More than a Matter of Appearances: Pharma’s Existential PR Problem


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When President Obama forced Pfizer to scrap its proposed $160 billion merger with Allergan, the industry as well as the company emerged as losers in the eyes of the public, despite Pfizer’s credible and constructive position.  As Pfizer CEO Ian Read explained in a recent op-ed piece in The Wall Street Journal:

Pfizer has long worked with Congress to make the U.S. tax system more competitive and fair. In the absence of tax reform, we undertook a proposed merger with Allergan PLC in good faith and after intense study and review of current laws. This strategic transaction, driven by strong commercial and industrial logic, would have made it easier to invest in the U.S. (emphasis mine.)

In his blog Matt Herper, a thoughtful observer of the industry, headlined the PfizerGan transaction as “Pharma’s Tax Dodge” and quoted the president saying for American corporations “to continue to benefit from that entire architecture [of the American economy] that helps you thrive, but move your technical address simply to avoid paying taxes, is neither fair, nor is it something that’s going to be good for the country over the long term.”

Bad enough that we are ruthless profiteers denying life-saving drugs to desperate patients.  Now we are tax cheats to boot.

This is more than a matter of appearances.  A tarnished reputation can have real consequences.  Pharma’s lowly standing has made it fair game in the political arena. If the politicians were to actually follow-up on their threats to reign-in the perceived abuses, the results could be catastrophic.

In fact, both Herper and the president are wrong.

The U.S. tax code is one of the few that requires domestic companies to pay a 35 percent tax, net of local taxes, on world-wide income. Since the companies are allowed to accumulate dollars overseas if they plan to deploy the money there, they legally pay no U.S taxes until they bring it home. Our foreign competitors, however, are not required to pay these taxes if they invest in the United States. Both Republicans and Democrats agree that this places US companies at a competitive disadvantage, discourages investment at home and should be changed.  But to Reed’s earlier point, it hasn’t been changed and it isn’t going to be any time soon.

So Pfizer’s proposed merger was not a tax dodge. The company was never going to bring back its foreign profits, because it simply makes no sense to pay $.35 tax penalty for every $1 of overseas earnings invested in the U.S.  As Read explained, the purpose of the merger was to enable Pfizer to invest those dollars in the U.S. to build jobs and industry here, rather than letting it sit in banks overseas.

Mainstream pharma are no more profiteers or tax cheats than any other business, and yet the industry continues to stagger from one public relations disaster to another. Many thoughtful observers already question the industry’s economic viability.  Despite the generous markets pharma enjoys in the US, neither the multi-nationals nor the bio-venture community have demonstrated that they can profitably discover new drugs.  While we may not like to face that reality, it is the life-or-death reason why Pfizer and other firms have had to resort to growth by acquisition, and will have to go on eating and being eaten, despite the regulations.

With proposals like cost-plus pricing, government-negotiated prices, and the proposed expansion of single-payer health-care, it would not take much to shift the risk-reward balance to the point at which pharmaceuticals sink back into the generic industrial landscape.  A sudden collapse might result in a crisis that could stir pharma supporters to action.  More likely—and more insidious—the government would make small changes, creating regulations and market controls that slowly erode incentives and sap the industry’s vitality.  The result: The further flattening of Pharma’s productivity curve—fewer new molecules, fewer blockbusters, fewer therapies. No one will notice the absence of drugs that didn’t happen.

In a recent blog post Bernard Munos drew a distinction between pharma CEOs as transformers and builders and observed that the industry needed the bold vision of the former but had an oversupply of the latter.  In a similar blog, Christopher Bowe also called for new leadership—the likes of an Elon Musk or a Steve Jobs.  Nowhere is that deficiency in leadership more apparent than in … Next Page »

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Standish Fleming is a 29-year veteran of early stage, life sciences investing. He has helped raise and manage six venture funds totaling more than $500 million and served on the boards of 19 venture-backed companies, including Nereus Pharmaceuticals, Ambit Biosciences, Triangle Pharmaceuticals (acquired by Gilead Sciences) and Actigen/Corixa (now part of GSK). Follow @

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