PHARMA 2020: TAXING TIMES AHEAD WHICH PATH WILL YOU TAKE? - PHARMACEUTICALS AND LIFE SCIENCES - PWC
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Pharmaceuticals and Life Sciences Pharma 2020: Taxing times ahead Which path will you take?
Table of contents
Previous publications in this series include:
Pharmaceuticals Pharmaceuticals and Life Sciences Pharmaceuticals and Life Sciences Pharmaceuticals and Life Sciences
Pharma 2020: The vision Pharma 2020: Virtual R&D Pharma 2020: Marketing the future Pharma 2020: Challenging business models
Which path will you take?* Which path will you take? Which path will you take? Which path will you take?
*connectedthinking
Pharma 2020: The vision # Pharma 2020: Virtual R&D 1
The founding paper in this series, The second paper, “Pharma Published in February 2009, “Pharma 2020: Challenging
“Pharma 2020: The vision”, 2020: Virtual R&D”, launched “Pharma 2020: Marketing the business models”, published in
launched in June 2007, highlights in June 2008, explores how future”, discusses the key forces April 2009, highlights the need for a
a number of issues that will have pharmaceutical companies can reshaping the pharmaceutical more collaborative approach to the
a major bearing on the industry dramatically improve the R&D marketplace – including the research, development and delivery
and outlines the changes we process. We argue that new growing power of healthcare of medicines. It also evaluates the
believe will help pharmaceutical technologies will enable them payers, providers and patients advantages and disadvantages
companies enhance the value to virtualise large parts of their – and the changes required to of various business models and
they provide to shareholders and R&D, while working more closely create a marketing and sales how each stands up against the
society in the future. with researchers, governments, model fit for the 21st century. challenges facing the industry.
healthcare payers and providers These changes will enable the
will enable them to address the industry to market and sell its
changing needs of society more products more cost-effectively, to
effectively. create new opportunities and to
generate greater customer loyalty
across the healthcare spectrum.
“Pharma 2020: Taxing times ahead” – the fifth report in our series of white papers on the future of the pharmaceutical and life sciences industry –
focuses on the opportunities and challenges from a tax perspective. It discusses how the political, economic, scientific and social trends currently
shaping the commercial environment, together with the development of new, more collaborative business models, will exert increasing pressure
on effective tax rates within the industry. It also shows how companies can adapt their tax strategies to support the provision of outcomes-based
healthcare and remain competitive.
All these publications are available to download at: www.pwc.com/pharma2020Table of contents
Introduction 2
Political and economic factors shaping the future taxation of Pharma 4
• Soaring public deficits
• Variations in effective tax rates
• The prospect of “green” taxes
• Competing tax incentives
Scientific, structural and social trends shaping the future taxation of Pharma 10
• The changing product mix
• The increasing importance of the emerging markets
• The bifurcation of the supply chain
• More demanding healthcare payers
The taxation of new business models 13
• Six key tax issues to consider
• The potential impact on effective tax rates
How the industry should respond 17
Conclusion 19
Acknowledgements 20
References 21
Pharma 2020: Taxing times aheadTable of contents
Introduction providing such services themselves. will be new competitors keen to build
knowledge-based economies.
These changes, together with the
We discussed many of the far-reaching political and economic trends now • Even so, the effective tax rates
changes influencing the pharmaceutical shaping the general commercial (ETRs) of most large pharmaceutical
and life sciences industry (Pharma) as environment, will have major companies will rise, as their product
it approaches the second decade of repercussions on the way in which portfolios become more specialised
the new millennium in the previous four Pharma is taxed. We anticipate that: and they start offering healthcare
papers in the PricewaterhouseCoopers’
• The corporate tax burden will packages that comprise medicines
Pharma 2020 series. Our latest report
rise significantly over the next 10 and supporting services – unless
focuses on the resulting opportunities
years, as the governments of the they actively pursue various
and challenges from a tax perspective.
industrialised world struggle to repair strategies to mitigate the impact.2
It builds on the fourth paper in the
series, “Pharma 2020: Challenging public finances deeply damaged For all these reasons, we think that
business models”, in which we argued by the debts they have accrued in pharmaceutical tax executives will have
that many companies will have to adopt managing the global recession. to play a much more strategic role in
a more collaborative approach.1 • Many governments will clamp down the future. The industry will need tax
Most Big Pharma companies have on the opportunities for minimising professionals who are not only versed
traditionally done everything from corporate taxes by shifting profits in international tax law and transfer
research and development (R&D) from countries with higher tax rates pricing, but who also understand the
through to commercialisation to countries with lower tax rates. broader business issues – people who
themselves. But we believe that this By 2020, all multinationals will be can help top management structure
model will alter over the next 10 years. subject to much more stringent tax its operations to support new ways of
If such companies are to prosper, regulations, and the major powers working.
they will need to improve their R&D could impose trading restrictions on
In the next chapter, we shall examine
productivity, reduce their costs, expand any traditional tax havens that still
the main political and economic trends
their presence in the emerging markets, refuse to cooperate.
shaping the taxation of Pharma over
switch from selling medicines to
• The tax authorities in most countries the next decade. (Our analysis excludes
managing outcomes and embrace the
will also work more closely with their labour taxes, which will be covered in a
changes taking place in the broader
counterparties in other territories, future paper in the Pharma 2020 series.)
healthcare arena – activities that will
reducing the ability to use hybrid Thereafter, we shall look at the effect
require them to take one of two routes.
instruments and entities in cross- of the scientific, structural and social
They will either have to collaborate
border transactions. changes taking place, including the way
with a wide range of organisations,
including academic institutions, • Despite the need to replenish in which healthcare delivery is evolving
hospitals, technology vendors and firms depleted public coffers, the (see Figure 1). We shall also explore the
offering compliance programmes, health competition to attract companies implications of using more collaborative
screening, physiotherapy, exercise engaging in R&D will intensify. Some business models and the key issues to
facilities and the like, or become fully countries will offer generous tax be considered for the purposes of tax
diversified conglomerates capable of incentives and credits – and several planning.
