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Africa/Global: Drug Company Profits vs. Public Health

AfricaFocus Bulletin
October 16, 2018 (181016)
(Reposted from sources cited below)

Prescription for Poverty : Drug companies as tax dodgers, price gougers, and influence peddlers

September 2018

Oxfam

https://www.oxfam.org/en/research/prescription-poverty

Executive summary

The world’s biggest drug companies are putting poor people’s health at risk by depriving governments of billions of dollars in taxes that could be used to invest in health care, and by using their power and influence to torpedo attempts to bring down drug costs and police their behavior.

New Oxfam research shows that four major pharmaceutical firms—Abbott, Johnson & Johnson, Merck, and Pfizer—systematically stash their profits in overseas tax havens. As a result, these four corporate giants appear to deprive the United States of $2.3 billion annually and deny other advanced economies of $1.4 billion. And they appear to deprive the cash-strapped governments of developing countries of an estimated $112 million every year—money that could be spent on vaccines, midwives, or rural clinics.

Such tax dodging corrodes the ability of governments everywhere to provide the public services that are essential to reducing poverty and that are particularly important for women. And it weakens governments’ ability to invest in health research, which has proven to be fundamental to medical breakthroughs.

As if this weren’t enough, the corporations mount massive lobbying operations to give price gouging and tax dodging a veneer of legitimacy. Their influence peddling is most blatant in the United States, where the pharmaceutical industry outspends all others on lobbying. But it is equally pernicious in developing countries, where the companies have won sweetheart deals that lower their taxes and divert scarce public health dollars to pay for their high-priced products—and where they deploy the clout of the US government to protect their profits.

Tax dodging by pharmaceutical companies is enriching wealthy shareholders and company executives at the expense of us all—with the highest price paid by poor women and girls. Oxfam is not accusing the drug companies of doing anything illegal. Rather, this report exposes how corporations can use sophisticated tax planning to take advantage of a broken system that allows multinational corporations from many different industries to get away with avoiding taxes.

When funding is cut, families lose medical care or are driven further into poverty by health care debts. When health systems crumble, women and girls step into the breach to provide unpaid care for their loved ones—compromising their own health and their prospects for education and employment. When governments are deprived of corporate tax revenues, they often seek to balance the budget by raising consumption taxes, which tend to take a larger bite out of poor women’s incomes.

Corporations should be more transparent about where they earn their money, they should pay tax in alignment with actual economic activity, rather than abusing tax havens, and they should use their political influence responsibly, rather than undermining governments’ efforts to provide medicines, schools, and roads for us all.

Tax dodging

Oxfam examined publicly available data on subsidiaries of four of the largest US drug companies and found a striking pattern. In the countries analyzed that have standard corporate tax rates, rich or poor, the corporations’ pretax profits were low. In eight advanced economies, drug company profits averaged 7 percent, while in seven developing countries they averaged 5 percent. Yet globally, these corporations reported annual global profits of up to 30 percent. So where were the high profits? Tax havens. In four countries that charge low or no corporate tax rates, these companies posted skyrocketing 31 percent profit margins.

While the information is far from complete, the pattern is consistent: this is either an astounding coincidence or the result of using accounting tricks to deliberately shift profits from where they are actually earned to tax havens. Pfizer, Merck, and Abbott are among the 20 US corporations with the greatest number of subsidiaries in tax havens; Johnson & Johnson is not far behind. All four were among the US corporations with the most money stashed overseas: at the end of 2016, these four companies alone held an astounding $352 billion offshore.

Profits can vary from country to country for any number of reasons, aside from the deliberate shifting of profits to avoid tax. Corporations may have higher transportation costs in some markets, for example, or employ more people. But it is highly unlikely that these explanations can fully account for the consistent pattern of much higher profits being posted in countries with very low tax rates where these corporations do not sell the majority of their medicines.

