Tax inversion deals are not the only trick Big Pharma has up its sleeve to avoid steep U.S. tax rates. Gilead Sciences ($GILD) is booking profits overseas in low-tax countries to take home more profits for its blockbuster hep C drug Sovaldi.
The Foster City, CA-based company posted foreign income before taxes of $8.2 billion last year, earning more in non-U.S. profits than it recorded in non-U.S. sales, according to a recent regulatory filing. The numbers suggested Gilead is moving intellectual property for Sovaldi to low-tax countries and paying about 5% in tax on its foreign income, Robert Willens, a New York-based tax consultant, told Bloomberg. At the end of last year, the company held $15.6 billion in offshore profits that were not subjected to U.S. taxes, up from $8.6 billion at the end of 2013.
Gilead's intellectual property for Sovaldi is in Ireland, a country with a 12.5% tax rate, compared to the U.S. rate of 35%. Robin Washington, the company's chief financial officer, told analysts last year that commercializing the drug there could lead to Gilead's tax rate falling over time.
There is nothing illegal with what Gilead and other companies are doing. The maneuver is just one way multinational drugmakers skirt tax rates in the U.S. that are higher than in many other countries. Under U.S. law, companies pay 35% on profits they earn around the world, plus the corporate income tax--which is 8.84% for California-based Gilead. Drugmakers get U.S. credits for tax payments made to foreign governments and only have to pay taxes in the U.S. if they bring profits home, spurring companies to book profits overseas.
Gilead is not the only drugmaker taking advantage of the system. Pfizer ($PFE), Merck ($MRK) and Bristol-Myers Squibb ($BMY) each have at least $24 billion booked outside the U.S., Bloomberg reports.
But the accounting maneuver may play into the criticism Gilead is already getting for the steep prices it has set on its hep C therapies. Last year, Express Scripts ($ESRX) CMO Steve Miller, a vocal critic of skyrocketing drug prices, instigated a pricing war by selecting AbbVie's ($ABBV) hep C combo Viekira Pak as its preferred hep C treatment, undercutting Gilead's prices. A 12-week course of Sovaldi runs at $84,000, and Harvoni is priced at $94,500 for a 12-week dose while Viekira Pak was priced at $83,320 before discounts.
Gilead has since struck back with a few exclusive deals of its own, but the pricing battles forge on. When all is said and done, Miller said cost-cutting deals with payers will save $4 billion on hep C drugs this year.
Special Reports: The new drug approvals of 2014 - Harvoni - Viekira Pak