Tax Overhaul: A Plus for Pharma

Congress delivered a significant Christmas present to President Trump last month – and to industry - by enacting landmark tax reform legislation that makes major changes in the corporate tax structure. The result may be billions in savings for multi-national biopharma companies. In addition to lowering the overall corporate tax rate from 35% to 21%, the measure simplifies the rules for expensing new investment purchases and eliminates the alternative minimum tax for business-a change that will enable many firms to take advantage of the R&D tax credit, which was retained.

A notable provision in the massive bill overhauls U.S. taxation of multi-national companies. The measure creates a modified territorial system that taxes domestic profits, instead of taxing income earned abroad. It also will permit corporations to bring back to the U.S. profits earned overseas at a much lower tax rate, which could affect more than $2 trillion in offshore foreign income held by U.S-based companies, including some $100 billion held by pharma companies.

This revision aims to stop the shift of profits by American firms to affiliates in lower-tax countries, which supporters claim will expand investment and create more jobs at home. Yet, the rules are complex, and U.S. firms may continue to find it attractive to invest overseas. This and other related tax changes also could alter how foreign-based multinationals do business with U.S. firms and could interrupt global supply chains and violate World Trade Organization rules and tax treaties.

It also remains to be seen how much the new policy benefits the U.S. economy. A “tax holiday” on repatriated funds in 2004 yielded few new jobs, and analysts expect a similar outcome this time. Pfizer recently said it would share newly gained funds with investors in the form of a dividend hike and stock buybacks. Pharma companies also indicate plans to use repatriated income to underwrite mergers and acquisitions, which would have a range of economic impacts.

A main loss for biopharma companies involves a cut in tax benefits for developing new treatments for rare diseases. The legislation reduces the orphan drug tax credit from 50% to 25% of qualified research and clinical testing activities – not as damaging as an initial proposal to eliminate the credit altogether, but still a hard blow that was strongly opposed by biotech companies and rare disease patient advocates.

The tax gains for pharmaceutical companies, moreover, may be offset by provisions likely to reduce health insurance coverage for millions through the insurance exchanges established by the Affordable Care Act. The legislation eliminates the ACA mandate that individuals purchase health insurance, which is predicted to lead more healthy people to opt out. Those consumers retaining coverage may see prescription drug benefits squeezed as plans gain more leeway to limit formularies. The result may be a notable reduction in prescription drug utilization and reimbursement and further pressure on drug costs and prices.