Pharma corporations’ “profit-shifting” may take the form of “domiciling” a patent or rights to its brand not where the drug was actually developed or where the firm is headquartered, but in a tax haven, where a company’s presence may be as little as a mailbox. That tax haven subsidiary then charges hefty licensing fees to subsidiaries in other countries. The fees are a tax-deductible expense in the jurisdictions where taxes are standard, while the fee income accrues to the subsidiary in the tax haven, where it is taxed lightly or not at all. Loans from tax-haven subsidiaries and fees for their “services” are other common strategies to avoid taxes.

Recent research by tax economist Gabriel Zucman estimates that nearly 40 percent of all corporate profits were artificially shifted to tax havens in 2015—one of the major drivers of declining corporate tax payments worldwide.

Drug companies are masters at taking advantage of the global “race to the bottom” on tax. Both corporations and governments are to blame. A dysfunctional international tax system allows multinational companies to artificially shift their profits away from where they sell and produce their products to low-tax jurisdictions. Companies are only too glad to take advantage of the broken system—and to invest millions in lobbying to further tilt the playing field in their favor.

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More transparency would shed light on how unjust the current system is. None of the four drug companies publish country-by-country reporting (CBCR)—basic financial information for every country in which they operate, including revenue, profits, taxes paid, number of employees, and assets.

Nonetheless, it is possible to use the data that is publicly available to estimate how much tax these companies may be avoiding due to an unequal distribution of profits. In seven developing countries alone—and just from the small sampling of subsidiaries Oxfam was able to access—the four companies may have underpaid $112 million in taxes annually between 2013 and 2015, which is more than half of what they actually paid. Johnson & Johnson may have underpaid $55 million in taxes every year; Pfizer, $22 million; Abbott, $30 million; and Merck, $5 million.

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These amounts are pocket change to these corporate behemoths. But they represent significant losses to low-income and middle-income countries. Developing countries could use the money to address the yawning gaps in public health services that keep many of the poorest people in the world from lifting themselves out of poverty.

The HPV vaccine is one example. Human papilloma virus (HPV) is a sexually transmitted infection that can cause cervical cancer, the fourth-most-common cancer among women worldwide and the second-most-common cancer in women living in less developed regions. HPV kills 300,000 people every year; every two minutes a life is lost to this disease, and nine out of 10 of these deaths are women in low- and middle-income countries. For example, in India, 67,477 women died of cervical cancer in 2012. The HPV vaccine drastically reduces the incidences of HPV and cervical cancer.

The amount of money we estimate these companies may have avoided in tax is enough to buy vaccines for more than 10 million girls, about two-thirds of the girls born in 2016 in the seven developing countries Oxfam examined. India could buy HPV vaccines for 8.1 million girls, which is 65 percent of the girls born in 2016. In Thailand, where 4,500 women die each year from cervical cancer, the $18.65 million in taxes we estimate these companies underpaid per year would be enough to pay for HPV vaccines for more than 775,000 girls, more than double the number born in 2016.

One might think that pharmaceutical profits really are lower in poorer countries, where purchasing power is small and drugs are sold at a discount. But the data indicates a different story. In advanced economies with larger markets and ample purchasing power, the drug companies’ profit margins are just as slim as in developing countries. The corporations may have avoided even more in taxes in these larger markets, a total of nearly $3.7 billion annually—equivalent to two-thirds of the $5 billion they actually paid. Johnson & Johnson led the pack with an estimated $1.7 billion underpaid annually. Pfizer may have underpaid by $1.1 billion, Merck $739 million, and Abbott $169 million.

Profits and innovation

Tax dodging, high prices, and influence peddling help explain the extreme profitability of these companies—and the extreme benefits they offer their wealthy shareholders and senior executives. The 25 largest US drug companies had global annual average profit margins of between 15 and 20 percent in the period 2006–2015; the figure for comparable nondrug companies was 4 to 9 percent. 27 These high profits, in turn, increase the incentive that these corporations have to shift profits and avoid tax.

