- In letters to five CEOs — representing Pfizer Inc., Merck & Co., Johnson & Johnson, AbbVie Inc., and Abbott — Senator Tina Smith, D-MN, asked each company to provide detailed plans for how they intend to spend the money they will receive as a result of the recent lowering of the corporate tax rate in the U.S.
- Smith requested the five companies disclose if there have been announced changes to dividends or announced share repurchases, awarded bonuses to high-ranking company officers, changed current list price of any of its pharmaceuticals or invested in any new R&D since Nov. 2, when the bill was introduced.
- She also asked for an estimate for the total amount of foreign income that could be considered liquid assets versus illiquid and the median annual total compensation for employees at the end of 2017 fiscal year compared to their salaries now.
Now that pharma has a win in the form of a reduced corporate tax rate via the Tax Cuts and Jobs Act, people are looking closely at just how it plans to allocate those savings — and has one senator, in particular, asking for specifics about how pharma plans to pay it forward, if at all.
Smith said in a statement yesterday she is concerned that rather than pass the buck to patients, pharma will likely use most of the savings it received from the recent corporate tax reform to drive up stock value and reward investors. "Given the growing national concern over the skyrocketing price of many prescription drugs, I would expect you to take every opportunity to lower the price of the drugs you produce, reducing the burden on consumers," wrote Smith.
Citing a Feb. 22 article from Axios, Smith expressed apprehension about pharma not using these newly found funds so altruistically. She said that typically, investor enrichment "comes at the expense of lowering the price of prescription drugs, investing in research and development that could lead to new cures, or passing along savings to consumers."
New tax law spurs pharma to buy back stock
|Share buybacks announced since tax law passed||2017 R&D expense (GAAP)|
Figures in billions USD. SOURCE: Data from companies
The recent changes to the tax code effectively lower the corporate tax rate from 35% to 21%. Many pharma companies already paid below that rate, although several big pharmas garnered significant benefit from the new law. (AbbVie, for instance, expects its effective rate to fall to 9% in 2018, increasing to approximately 13% over the next five years.)
Many big pharma companies also hold large stashes of cash overseas, and previously had to pay high taxes to repatriate that money. Several years ago, the big trend for pharma companies was to relocate their headquarters to more favorable tax domiciles to lower their tax rates and get access to overseas earnings. But the option for inversion was taken away when a loophole was closed in the tax code.
It should not come as a surprise that pharma may use the tax break to enrich investors — the industry is just drawing from its existing playbook. For example, many of the profits that were returned under the American Jobs Creation Act of 2004 were not used to create new jobs or re-invest in the U.S. Instead, many of the biggest pharma companies responded by slashing U.S. jobs and paying large executive bonuses, according to a report from the Congressional Research Service.
In fact, compensation for the top five corporate executives at the top 15 corporations to bring back cash increased the most after corporations repatriated offshore funds — and six of the top 15 companies to repatriate were pharmaceutical companies.