Pfizer CEO on AstraZeneca management: They need convincing

On Monday, Pfizer (PFE) publicly announced its interest in acquiring British drug giant AstraZeneca — an overture that the U.K. firm has so far met with silence, at least publicly. It’s the latest chess move in a sudden wave of big pharma dealmaking. The push has been driven by an industrywide slowdown in blockbuster drug development — as well as a need for large multinationals to do something with their hundreds of billions of dollars in overseas earnings. (Much of it can’t be repatriated without generating a huge tax bill.)

Below, Pfizer Chairman and CEO Ian Read weighs in on what he hopes to accomplish by meshing his $52 billion-in-revenues company with its U.K. rival. One thing’s for sure: If it happens, the $100 billion behemoth would be the industry’s biggest company ever.

Fortune: Why AstraZeneca and why now?

Read: AstraZeneca (AZN) is a wonderful portfolio match with our portfolio. It has tremendous strength in inflammation, a good oncology presence, and a good position in diabetes. And we can be far more productive if you look at the match with the established products unit by leveraging the network in emerging markets and elsewhere. That’s of critical importance to us. There are a lot of overlaps in science being done, and the secular trend is that the industry will continue to consolidate by the type of deal we’re doing, or by an exchange of assets.

What’s in it for AstraZeneca, other than the share price premium? Have there been any formal discussions yet?

They’re a new management team, and clearly they are good people and they’ve got a focused vision. I think they need to be convinced that the combination of the two [will work]. There have been no real discussions of substance other than “we’d like to do a deal.” We did give them an offer on the last day we had an undisturbed stock price (Jan. 3). Now [because of U.K. law] we have 28 days to decide [whether to make a formal offer]. There has been no direct response.

A lot of analysts and investors think this deal is motivated by tax benefits rather than strategic advantages, since you would use the inclusion strategy to get a U.K.-based tax treatment. Is this true?

I’ve been very clear that the origin of this deal is the combination of the two companies, and the science and the ability to create great value for shareholders. Now when I look at that deal compared with what I would have to pay if I did it in the U.S., the negative [tax] synergies would kill the deal. There’s a 20% tax rate in the U.K., and here, because of dividend requirements, it would probably be a 38% tax rate. So to get the deal done we have to domicile in the U.K.

[Editor’s Note: After Fortune’s interview was posted online, Pfizer wrote to clarify that Read meant, “to get the deal done we have to domicile in the U.K. in order to not subject AstraZeneca’s non-US earnings to US tax.”]

When you look at a deal you look at three components: What are the possible revenue synergies, what are the cost synergies, and some deals also look at financial synergies. We have got all three components in our deal, and we don’t think any one is dominant.

It seems like Pfizer has been trying to get smaller, not bigger, of late, with its sales and spinoffs of nutritional health and animal health, respectively. Why the shift in strategy?

When I took over (in late 2010), I said we’re a pharmaceutical company and we have got to fix the innovative core and get capital allocation right. We haven’t gotten smaller in pharma. My discussion point has always been that size is not the relevant question. We just want to focus on what creates shareholder value. [Over my tenure] I have been trying to create this optionality, which we’ve discussed with the Street, that we’re going to give you transparency, and you’re going to be able to feed back to us through how you invest whether you believe we’re managing [our assets] well or if they would be better managed separately.

Every Pfizer CEO of the past two decades has done an enormous, industry-changing merger (Warner-Lambert in 2000, Pharmacia in 2002, Wyeth in 2009). Is this one meant to be your legacy?

I think if you look at the deals, each was caused by different circumstances. Warner-Lambert was driven by the [patent expiry] of Lipitor and seeing that share taken away. [Editor’s Note: Pfizer later clarified that the Warner-Lambert deal was driven by Pfizer’s desire to acquire “the exclusive rights” of Lipitor.] The Pharmacia deal was more about the pain franchise. As a concept it worked. The specialty businesses we got were wonderful businesses, but we had a Bextra problem [like Merck’s Vioxx, it was withdrawn from the market after negative side effects were reported; in 2009 Pfizer paid $2.3 billion in a civil and criminal fine for illegal marketing of Bextra and other drugs]. The Wyeth deal was a deal about technology, about getting into large molecules and vaccines and about cost synergies. That was a trifecta. This one is too.

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