Former Turing Pharmaceuticals CEO Martin Shkreli faced Congress last month.
And he laughed.
While that may be putting it a bit too strongly, his suppressed snickering betrayed the fact that Big Pharma plays a wonderful game with the American economy, and it very often wins by a staggering margin.
Some might describe it as laughable.
According to the Organization for Economic Growth and Development, Americans pay $1,000 per person annually for prescription drugs. That’s the most in the world. Canada, the runner-up, pays $750. Do Americans rely too heavily on drugs? Perhaps, but maybe pharmaceutical companies simply enjoy American cash.
Martin Shkreli and Turing Pharmaceuticals, of course, came under fire for purchasing Daraprim and raising the price to $750 per pill. Back in 2013, Gilead pulled a similar move by charging $84,000 for the 12-week Sovaldi course. But who is at fault here? Is it the pharmaceutical giants trying to create the biggest returns for shareholders, or is it the U.S. government for allowing this game to go on? Both sides are at fault, and the tax evasion strategies from Big Pharma companies and the government support they receive save them billions of dollars each year.
Big Pharma Enjoys Government Support–Explicitly and Implicitly
Pharmaceutical companies like Turing, Pfizer, and AstraZeneca benefit hand over fist in tax breaks, leadership, and government non-involvement.
Tax Breaks
Ernst and Young describes how drug makers get taxes back—as much as 65 percent—on expenses paid to 3rd party researchers (as long as those researchers reside in the U.S.). In other words, when Pfizer outsources its development and research work to a U.S.-based contractor, it gets a 65 percent return. The reasoning would follow that if companies are given tax breaks on research, more research will happen, and advances in medicine will come sooner.
Robert Kneller, of the University of Tokyo, implies otherwise in his 2010 analysis on drug development. He claims that from 1998-2007, 50 percent of scientifically innovative drugs approved in the U.S. came from university and biotech company research rather than pharmaceutical company research.
Indirect Government Support
The government also helps Big Pharma by allowing certain practices of questionable ethics to continue. For instance, Robert Reich, in one article on Big Pharma’s practices, mentions that directly marketing prescription drugs remains legal in the U.S. despite the fact that it is a banned practice in most advanced nations. Not only that, but companies continue to do so after the 20 year patent has expired on a drug—leading customers to think that generic alternatives are not available.
Furthermore, government agencies intended to regulate pharmaceuticals can fall into compliance instead, as shown by the recent appointment of Robert Califf as the head of the FDA. While Califf worked as a researcher at Duke—not necessarily linked to a particular pharmaceutical company—he did develop strong ties with the pharmaceutical industry, and his loyalties have been challenged before the senate.
Despite the threat of a filibuster, President Barack Obama followed through with the appointment.
Big Pharma and Tax Evasion
Tax Deferment
According to americansfortaxfairness.org, Pfizer didn’t pay U.S. income tax from 2000-2012, despite $43 billion in global earnings. During that time, Pfizer made $3.4 billion on U.S. contracts—still without American tax. Pfizer simply shifted income overseas and enjoyed tax deferment.
All told, Pfizer parked $73 billion outside the U.S. by the end of 2012, and it is unlikely that any of that cash will be repatriated. “We really shouldn’t be surprised,” said Dallas tax attorney Joe Garza. “They’re just playing a small part in the U.S. corporate tax drama that has left over $2 trillion in income overseas. That money will never to be taxed in the U.S, most likely.”
Smells Like a Tax Inversion . . .
Pfizer has since agreed to a record breaking merger with Dublin-based pharmaceutical company Allergan, which would move Pfizer’s taxable headquarters to Ireland. The company remains under the 60 percent threshold for avoiding tax inversion charges, but the intent remains painfully clear: Pfizer likely won’t be paying any more U.S. income tax, and many U.S. pharmaceutical companies are following (or have followed) suit.
Chances are, Big Pharma hates Martin Shkreli as much as the rest of the country does—simply because he’s bringing a spotlight onto the opaque business practices of a multi-billion dollar industry. Government regulation over the prices of pharma products would help in the short term, but is added government intervention the best way? As one commenter puts it, government intervention is “like chemotherapy for a cancer patient.” It’ll kill the cancer, but it will also introduce a fresh set of difficulties.
Either way, legislation is needed to end the cycle of Big Pharma tax inversion, unethical price gouging, and Medicare’s ridiculous legal inability to negotiate for fair pharmaceutical prices.
Until then, Martin Shkreli will have the last laugh.