2 PricewaterhouseCoopersFigure 1: The key trends driving change in Pharma
Trends
Political & economic trends Market trends Health & healthcare trends Geographic trends
• The governments of the • Numerous blockbusters are • Demand for personalised • A growing amount of R&D is
industrialised world will have to going off patent medicine is increasing being performed in Asia and
reduce their massive deficits. • Pharma’s focus is shifting to • Healthcare bills are soaring other emerging areas
They will target many of the specialist medicines • The supply chain is becoming
practices multinationals use to • Healthcare payers & providers
• The emerging markets are are placing ever greater more complex and more
defer taxation or shift income to geographically dispersed
lower-tax jurisdictions becoming increasingly attractive emphasis on wellness &
places in which to do business prevention
• The competition to attract
corporate capital will increase, • Some payers are also piloting
and the emerging countries will value-based purchasing,
play a bigger role in this battle where payment for treatment is
as they try to build knowledge- contingent on outcomes
based economies
Implications
Tax incentives will become more Pharma will target new areas of Pharma will go “beyond the Pharma’s operations will become
critical if Pharma is to sustain its growth medicine” to focus on outcomes more complex
profitability
• Corporate taxes could rise • Pharma will engage in more • Pharma will offer packages • Pharma will perform more
• Generous tax incentives and low mergers, acquisitions and of products and services, but business activities in emerging
corporate tax rates will become in-licensing arrangements to products and services are often countries, some of which
increasingly important factors in replenish its pipeline taxed differently may have less developed tax
decisions about where to locate • Pharma will expand its presence • Pharma will collaborate with regimes.
business activities in the emerging markets. Its multiple service providers • Pharma will form more
sources of revenue and profit will and enter into profit-sharing partnerships and alliances with
shift accordingly agreements that have complex payers and companies in other
tax ramifications sectors.
• Pharma will perform more • Pharma will outsource much
activities in its end markets, of its high-volume, low-profit
many of which are in higher-tax manufacturing capacity in lower-
jurisdictions, to provide services tax locations and concentrate
directly to patients on the production of specialised
• Locating service provision in medicines.
multiple markets could trigger
“permanent establishment”
issues
More complex global tax arrangements & higher effective tax rates
Source: PricewaterhouseCoopers
Pharma 2020: Taxing times ahead 3Political and economic about 75% of gross domestic product many different jurisdictions, including
(GDP) in 2008 to almost 110% by 2014 locations with low taxes. That, in turn,
factors shaping the (see Figure 2). Should the situation reduces their global tax bills, and the
future taxation of Pharma deteriorate, the level of debt could reach overall effect of such arrangements
an even more eye-watering 140% over can be substantial. According to a
the same period.5 report recently published by the US
Soaring public deficits Government Accountability Office, US-
But whether or not the recession ends based multinationals paid an average
The global recession of the past relatively rapidly, one thing is clear: US ETR of just 4% on the foreign-
two years has sent budget deficits many governments will be forced to source income they earned in 2004 –
soaring, with the governments of the raise taxes and cut public spending, less than one-sixth of the 25.2% they
industrialised world borrowing heavily including expenditure on infrastructure paid on domestic income.6
to pump cash into faltering economies. projects and R&D. They will almost
The US has earmarked more than certainly begin the first of these two The comparison is an imperfect one
US$12 trillion for its economic bailout,3 tasks by focusing on companies and because it excludes the impact of
industries that have enjoyed relatively the foreign taxes these multinationals
while the European Union (EU) has
paid on their foreign-source income.
committed $4 trillion.4 low rates of taxation.
However, it helps to explain why
The International Monetary Fund Multinational corporations – and many President Barack Obama was initially so
predicts that, if this pattern continues, pharmaceutical companies fall into keen to change the tax regime. In May
the level of public debt in the 20 leading this category – are one obvious target. 2009, he announced several proposals
economies (the G-20) could rise from Multinationals commonly operate in to reform “a tax code full of corporate
Figure 2: The projected level of public debt as a percentage of GDP
Public Debt 120
100
Advanced
economies 80
Percentage
60
World
Emerging and 40
developing economies
20
1970 1980 1990 2000 2010 2014 0
Source: International Monetary Fund, “World Economic Outlook”, April 2009
4 PricewaterhouseCoopersloopholes” and generate an estimated standards but have not yet signed the to look at country-by-country reporting
$200 billion in new taxes.7 He was necessary international accords.9 and the benefits…for tax transparency
forced to shelve his plans in October and reducing tax avoidance”.11
Meanwhile, several international
2009, after extensive lobbying from the
charities, including Christian Aid, Of course, any government that tries
business community. But aides say that
are pushing for the introduction of to generate additional revenues by
the administration may include some of
country-by-country reporting – where taxing multinationals – or, indeed, the
the measures he outlined in a broader
companies would be required to people who lead them – more heavily
overhaul of the tax regime sometime
publish country-specific information must be careful to ensure that it does
in 2010.8
on their corporate income, assets, not preclude such companies from
Moreover, the US is by no means investments, profits and taxes, rather competing on an equal footing in the
alone in wanting to close “corporate than consolidating the data in a single global marketplace. Corporate income
loopholes”. During its 2009 summit in global or regional figure. These charities tax rates are already considerably higher
London, the G-20 pledged to crack argue that country-by-country reporting in India, Japan, the US and Argentina
down on tax havens as part of its would expose any multinationals that than they are in many of the other G-20
global plan for recovery and reform. are using tax havens and enable the countries, although employer social
The Organisation for Economic Co- governments of emerging countries to
security costs and consumption taxes
Operation and Development (OECD) identify the taxes they are fairly owed.10
must also be factored into the equation
has now created a blacklist of non- British Prime Minister Gordon Brown
(see Figure 3).12
cooperative jurisdictions. It has also and French President Nicolas Sarkozy
created a “grey list” of countries that have also backed the initiative, with a All governments must likewise ensure
have agreed to adopt more transparent joint declaration calling “on the OECD that they do not trigger a mass exodus
Figure 3: The highest marginal percentages at which different corporate taxes are
charged in 18 of the G-20 countries, 2009
100
19.6
80
17
25 20 15
21
60
18 12.4
45 5
Percentage
49
18
28.8 35 27 38.7 12 13.7 15 13 10 6.3
40 10
7.7 5.1
30 7.4 12 19 14
26 12.8 14 9
20 1
41 36 12
34.4 42 32
34 31.4 35
28 28 30 30 28
25 20 20 24.2
15.8
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Source: The Forbes Magazine 2009 Tax Misery and Reform Index
Note: The chart shows the highestCorporate Income Tax
marginal percentage at whichEmployer
each tax isSocial Security
charged in eachCosts Value Added
locale. The countries on theTax/Sales
left of theTax
chart have the harshest tax
regimes, while those on the right are the most tax-friendly.