The current system for biomedical research and development (R&D), a cornerstone of these corporations’ business model, is based on monopoly protection secured by intellectual property rules as pharmaceutical companies invest in development of products that can produce the highest profit. The IP-based system of R&D has failed to produce many medicines needed for public health. For example, there has been no new class of antibiotics developed since 1987 despite the rising problem of antimicrobial resistance. 28

The companies claim they need superprofits so they can invest in discovering new medicines to treat the world’s ailments, but this simply isn’t true. Big drug companies spend more on whopping payouts to shareholders and executives than on research and development. In the decade from 2006 to 2015, they spent $341.4 billion of their $1.8 trillion in revenue on stock buybacks and dividends—equivalent to 19 percent. They spent $259.4 billion on R&D, or only 14 percent. What’s more, R&D expenses are tax deductible.

The cost of medicines, many of which were originally set at exorbitant prices, has continued to rise dramatically, with seven of the nine best-selling drugs sold by Pfizer, Merck, and Johnson & Johnson seeing double-digit price increases in 2017.0 For example, Pfizer raised the price of Lyrica—which treats diabetic nerve pain, has no generic competition, and generated $4.5 billion for the company in sales last year—by more than 29 percent in 2017.

In July the South African government negotiated a reduction in price to $400 for a six-month course for bedaquiline (see http://tinyurl.com/y8d3cxqt).
But that is still far greater than the estimated potential price for a generic equivalent.

New medicines are also set at sky-high prices from the start. Take, for example, Ibrance, a drug for metastatic breast cancer, which Pfizer put on the market for nearly $10,000 per month. These high prices are unaffordable in the US, where medical costs are the primary reason for individual bankruptcy. In low- and middle-income countries, such outrageous prices break public health budgets and place the burden of paying on sick people and their families, who cannot afford it. As another example, a new medicine to treat multidrug-resistant tuberculosis, bedaquiline, was priced by Janssen—a subsidiary of Johnson & Johnson in South Africa—at $820 for the six- month course, which makes it unaffordable for most who need it, especially galling when researchers estimate a generic equivalent of the medicine could be made available for only $48.

In recognition of the global nature of this crisis in access to medicines, the UN Secretary-General set up a High-Level Panel on Access to Medicines that produced a report containing important recommendations to ensure innovation and access to medicines. Oxfam has called on governments and international health organizations to fully implement the recommendations of the High-Level Panel.

Even while Pfizer hiked the price of dozens of drugs, the total compensation of Pfizer’s CEO leaped up by 61 percent in 2017, to $26.2 million. That year Johnson & Johnson’s CEO earned $22.8 million, Merck’s earned $17.1 million, and Abbott’s earned $15.6 million. The average compensation for a drug company CEO in 2015 was $18.5 million, 71 percent greater than the median earned by executives in all industries.

The companies’ R&D spending is also smaller than the billions they spend on marketing. In 2013, Johnson & Johnson spent more than twice as much on sales and marketing than on R&D ($17.5 billion vs. $8.2 billion). Pfizer nearly did as well ($11.4 billion vs. $6.6 billion), and Merck spent 20 percent more ($9.5 billion vs. $7.5 billion). These marketing costs are also tax deductible.

The reality is that the taxpayer-funded National Institutes of Health in the United States is by far the largest investor in health research, with European governments providing substantial funding, as well. All 210 drugs approved in the United States between 2010 and 2016 benefited from publicly funded research, either directly or indirectly. The source for these public investments, of course, is taxes. Patients thus often pay twice for medicines: through their tax dollars and at the pharmacy—or three times if we count the extra tax dollars we pay because the companies don’t.

Corporate social responsibility

Pharmaceutical corporations paint themselves as noble scientists leading the charge against disease. Pfizer’s code of conduct says: “Integrity is more than just complying with the law. It is one of our core values.” Johnson & Johnson’s corporate credo states: “We must be good citizens—support good works and charities and bear our fair share of taxes.”

Unfortunately, the reality of these corporations’ business practices bears little resemblance to this rhetoric.

These companies should choose the high road. Rather than engage in elaborate schemes to hide their profits, they must pay their taxes in an open and transparent way. After all, the companies’ very profitability depends on publicly funded research, public drug certification, public procurement, and public protection of intellectual property.

