Taxing Times for French Pharma

While French politics has taken a decisive shift to the left with the election of the country’s first socialist president for 17 years, it does not look like Francois Hollande will be changing or derailing any of the existing - and sometimes quite radical - healthcare reforms that the outgoing Nicolas Sarkozy had introduced over the last few years.

Acccording to IHS Healthcare, Hollande will still pursue Sarkozy’s planned price cuts, concentrating on better control of drug prescriptions and volumes delivered. And the new incumbent agrees with Sarkozy’s planned policies to introduce legislation on physicians’ extra-billing (currently, some French doctors are allowed to exceed the limit for reimbursement for consultations and acts) and to renew focus on the limitation of fraud.

For its part, the French pharma industry used the recent Presidential campaign to call for more favourable policies and to boost its public image. To date, it has been worried by the narrow focus on cost containment by successive governments, which is most apparent in the form of various taxes on the pharma sector.

The French pharmaceutical industry association, Les entreprises du médicament (LEEM), has calculated that these taxes account for 5.5% of annual turnover, in addition to other burdensome levies imposed upon all industrial sectors. Officially, the taxes are described as “contributions”, and were introduced to reduce the French health system’s huge deficit, for which pharma was partly blamed because of high product prices. Pharma companies have rejected such accusations, pointing out that since they must negotiate in advance with the government about product pricing, the government is fully aware of, and involved in, the decision-making. The industry believes that the government should pay more attention to the non-pharmaceutical costs within the healthcare system.

Pharmaceutical-specific tax rates have increased steadily, and are likely to continue to do so for the foreseeable future. They secure substantial revenue for the government, which is struggling to deal with the eurozone crisis. These types of industry-focused taxes are likely to continue in a bid to avoid imposing tax rises on the general population. Currently, 13 pharmaceutical-specific taxes generate revenue for the government, but are an irritant to the industry since they can represent between 50% and 100% of companies’ annual corporate income tax.

One, the Promotion Tax, taxes promotional expenses for medicines that have a marketing authorization in France and are included on the official list of reimbursed medicines. Initially, it was set at 5%, but it is now charged at 19–39%, depending on the nature of the company’s promotional expenses. Currently, it brings in between €130 million and €165 million per year for the government. One criticism of the Promotion Tax is its lack of clarity and ambiguous wording, about which certain companies have challenged the government.

Another tax (introduced by Article 12 of the law for Health Insurance Financing of 2004) is levied on sales of pharmaceutical products, and nets annual revenue from €215 million to €250 million. This tax is charged at 1%, but does not apply to exported, generic and orphan products. Since 1999, companies have also had to pay a tax on the basis of the annual increase of sales to prevent an unaffordable increase in health expenses caused by product sales.

French pharma’s ongoing criticism of the tax system was starting to make a mark on the previous government. In 2009 Sarkozy gave a keynote speech to the Health Industries Advisory Board (CSIS), in which he publicly acknowledged that healthcare expenditure could not be viewed solely on the basis of cost containment. In January this year, the CSIS reviewed the tax system and agreed that a simplification of the various measures was required. It recognized that the industry’s views were not being taken into account, and that some of the tax provisions did not appear to align with other branches of government policy to stimulate industrial competitiveness.

But the Sarkozy government remained committed to making difficult cost-cutting decisions and, before the election, Finance Minister François Baroin stated that it would not back down from the policy of containing medical spending. The incoming government faces the same financial challenges. Since considerable revenue comes from the long-standing taxation measures, it is unlikely that any tax reform will be to the satisfaction of the industry.

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