Pharma 2020: Taxing times ahead 5to more favourable tax jurisdictions. public finances, it is hard to see how the our research suggests that some
Companies sometimes use the threat industrialised economies – and, indeed, companies could still be singled out for
of relocating as a bargaining tool, but some of the emerging economies – will higher taxation.
this is not always idle talk. A number of have any other choice.
We have calculated five-year average
companies in various industries have
ETRs for the top companies in the
already relocated to other countries, Variations in effective tax rates pharmaceutical, biotechnology, generics
specifically to protect or improve
A number of pharmaceutical companies and medical device sub-sectors. (We
their tax positions. British Chancellor
could prove especially vulnerable. A have classified any companies that
of the Exchequer Alistair Darling’s
study recently conducted by the US operate in more than one sub-sector
recent decision to tax high earners
Congressional Budget Office (CBO) according to their biggest source of
more heavily by raising the top rate of
shows that, between 2000 and 2006, revenue.) Our analysis shows that there
personal income tax to 50% – one of
Pharma’s average ETR was lower than are some substantial differences both
the highest in the G-20 – has elicited
that of all but two other sectors (see between companies in different sub-
similar warnings of a “brain drain”.13
Figure 4). The CBO warned that “all sectors and between companies in the
Nevertheless, we believe that, by other things being equal, a substantial same sub-sector (see Figure 5). Some
2020, many countries will have higher increase in the industry’s tax burden of these variations are attributable to
corporate tax rates and they will expect might slow growth in this investment the home countries in which individual
multinationals to foot a larger share by raising the industry’s cost of capital companies are based, the precise
of the bill. Given the dire state of their and reducing its cash flow”.14 However, nature of their activities and their
Figure 4: Average effective tax rates for the pharmaceutical industry and other major US industries, 2001-2006 (percent)
Average
Rates for
Industry 2001 2002 2003 2004 2005 2006 2001-2006
Mining 33.0 34.0 33.0 35.0 35.0 33.0 34.0
Finance, Insurance & Real Estate 34.0 33.0 33.5 33.0 33.0 34.0 33.5
Manufacturing 32.0 33.0 32.0 33.0 33.0 33.0 33.0
Wholesale & Retail Trade 33.0 33.0 33.0 33.0 33.0 33.5 33.0
Services 32.0 33.0 32.0 33.0 33.0 32.0 32.5
Construction 31.0 32.0 32.0 32.0 33.0 32.0 32.0
Information 31.5 30.0 32.0 33.0 34.0 35.0 32.0
Pharmaceuticals 32.0 31.0 30.0 31.0 32.5 32.5 31.5
Transportation, Warehousing & Utilities 32.0 31.0 29.0 32.0 31.0 31.5 31.0
Agriculture, Forestry, Fishing & Hunting 28.0 27.0 29.0 30.0 30.0 29.0 29.0
Source: Congressional Research Service
Notes: The average ETR for an industry is the ratio of its federal income tax liability after all tax credits, except the foreign tax credit, to its worldwide taxable
income, expressed as a percentage.
Pharmaceuticals includes manufacturers of generic and biologic drugs.
6 PricewaterhouseCoopersFigure 5: Effective tax rates in the top pharmaceutical, biotech, generics and medical device companies
Big Pharma Top 10 Biotech Companies
Company Location ETR (%)1 Company Location ETR (%)1
Bayer DE 29.30 Cephalon US 39.19
GlaxoSmithKline UK 29.27 Genentech (pre-merger) US 36.87
AstraZeneca UK 28.21 Biogen Idec US 31.60
Wyeth (pre-merger) US 26.26 Genzyme US 30.00
Roche CH 25.83 Gilead Sciences US 29.20
Schering-Plough (pre-merger) 2
US 25.80 UCB BE 27.87
Johnson & Johnson US 25.02 CSL AU 26.38
Bristol-Myers Squibb US 24.24 Amgen US 24.34
Merck (pre-merger) 3
US 23.24 Celgene US 24.00
Pfizer (pre-merger) US 18.21 Actelion CH 12.26
sanofi-aventis FR 15.91 Average 28.17
Novartis CH 14.44
Average 23.81
Top 10 Generics Companies Top 10 Medical Device Companies
Company Location ETR (%) 1 Company Location ETR (%)1
Goldshield Group UK 138.52 Cardinal Health US 33.30
Towa Pharmaceutical JP 42.44 Stryker US 30.50
Sawai Pharmaceutical JP 39.31 Covidien BM 30.00
Mylan US 37.80 Boston Scientific US 29.22
Watson Pharmaceuticals US 35.93 Becton, Dickinson & Co. US 27.57
Nichi-iko Pharmaceutical JP 33.96 Siemens 5
DE 24.86
Teva Pharmaceuticals IL 24.69 Medtronic US 24.28
Pharco Pharmaceuticals EG 12.61 Baxter International US 20.32
Dr. Reddy’s Laboratories IN 5.53 Philips5 NL 19.06
EastPharma 4
TR 0.00 General Electric 5
US 14.85
Average 37.08 Average 25.40
Source: Annual reports and PricewaterhouseCoopers analysis.