Governments must do more to reverse their race to the bottom on taxation. They must mandate basic transparency measures that would prevent abuse by multinationals. They must also open up budget and spending processes to citizens to ensure that public spending meets citizen priorities. Oxfam’s Fiscal Accountability for Inequality Reduction (FAIR) program supports citizen engagement in government decisions on taxes, budgets, and expenditures, including on health, in dozens of countries around the world.

Governments must allocate sufficient available public resources to important social services, and citizens must engage governments to ensure that budget decisions reflect citizen priorities, including access to affordable health care. Serious coordinated action is essential if we are to unravel the global web of secrecy that encourages rich corporations to avoid paying their fair share. Women and men around the world are standing up and calling for better and fairer tax and health systems, and we stand shoulder to shoulder with them.

The way forward

Tax dodging, high prices, and influence peddling clearly victimize the most vulnerable. Abbott, Johnson & Johnson, Merck, and Pfizer funnel superprofits from people living in poverty to wealthy shareholders and corporate executives, driving ever wider the gap between the richest and the rest.

As with most drivers of inequality, exorbitant drug prices, aggressive tax avoidance, and excessive lobbying are not accidental. They result from deliberate choices made by companies and by the politicians under their sway. It is our hope that this report will encourage the four companies and others to reform their policies and practices, and that it will spur governments to enact rules that promote responsibility and benefit all society. We believe such a change is in the companies’ long-term interest. Just as extreme inequality is toxic for society, undermining public institutions is no recipe for a stable, profitable industry.

Oxfam’s recommendations

We call on companies to:

Be more transparent by publishing all information necessary for citizens to understand and assess the company’s tax practices.

• Publish full country-by-country reporting (CBCR) of key financial information.
• Publish a full list of all company subsidiaries in every country where they operate.

Pay their fair share by aligning tax payments with actual economic activity.

• Publicly commit to pay tax on profits where value is created and economic activity takes place, and to stop artificially shifting profits to low-tax jurisdictions.
• Take concrete steps to progressively align economic activities and tax liabilities, including shutting down subsidiaries in tax havens when a primary purpose of those subsidiaries is to avoid taxation.

Use their influence responsibly to shape a more equitable tax system for sustainable and inclusive growth.

• Publicly commit to advocate for greater transparency, for an end to abusive tax practices, and for stronger international cooperation to stop the dangerous “race to the bottom” on corporate tax.
• Publicly disclose all contributions made to political candidates, policymakers, trade associations, think tanks, coalitions, and other political entities to influence policy in the US and abroad.
• Publicly commit to align the corporations’ financial contributions and private advocacy with their credos and codes of conduct on tax policy issues.
• Monitor the impact of their policies, pricing, and other practices on women and girls living in poverty.

Enable access to affordable medicines for all by:

• Publicly declaring actual spending on R&D, production, and marketing of medicines and committing to full transparency on medicine prices, results of clinical trials, and patent information.
• Publicly declaring support for the UN High-Level Panel on Access to Medicines and its recommendations, including governments’ right to use mechanisms in the World Trade Organization (WTO) Agreement on Trade- Related Intellectual Property (known as the TRIPS agreement) to reduce medicine prices, affirming that intellectual property protection must not take precedence over public health needs.

We call on governments to:

Require companies to adhere to full transparency and pay their fair share of taxes.

• Mandate and implement public country-by-country financial reporting for all large multinational corporations.
• Require large multinational corporations to pay a fair, effective tax rate on their profits, strengthen rules to discourage profit-shifting, and take action against tax havens.

Ensure access to medicines for their citizens.

• Require corporations to disclose the cost of R&D, production, and marketing of medicines before approving product registration.
• Implement the recommendations of the UN High-Level Panel report at the national level and call for implementation by international institutions including the World Health Organization (WHO), the WTO, and the UN.
• Invest in public health services that are free for patients at the point of use.

We call on citizens to:

Join Oxfam to demand that drug companies stop cheating women and girls out of the chance to beat poverty.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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