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Competition concerns should be main factor on Pfizer bid

CMC Markets

The recent bid by US drugs giant Pfizer for AstraZeneca has raised concerns about job losses being implemented on one of the UK's largest and most successful companies. AstraZeneca has been a British/Swedish success story which employs nearly 7,000 people in the UK and whose research and development has been instrumental in the UK based company's success. The company is also a big contributor to UK GDP, providing 2.3% of UK exports and it is precisely this type of area that the UK government should be looking to encourage as it looks to rebalance the UK economy. Fears have already been expressed about the fate of a new research centre in Cambridge in light of the recent Pfizer bid. The current bid has raised not unreasonable concerns about the prospects of job cuts in the UK, given the recent decision by Pfizer to shed 2,000 jobs in 2011 at its research site in Sandwich, where Viagra was invented. Pfizer management have gone to great lengths to assuage concerns that they will be similarly aggressive if they succeed in their bid; however US CEO's do have form in this area, and Pfizer's track record in cutting costs in the wake of previous takeovers doesn't encourage in this area. When Cadbury was taken over a few years ago Kraft CEO Irene Rosenfeld went to great lengths to promise to keep open a UK factory only to develop selective amnesia and subsequently close it once the deal has gone through. Furthermore it is not immediately clear what the benefits to AstraZeneca would be in the event the Pfizer bid succeeds. It seems the main driver behind the deal is the desire of Pfizer to shelter $70bn of its cash pile from US taxation rules, and that doesn't seem a sufficiently good reason to do a deal if you are AstraZeneca. The Pfizer CEO has talked up the prospects of a deal being good for the creation of new drugs but AstraZeneca already has a healthy pipeline relative to Pfizer, and reducing competition in the pharmaceutical sector seems a funny way to generate growth in new drugs. This is a particularly important factor when demographics dictate an aging population, and the search for new drugs to combat the ailments brought about by aging will increase costs to governments with respective to health care. For all the arguments for and against a deal the competition element is the most important one, and big multinationals rarely offer value in this regard. Less competition will therefore mean higher prices and for that reason alone the competition element has to be the driving factor behind any deal being successful or being blocked. The drivers behind the deal have certainly raised tensions on the US side of the Atlantic prompting calls for tax reform in the US. This raises the question in the event a deal goes ahead and that if US tax laws change in the future then Pfizer will do what any company will do and maximise value to its shareholders, making any promises that it makes now to UK politicians utterly worthless. The fact is as things currently stand AstraZeneca has the more encouraging pipeline and on the face of it Pfizer would appear to need AstraZeneca more than AstraZeneca needs it. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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