Notes: (1). We have calculated the average ETR for each company using the annual ETR for the five most recent years. We have excluded any year in which a
company has made pre-tax losses from our calculations. (2). Schering-Plough’s ETR reflects the imposition of a valuation allowance on its tax assets. (3). Merck’s
ETR reflects the impact of a one-time gain in 2008. (4). EastPharma was established in August 2006 and has made a pre-tax loss in each subsequent year.
(5). The ETRs for Siemens, Philips and General Electric are those reported in the consolidated accounts for each group.
Pharma 2020: Taxing times ahead 7geographical spread. But the big picture energy efficiency by 20% and to ensure revenues. And here Pharma holds
also reveals several features that cannot that 20% of its energy consumption some very powerful cards. The industry
be so easily explained. comes from renewable sources, all by spent an estimated $75 billion on R&D
2020. The US is currently exploring in 2008,18 and an increasing number
First, companies in the biotech and
various options, including a carbon tax; of countries are vying for a slice of this
generics manufacturing sub-sectors
the UK recently set legally binding targets business.
typically have significantly higher ETRs
for the reduction of carbon emissions, to
than those in the pharmaceutical and President Obama recently vowed to
be measured on a four-year budgetary
medical device sub-sectors. Nine lift spending on scientific research in
cycle; and several emerging economies
of the top 20 biotech and generics the US from 2.6% to 3% of GDP. The
have been equally proactive.15
companies have average ETRs of more EU set itself the same goal in 2000,
than 30%, a rate matched by only However, two other issues could although the current level of investment
two medical device firms and not one have an even bigger impact on the is only 1.84%. But Japan already
pharmaceutical concern. Yet biotech sector. The rules governing the use spends nearly 4% of its GDP on R&D;
companies also engage in extensive of chemicals are becoming much South Korea spends 3.2%; and China’s
R&D and are therefore generally eligible more stringent. In July 2007, for investment has risen from 0.9% to 1.4%
for the same sort of R&D tax credits Big example, the EU launched a new set of GDP in less than a decade.19
Pharma can claim. of regulations on the registration,
Most developed countries offer tax
evaluation, authorisation and restriction
Second, there are significant differences credits or deductions on eligible R&D
of chemicals (REACH).16 There is also
between companies operating in the expenditure. The US offers a credit of
a growing body of opinion that the
same home country and sub-sector. 20% on qualifying expenditure that
industry should be held accountable
The variation is especially marked in exceeds 16% of a company’s gross
for the indirect environmental effects
the biotech sub-sector; seven of the receipts in the preceding four periods,
of its products. Residual traces of
top 10 companies are based in the for example; Canada offers a credit of
hormones and other medicines have
US, but their average ETRs range from 35% on qualifying expenditure up to a
been detected in drinking water
24% to nearly 39.2%, a span of 15.2 maximum of CAN $3 million and 20%
supplies throughout the world.17 Some thereafter; and Japan offers a credit
percentage points.
governments might respond by taxing of between 8% and 10% on gross
In short, governments urgently in need pharmaceutical manufacturers to fund R&D costs, depending on the ratio of
of additional tax revenues may conclude the development of more effective R&D costs to sales. Similarly, Australia
that some sub-sectors are shouldering a wastewater treatments. allows companies to deduct 125% of
smaller share of the burden than others. their eligible expenditure (and 175%
And they may pursue companies in Competing tax incentives of their incremental expenditure, if that
such sub-sectors – particularly those expenditure increases by more than the
that appear to be paying much lower That said, greater competition for
previous three-year average), while the
taxes than their peers – more vigorously. companies engaging in R&D and
UK offers a deduction of 130%.20
manufacturing might help Pharma to
mitigate the effect of higher tax rates However, several Asian countries are
The prospect of “green” taxes
and new forms of taxation. R&D is now pitching equally hard for a share of
The “Green” agenda could add to these widely recognised as one of the main the R&D market. China and Singapore
pressures. The EU introduced a carbon engines of economic growth because both offer “super deductions” of
trading scheme some years ago. It has it creates not only jobs but also 150% on qualifying R&D expenditure.
also undertaken to reduce its greenhouse intellectual property that can generate Singapore offers eligible companies an
gas emissions by 20%, to improve its long-term income streams and tax additional deduction of up to 100%,
8 PricewaterhouseCooperssubject to approval, together with corporate income tax rates of 12.5% recognised as “new, high-technology
generous capital allowances. And India and 20%, respectively. But Asia is fast enterprises”, although the simultaneous
offers various incentives, including catching up here, too (see Figure 6). abolition of many tax incentives and
a deduction of 100% of eligible Singapore offers a low flat corporate the introduction of a 10% foreign
expenditure (whether revenue or capital, income tax rate of 18% (falling to 17% withholding tax on passive income
except expenditure on land) in the year in 2010), and grants qualifying new have complicated the picture.23 And
that the expenditure is incurred.21 companies full exemption from tax on India grants tax holidays for locating
the first $100,000 of annual profits for manufacturing in certain states or
The competition to attract companies
each of the first three consecutive tax- economic development zones.24
setting up new manufacturing facilities
is also rising. Ireland and Puerto Rico filing years.22 China recently reduced its We believe that the battle to attract
have established particularly strong corporate income tax rate from 33.3% pharmaceutical companies will intensify
manufacturing bases, thanks to to 25% – or 15% for companies that are over the next decade, as some of
Figure 6: Competing tax incentives
With its 12.5% corporate tax rate and
China now produces many of the
highly educated populace, Ireland has
active pharmaceutical ingredients used
attracted numerous pharmaceutical
in pharmaceutical manufacturing. But a
companies. It now has a strong base in growing number of multinationals are
R&D and high-tech manufacturing. In May
also setting up R&D operations there
2009, the government also introduced a
(e.g., GlaxoSmithKline’s neuroscience
new tax incentive under which companies research centre in Shanghai).
can write off the capital cost of acquiring
certain intellectual property against income
generated from exploiting that property.
