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 the tarnished image that has made Pharma a whipping boy for politicians on both the left and the right—the one thing they all agree on.
Who in the industry stood up for Pfizer and Ian Read? On the PBS Evening News Hour a White House spokesman smugly repeated verbatim the president’s mischaracterization of the transaction. But there was no industry rebuttal.
The pharmaceutical industry must communicate a consistent message regarding its devotion to treating debilitating disease and the value of pharmaceuticals. Television news shows the horrors of drug addiction, but fails to mention the suffering alleviated by these same opioid drugs.
The campaign needs to be relentless. Think of Reagan and the Cold War. I helped start a company with a scientist from the former Yugoslavia during the conflict in Bosnia. On her visits home she brought two things to keep friends and family alive: U.S. dollars and pharmaceuticals. No other products made anywhere in the world can touch that value proposition, and yet somehow it gets lost in the discussion.
At a dinner some years ago John Lechleiter, the CEO of Eli Lilly, recounted a day he had spent talking with members of Congress. When asked what he had accomplished, he thought a moment and said, “Well, maybe we convinced at least some of them that generic companies don’t create generic medicines.”
These are the people who make the rules that govern our industry. If they don’t know the difference between a generic and a proprietary drug, how can we expect them to understand the industry’s more nuanced needs for sustaining innovation?
Pharma must focus attention on value, or it will surely be lost. Not even big pharma can invest hundreds of millions over 15 years with a less than 10 percent chance of success, knowing that the payoff will be determined, not by the value created, but what public opinion decides is “fair” a decade or more in the future.
How many people understand that the Merck drug pembrolizumab (Keytruda) is the reason that Jimmy Carter is alive today? The pharmaceutical industry literally works miracles… and gets credit for dodging taxes.