a public limited company, which I’m sure Soriot and Astrazeneca have enjoyed immensely, there are drawbacks, and a hostile takeover is one of them.
Which is why I was disappointed at Soriot’s strategy in front of the Business Committee on Tuesday and in the rounds of interviews he did. He argued that the “takeover would create huge disruption and distraction as scientists worried about their futures rather than development.” He went on to be even more opportunistically heart-rendering, asking the committee “What will we tell the person whose father died from lung cancer because one of our medicines was delayed because our companies were involved in saving taxes or saving costs?”.
Who does Soriot think Pfizer is? A bunch of kids with no business experience? They have integrated other companies before. They would know how to do it without the pipeline of drugs slowing down, as they do actually know how important that pipeline is. This was shamefaced appealing to the baser instincts of the politicians he had in front of him.
Because here’s why Soriot using the example of a medicine for lung cancer was particularly cheeky. AstraZeneca’s most promising drug in their pipeline is called MEDI4736. It’s a molecule, designed to fight lungcancer. It was developed by MedImmune – and AstraZeneca acquired it by buying MedImmune in 2007. So let me get this straight, Soriot doesn’t want Pfizer to buy AstraZeneca because it might delay a lung cancer drug that AstraZeneca only have because they bought another company. Is he kidding?
The truth is that there is little economic reason to reject this takeover, and Soriot knows that. He knows that given the difficulty in finding more blockbuster drugs if you can combine company R&D departments it may actually help get them to market quicker. He knows that when companies merge together they are likely to have some duplicated roles which aren’t needed anymore (they won’t need two people in charge of HR for instance, it’s called economies of scale and it is an economic justification for a merger), so the cutting of costs shouldn’t come as a surprise.
This doesn’t mean that this enquiry shouldn’t take place. It would be the biggest ever takeover of a UK company at £63bn. AstraZeneca, by themselves, provide 2% of ALL UK exports. It would create a massive company with huge market power. The UK has a comparative advantage in science and we should think about protecting that, but not by blocking a takeover that, in an open market, has no other reason not to take place than political grandstanding.
Thankfully, Vince Cable the Business Secretary, whose final decision this will be, has admitted blocking the takeover would be “tricky”.
Meanwhile, as Soriot’s grandstanding forces up the value of Pfizer’s bid, I wonder what he’s planning to do with the payoff that he’ll get if the takeover goes ahead and, as is likely, he will be removed from his post. I wonder what he’ll do with the money he gets for the shares that he owns as the CEO of such a large publicly listed company, an amount that will of course grow as Pfizer’s bid grows.
It’s hard being the CEO of a publicly listed company that is the subject of a takeover bid. But not THAT hard.