Puerto Rico’s low corporate
tax rate and off-shore status India has emerged as a key territory for
have stimulated a large manufacturing, thanks to a combination of Singapore has introduced a low-tax
pharmaceutical manufacturing low-cost raw materials and labour and regime to attract pharmaceutical
presence. Most of the big quality engineering. India is increasingly manufacturing. It has also invested in
players, including AstraZeneca, moving up the value chain and several educating the population and is
GlaxoSmithKline, Johnson & domestic pharmaceutical companies have becoming increasingly popular as an
Johnson, Lilly, Merck & Co. and R&D alliances with multinationals (e.g., R&D base (e.g., the Novartis Institute
Pfizer have plants there. Ranbaxy with GlaxoSmithKline). for Tropical Diseases).
Source: PricewaterhouseCoopers
Pharma 2020: Taxing times ahead 9Table of contents
the emerging nations attempt to But translating the knowledge gleaned substantially over the next decade.
build knowledge-based economies. from mapping the human genome into Again, in-licensing can have significant
Pharmaceutical tax executives will thus safe, effective new medicines is proving tax consequences, depending on
need to monitor the situation constantly, difficult, and the industry leaders are the structure of the contract and its
so that they can advise management struggling to fill their pipelines. They provisions for allocating losses and tax
on the best places in which to locate have adopted several tactics for dealing credits and for making payments.
new facilities – although no company with the shortfall, each with its own tax
Many pharmaceutical companies are
will make such decisions on the basis implications.
also forming increasingly complex
of tax incentives alone. It is also crucial Not surprisingly merger and acquisition relationships with other organisations
to bear in mind a country’s political (M&A) activity has surged. Indeed, in both inside and outside the industry – a
and economic stability, infrastructure, the first quarter of 2009, the value of the pattern that will become even more
attitude to intellectual property rights, deals that took place was $166 billion pronounced over the next 10 years.
the availability of its workforce and other – 46% more than the $114 billion that New technologies are facilitating the
such risks. changed hands in the whole of 2008.25 collection of vast quantities of outcomes
Some of this activity reflects two recent data and the virtualisation of large parts
mega-mergers (Pfizer-Wyeth and Merck of the R&D process, as we explained in
Scientific, structural and & Co.-Schering Plough), but some of “Pharma 2020: Virtual R&D”.29 But any
social trends shaping the it stems from the convergence of the company that wants to capitalise on
pharmaceutical and biotechnology sub- these advances will have to collaborate
future taxation of Pharma sectors. In 2008, Big Pharma completed with numerous other agencies,
$33.5 billion worth of biotechnology including hospitals, clinics, academic
The prospect of politically and acquisitions in the US and Europe.26 institutions, bioinformatics firms and
economically motivated changes in technology providers. Moreover, some
We anticipate that this trend will
taxation is not all that Pharma will have of the alliances it strikes are likely to
continue for the foreseeable future
to consider. The industry’s research involve multiple entities, staggered
and that many companies will
focus is altering, the emerging markets levels of profit-sharing and dissimilar
therefore need to pay more attention
are becoming increasingly attractive, participatory rights between the parties
to how such business combinations
the supply chain is bifurcating and – all factors that will add to the intricacy
are taxed. Clearly, their individual
healthcare delivery is undergoing a of its tax arrangements.
circumstances will determine the
huge transformation. All these trends
precise impact. But, under the current
are dictating the need for new business The increasing importance of the
M&A standards in some countries, the
models – and, since a company’s tax
way in which a company accounts emerging markets
strategy follows its business strategy,
for acquisition-related items – such
an understanding of these shifts is Meanwhile, the purchasing power of the
as deal costs, acquired valuation
essential. emerging economies is rising rapidly,
allowances, deferred tax adjustments,
with a corresponding boom in demand
income tax contingencies, income
for Western medicines. In 2008, global
The changing product mix tax indemnifications, contingent
pharmaceutical sales reached $773.1
A growing number of pharmaceutical consideration and share-based
billion. Asia, Africa and Australia
companies are investing in the compensation – can have a significant
accounted for nearly 12% of this sum,
effect on its ETR.27
development of specialist therapies while Latin America accounted for 6%.
as the genomic sciences produce In-licensing is likewise on the rise. But IMS Health predicts that all four
new tools with which to make large PAREXEL estimates that in-licensed markets will increase at a compound
molecules that mimic naturally occurring products currently account for annual growth rate (CAGR) of 11-14%
molecules in the human body and 32% of the pipelines of the top 10 between 2009 and 2013.30 This is
generic manufacturers occupy an ever pharmaceutical companies,28 and broadly in line with the higher of the
larger part of the primary care space. we think that percentage will grow two forecasts we published in “Pharma
10 PricewaterhouseCoopersFigure 7: The global pharmaceutical market by region, 2008 & 2020 manufacturing process. The global
market for pharmaceutical contract
manufacturing is expected to rise from
2008 2020
about $20.4 billion in 2008 to more than
$31 billion by 2012, with much of the
increase concentrated in Asia, where
46.5
193.4
the market is growing at a CAGR of
90.8 North America 335.9 nearly 16%.32
311.8 Europe However, outsourcing to manufacturers
76.6 Japan 377.6 in the developing world carries some
Asia/Africa/Australia
substantial operational risks. In 2008,
for example, the US Food and Drug
Latin America
425.5 Administration (FDA) banned imports of
247.5 104.5
more than 30 generic medicines produced
by India’s Ranbaxy Laboratories, after
US$bn US$bn finding serious and extensive violations
of good manufacturing practice at two
Ranbaxy plants.33
Sources: IMS Health Total Unaudited and Audited Global Pharmaceutical Market by Region (2008); IMS
Health Market Prognosis (March 2009); and PricewaterhouseCoopers analysis. Moreover, it is much more difficult to
Note: IMS Health has produced lower and upper projections for the growth of the global pharmaceutical
manufacture and distribute biologics
market over the next five years. We have extrapolated from these projections to estimate the regional split than chemical entities. Biologics
in 2020, using the midpoint between the upper and lower ranges. are more vulnerable to impurities in
the production process and more
2020: The vision”, where we estimated countries in which a company earns susceptible to damage from heat,
that the E7 markets – Brazil, China, an income and those in which it makes light and motion.34 The challenges
India, Indonesia, Mexico, Russia and a profit may also be different – and for associated with making gene and
Turkey – could grow by between 10% the purposes of taxation, it is the latter tissue-based therapies are even greater;
and 15% a year.31 that counts. Even so, it seems likely each sample must be individually
that a greater presence in the emerging “manufactured”, and the final steps in
Given that the North American,
markets will boost the proportion of the process must be performed at a
European and Japanese markets are
the industry’s profits that is generated location that is close to the patient.
