Drugmakers have been salivating at the prospect of tax reform ever since President Donald Trump won the election, and for two good reasons: They’re looking to bring overseas cash home (cheaply) for dealmaking, and they’d like to pay lower rates without working so hard on tax planning.
As anyone who watches pharma finances can attest, the tax rates paid by pharma companies, while higher than Trump’s currently proposed 15%, are hardly uniform. Some work harder than others at keeping a lid on their taxes, with caching profits overseas as one key tactic. Others, partly because of the geographic distribution of their operations, can’t avoid paying more than average.
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Evercore ISI analyst Umer Raffat has some numbers to show just that: the tax rates estimated by nine of the biggest biopharma companies based in the U.S. We’ve added in Johnson & Johnson, which isn’t as pharma-centric as Raffat’s group, given its hefty consumer business and devices unit, but still counts in the overall industry universe.
The expected tax rates range from 35% at the high end (Regeneron) to 19% at the low end (Amgen, J&J’s low-end guidance), with a median at 22% (Eli Lilly). Average rate, overall? 23.2%.
Obviously, if Trump were to succeed at pushing U.S. corporate tax rates down to 15% from the current 35%, pharma companies could slash those numbers considerably. And it includes a one-time tax break for bringing home foreign war chests, rate as yet unspecified, Raffat notes.
That’s doubtful, however. Trump has outlined no plan to pay for the corporate tax rejig, which would be coupled with tax cuts for individuals, particularly at the top end. Add in Trump’s proposed boost to defense spending and border-wall budget hit, and it’s tough to find a scenario in which the numbers don’t lead to a big increase in the national debt.
That’s not likely to fly with conservatives, particularly the Tea Party types, and Democrats have their own long list of objections on both sides—tax and spending—of Trump’s overall financial plans for the country.
House Speaker Paul Ryan has his own plan, as Raffat points out, which, as is typical for Ryan, contains far more detail. His corporate tax rate would be 20%, with numbers on ex-U.S. earnings tax liabilities—past and future (0%, incidentally)—and a quote-unquote destination-based tax that Raffat puts in the border tax category. Trump, incidentally, doesn’t mention a border tax, though he was rather vocal about it early on.
As House reps and senators have warned, coming to a tax reform deal won’t be easy—in fact, it’s likely to be as fraught as the Affordable Care Act repeal efforts, which fell flat in first-draft form, to Trump’s chagrin, and looks no likelier to succeed in its current form in the House. So, pharma could be waiting for some time to see its tax boon arrive.