growing much more sluggishly, the
in high-tax locations because some
Asian, African, Australian and Latin We therefore believe that, by 2020,
of these countries have relatively
American markets will thus account for most pharmaceutical companies
high tax rates. Further compounding
a much greater share of the industry’s will adopt a two-pronged approach.
the challenges involved in ensuring
revenues by 2020. Indeed, we project They will outsource the production of
compliance, most emerging nations
that they could collectively be worth mass-market medicines to contract
have tax regimes that are less fully
about $571 billion – or nearly 40% of manufacturers in low-cost, low-tax
the total market (see Figure 7). developed and less clearly articulated
than those of the industrialised jurisdictions, but they will manufacture
Clearly, some pharmaceutical economies. and distribute complex specialist
companies may choose to serve therapies themselves. That, in turn,
certain countries by using independent could have major ramifications for many
The bifurcation of the supply chain companies’ ETRs. Making specialist
intermediaries domiciled in other
jurisdictions. A company that wants to The emerging countries are not only therapies in end markets where tax
target Latin America might, say, use becoming more attractive places in rates may be higher could substantially
an agent based in Brazil to market its which to sell medicines; they are also increase the taxes they pay.
products throughout the region. The playing a more prominent role in the
Pharma 2020: Taxing times ahead 11Figure 8: Price controls in Pharma’s main markets
Free Pricing Direct Price Controls Indirect Price Controls
International Cost- Price-
Price Price Benefit Reference Profit Co- Volume Negative Positive
Country Comparisons Ceilings Analyses Pricing Controls payments Agreements Lists Lists
France ¢ ¢ ¢ ¢ ¢ ¢ ¢
Germany ¢ ¢ ¢ ¢
Italy ¢ ¢ ¢ ¢ ¢ ¢ ¢
Spain ¢ ¢ ¢ ¢ ¢ ¢ ¢ ¢
UK ¢ ¢ ¢ ¢ ¢
US ¢ ¢ ¢ ¢ ¢
Canada ¢ ¢ ¢ ¢ ¢ ¢
Japan ¢ ¢ ¢ ¢
Sources: Petra Laux & Jens Grüger, “Pricing and Reimbursement of Pharmaceuticals: A Political and Technical Perspective” (June 2007); Frost & Sullivan, “Drug
Approval Process in Europe: An Outlook” (December 2008); Valérie Paris & Elizabeth Docteur, “Pharmaceutical Pricing and Reimbursement Policies in Canada” (2006).
More demanding healthcare Italy, France and Spain were only 40% Meanwhile, several countries with
payers of those in the US, where free market socialised healthcare systems
pricing prevails.36 are going still further. The French
The dramatic changes currently taking government recently introduced a
place in healthcare delivery will have However, there are signs of a major
bonus scheme for doctors who meet
an even bigger impact on the taxation shift within the US, too. In June 2009,
its generic prescribing targets in
of Pharma. The global healthcare bill the member companies of trade
seven pharmaceutical categories,39
is soaring, as the population ages, body Pharmaceutical Research and
for example, while the British National
new medical needs emerge and the Manufacturers of America agreed to
Health Service has launched a flexible
disease burden of the developing contribute $80 billion towards the
pricing scheme under which the prices
world increasingly resembles that narrowing of the gap in Medicare
of medicines can be lifted or lowered in
of the developed world. Healthcare prescription medication coverage over
line with the results they deliver.40
payers almost everywhere are therefore the next decade, partly by reducing
beginning to measure outcomes much the prices charged to senior citizens Some significant practical and
and government for all branded procedural issues still have to be
more carefully and to experiment with
medicines.37 And US Senate Finance resolved, if pay-for-performance is to
new pricing mechanisms.
Committee Chairman Max Baucus work widely, including: what factors
Use of direct and indirect price controls recently introduced a bill to reform should trigger a price review; how
is already commonplace in the the healthcare system that includes to deal with products that deliver
industry’s main markets (see Figure 8).35 a provision to offset the costs by different value for different indications;
A number of countries have also imposing annual fees of $2.3 billion and how to treat revenues that could
established agencies specifically to and $4 billion on pharmaceutical be clawed back via rebates several
conduct pharmacoeconomic manufacturers and medical device years later, since it may take a while to
evaluations of new medicines, with manufacturers, respectively. The determine the real worth of many new
predictable consequences for the fees would be apportioned among medicines. Such clawbacks could have
industry’s returns. In one study of 150 the participants according to each considerable cash tax ramifications,
top-selling patented medicines, for participant’s relative market share of depending on how and when a
example, ex-manufacturer prices in domestic sales for the preceding year.38 company has recognised the revenue
12 PricewaterhouseCoopersand whether it has a net operating In the future many pharmaceutical on R&D productivity beyond an amount
loss.41 Nevertheless, we believe that, by companies will generate revenues from anyone can deliver.”43
2020, pay for performance will be the services as well as from products.
As we explained in “Pharma 2020:
norm in many countries. And they will collaborate with a wide
range of organisations to supply such Challenging business models”, we
Most healthcare payers are also expect that two principal models –
integrated product-service offerings.
beginning to emphasise the importance federated and fully diversified – will
However, these two changes have huge
of health management, with even more emerge. We have also identified two
tax implications, which we shall discuss
momentous consequences. As we have variants of the federated model. In the
in the next chapter.
indicated in earlier papers, we anticipate
virtual version, a company outsources
that the majority of pharmaceutical
most or all of its activities; in the venture
companies will have to supplement the
medicines they make with supporting
The taxation of new version, it manages a portfolio of
investments (see Figure 9).
services, such as compliance business models
programmes, nutritional advice, Seen from a tax perspective, these
physiotherapy, stress management The majority of Big Pharma companies models possess a number of common
and health screening. Several Big already recognise that they need characteristics:
Pharma companies have already started new business models. When Pfizer
exploring this route, one example being announced the $64 billion acquisition of • They provide a framework for
Novartis, which is currently testing a Wyeth, for example, chief executive Jeff diversifying beyond a company’s
technology that inserts a tiny microchip Kindler told Bloomberg News: “Once you core product offerings and supplying
into each pill and sends a text message reach a certain size, if you are dependent patients with integrated packages of
to patients who forget to take their on one or two huge blockbusters to goods and services, wherever those
medicine.42 move the needle, you are raising the bar patients reside.
Figure 9: The business models that are likely to prevail in 2020
Collaborative: Federated Model Owned: Fully Diversified Model
• Network of separate entities • Network of entities owned by one
parent company
• Based on shared goals & infrastructure
• Based on provision of internally integrated
• Draws on in-house and/or external assets
product-service mix
• Combines size with flexibility
• Spreads risk across business units
Virtual Variant Venture Variant
• Network of contractors • Portfolio of investments
• Activities coordinated by one company • Based on sharing of intellectual property/
acting as hub capital growth
• Operates on project-by-project basis • Stimulates entrepreneurialism & innovation
• Fee-for-service financial structure • Spreads risk across portfolio
Source: PricewaterhouseCoopers
Pharma 2020: Taxing times ahead 13Table of contents
• The supply chains they use are The introduction of live licensing – taxed twice on the same income. Most
more complex and responsive than where new medicines are approved double-taxation disputes involve inter-
those that currently exist, because subject to further testing to substantiate company or intra-company allocations
many specialist therapies must be their safety and efficacy – could – typically, pricing, royalty rates, interest
delivered on demand. provide some relief, since the industry payments, management fees, business
would then be required to perform expenses and gross revenues.45 With
• The intellectual property they
extensive “in-life” studies in its end more complex networks of alliances
produce goes beyond legally
markets, thereby giving it greater cash involving more (and more varied)
protected patents and R&D know-
deductibility. However, scientific and partners, the allocation of such items will
how. It includes skills like the ability
technological advances will ultimately become very much more complicated.
to capture, aggregate and analyse
reduce the cost of such studies
data, and to negotiate with payers In the US, where there is both federal
dramatically.44 We therefore expect
and joint-venture partners. and state taxation, the delivery of
that many of those pharmaceutical
services directly to patients might
• The risks and rewards they create companies which move into the service
are spread among the member also be regarded as enough to create
arena will see their ETRs rise.
companies or respective business a “nexus” for the purposes of state
units, where the entity is a 2. Providing services will increase taxation. Under the traditional definition,
conglomerate. the risk of creating a “permanent some sort of physical presence is
establishment”, even where those required; but a number of states
• The income they generate is services are delivered remotely. have recently extended the concept,
dependent on outcomes. arguing that economic connections are
The principle of “permanent
We think that these models will have sufficient to establish a nexus.46
establishment” is critical in determining
a bearing on how pharmaceutical where the income from the sale of Such arguments are usually motivated
companies are taxed in six key ways. goods and services is to be taxed. If a by the desire to increase the tax take
company sells goods or services in a from out-of-state companies, but
Six key tax issues to consider country in which it does not have a fixed they are by no means exclusive to
place of business (including a place of competing US states. The financial
1. Providing services will drive up
management) or dependent contracting difficulties many governments are
effective tax rates.
agents, that country has no jurisdiction currently experiencing, as they contend
The provision of integrated healthcare to tax the resulting profits. with the global recession, have already
packages that include services which eroded the international consensus on
However, any company that delivers
must be supplied locally (such as drug the allocation of taxing rights between
services will have to undertake – or
administration training, home delivery, residence and source countries. So
manage – more business activities in its
physiotherapy, health screening and global companies with extended supply
end markets, thereby making it harder
exercise facilities) will increase the chains are more likely to be caught in
to prove that the company has not
proportion of income that is generated the crossfire and subjected to double
created a permanent establishment.
in the industry’s end markets. That, taxation, even if they are in compliance
This may increase the risk of failing
in turn, will make it more difficult for with the relevant tax treaty.
to obtain double tax relief, as allowed
companies to assign profits legitimately
under international tax treaties, and thus 3. Providing services will increase
from high- to low-tax jurisdictions – and,
of being taxed on the same earnings companies’ withholding tax liabilities.
since demand for such services is,
in the home country and the country
initially at least, likely to be greatest in The purpose of a cross-border
where the services have been delivered.
the industrialised world, where corporate withholding tax is to facilitate the
income tax rates are often higher, the The growing complexity of the supply collection of tax on that part of the
effect could be very pronounced. chain will compound the risk of being profit which arises from the provision
14 PricewaterhouseCoopersof goods or services in the taxpayer’s 4. Where services rather than goods are income among related business entities
country. However, countries have supplied, exposure to controlled foreign via the pricing of intellectual property,
traditionally adopted a more diverse corporation legislation will increase. tangible goods, services and loans or
approach to the application of withholding other financial transactions – enables
Many developed countries – including
taxes to payments for services than multinationals to avoid double taxation.
Australia, Canada, France, Germany,
they have to payments for goods. These But it is also open to abuse. It can be
Italy, New Zealand, the UK, the US and
variations can result in substantial used to shift profits artificially from
Japan – have enacted laws governing
differences in the way in which companies a high- to a low-tax jurisdiction, by
the taxation of controlled foreign
are treated, producing yet more fodder for maximising expenses in the former and
corporations (CFCs). These laws usually
tax disputes. income in the latter.
provide that the profits of a CFC may
In the US, for example, the place in be attributed to the holding company Many tax authorities are therefore
which services are performed generally and taxed immediately, rather than clamping down where they suspect
determines the source (US or foreign) of being taxed only when (and if) they are that an organisation has manipulated
the income those services generate. But repatriated. its internal pricing arrangements to
the regulations governing international reduce the taxes it pays rather than
information reporting and withholding CFC legislation often distinguishes
following the arm’s length policy
taxes are so intricate that many companies between “passive” income (i.e.,
recommended by the OECD: namely,
find it difficult to comply with them. interest, dividends, annuities, rents and
that a transfer price should be the same
royalties), which is taxed, and “active
Compliance with multiple national as if the two companies involved were
income (i.e., income from commercial
and regional regulations governing independent parties, not part of the
activities), which is not taxed. But the
withholding taxes is already a major same group.49 We anticipate that this
laws outline various exceptions.48 In
challenge. But the provision of direct- trend will continue and that, by 2020,
the US, for instance, Subpart F of the
to-patient services – some of which the tax authorities in many countries
IRS Code stipulates that “foreign base
must be delivered physically and some will cooperate more closely, making it
company services income” – including
of which may be delivered electronically even more important that companies
income generated from the performance
– will make it even more difficult for the comply with the differing requirements
of certain personal services outside a
industry to negotiate its way through of multiple tax jurisdictions.
company’s home country – cannot be
the maze. deferred. Similar rules apply in Germany, However, as Pharma expands into new
Moreover, many multinationals may find Japan and the UK. Some of the new markets over the next decade, and the
it harder to claim credit for the foreign healthcare services pharmaceutical number, magnitude and complexity
taxes they have paid. In a recent speech multinationals provide may fall into this of the cross-border, inter-company
to the OECD, Internal Revenue Service category, and the income they generate transactions in which it engages grows,
(IRS) Commissioner Doug Shulman from such services would thus be this will become even more difficult.
announced that the amount of foreign subject to immediate taxation in their Many pharmaceutical companies will
tax credits claimed by US firms rose by home countries. need to collaborate with numerous
71% between 2000 and 2007. He made organisations in numerous areas of
5. The allocation of income among
it clear that policing the increasingly business and numerous countries.
the participants in the supply chain
complex world of international taxation Measuring their respective contributions
will become much more difficult,
is “a top agenda item” for the IRS.47 – not only the goods and services, but
compounding the challenges
And, as we have already noted, the the intellectual property, investment
associated with the administration of
US is not alone in its determination to capital, advisory services and other
transfer pricing for companies and tax
secure a larger share of the income such inputs they provide – and
authorities alike.
domestic companies generate beyond allocating the income accordingly will
its borders. Transfer pricing – i.e., the allocation of be an enormous undertaking.
Pharma 2020: Taxing times ahead 156. Indirect taxes will become more consequences for the purposes of VAT. may be ameliorated with the negotiation
complex and more difficult to manage in If it is regarded as an exempt medical of additional free trade agreements. The
collaborative supply chains. service, no VAT will arise on the charge original signatories to the Association
to the consumer, but the supplier will of Southeast Asian Nations (ASEAN)
Lastly, providing integrated packages of
be unable to recover its VAT on related Free Trade Agreement aim to eliminate
products and services could increase
inputs. This is akin to the situation in almost all import duties on goods
the compliance costs and risks
the financial services industry, where originating within the area by 2010, for
associated with indirect taxes. Consider,
for example, the potential impact on VAT-exempt services are an absolute example, while the four more recent
VAT. Pharmaceutical companies can cost that must be built into prices. members (Cambodia, Laos, Myanmar
currently recover the VAT they pay – i.e., Treating entire healthcare packages as and Vietnam) plan to do so by 2015.
the input VAT – on all the expenditure VAT-exempt could even more seriously Australia and New Zealand also signed
they incur in bringing products to impair the recovery of input VAT in the a free-trade agreement with ASEAN
market. In many tax regimes, patients supply chain. in February 2009,50 and China is
also pay a lower rate of VAT on scheduled to join them in 2010.51 But
Local regulators tend to have more
medicines than on most other kinds of managing a supply chain that involves
settled views on products than services,
goods. This benefits both the industry multiple parties and spans multiple
so there is considerable potential for
and patients. jurisdictions in a way that capitalises
national variations in the interpretation
on such agreements to minimise import
However, the delivery of bundled of the VAT rules applicable to integrated
duties requires careful planning.
healthcare packages comprising healthcare offerings. However, the
products and services could change EU has adopted a VAT package that
that paradigm. Some VAT regimes may should simplify the situation within the The potential impact on ETRs
apply the appropriate rate of VAT to 27 member states and allow a greater
So how might the changes we have
each component, while others may treat range of cross-border services to qualify
outlined affect the industry? Clearly,
them as part of a composite offering as VAT-free, with effect from January
numerous factors determine a particular
and apply the rate of the principal 1, 2010. Other regions may yet adopt
company’s ETR, and it would be
element to the entire package. similar frameworks.
impossible to predict the full gamut
Suppose, for instance, that the standard The increasing importance of the of possibilities. However, we have
rate of VAT is 20% and that the rate emerging markets, evolving supply quantified the potential impact of
of VAT on medicines is 10%. If a chain and shift to services could one major change – the generation of
healthcare package is considered a also have a major bearing on the revenues from the delivery of services –
combination and the principal element customs duties and other trade-related on a hypothetical pharmaceutical group
is a service, all the elements will be tariffs pharmaceutical companies to provide a very simple illustration
taxed at 20%. The industry will still be incur. A number of countries levy of how its ETR might alter. We have
able to recover its input VAT (via the significant import duties on key active assumed that the group is domiciled in
output VAT it charges on what it sells), pharmaceutical ingredients and finished the US (where the federal corporate tax
but patients will have to pay more for products, and the valuation of combined rate is currently 35%) and that it earns a
the medicines they buy. product-service offerings for customs taxable income of $100m a year.
purposes could prove complicated.
The characterisation of the service In our baseline scenario, the group
component may also have significant Fortunately, some of these problems only sells products. Fifty-five percent
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