This post was originally from http://www.nytimes.com/2014/09/30/business/patents-put-overseas-can-pare-tax-bills.html?_r=0
As the Obama administration tries to stop companies from avoiding taxes by moving their headquarters overseas, the makers of some of the world’s most lucrative and expensive medicines are using another tactic to reduce their payments to the government.
Take the case of Gilead Sciences, which has come under severe criticism for the high cost of its in-demand new hepatitis C drug, Sovaldi, which sells for $1,000 a pill, or $84,000 for a typical course of treatment.
Although Gilead, the developer of Sovaldi, is an American company based in Foster City, Calif., the patent rights have been transferred to an Irish subsidiary. So Gilead’s profits from the booming sales of Sovaldi are taxed at Ireland’s rate, which is well below the American one.
Big pharmaceutical companies have done this for decades, as have some technology companies. Now biotechnology companies are following suit.
Transferring individual products is not as advantageous, tax-wise, as moving the company’s official headquarters, which is known as an inversion. Pharmaceutical companies, including Pfizer, AbbVie, Actavis and Mylan, have been particularly active recently in pursuing this inversion strategy, and President Obama is trying to rein it in.
But for many biotech companies, the transferring of product rights is providing a substantial tax benefit. That’s because the true value of a drug lies in its patent — which protects it from competition and allows it to be sold at a higher price.
Alexion Pharmaceuticals has said that as of this year, certain intellectual property for Soliris, its super expensive drug for rare diseases, is being held in Ireland, where it has established certain operations.
Regeneron Pharmaceuticals has made Ireland the tax base for foreign sales of its big-selling eye drug Eylea and for some drugs still in development like the powerful cholesterol-lowering medicine alirocumab.
A sign of the times: Regeneron recently agreed to pay $67.5 million to BioMarin Pharmaceutical for a voucher that will entitle the cholesterol drug to a faster review by the Food and Drug Administration. Although Regeneron is based in Tarrytown, N.Y., and BioMarin in San Rafael, Calif., the transaction was between the Irish subsidiaries of the two companies.
BioMarin earned the voucher as a reward for developing a drug for a rare childhood disease. The drug, Vimizim, which treats an enzyme deficiency called Morquio A syndrome, will eventually be manufactured mainly in Ireland, the company has said.
The companies in general declined to be interviewed about their taxes. But in written statements some said that they complied with the law and provided jobs and valuable medicines to Americans.
Some said tax savings would allow them to invest more in drug development and to remain competitive with overseas rivals that do not pay the 35 percent federal tax rate. The rate in Ireland is 12.5 percent.
“If we want to go buy something and a foreign company wants to buy something, they can pay so much more because they pay much lower taxes,” said the tax director of one biotech company, who spoke on the condition of anonymity because of the sensitivity of the issue.
Still, Karl Wündisch, president of Transfer Pricing Pharma-Biotech, a Berlin-based consulting firm on tax issues, said such profit-shifting was considered an “international abuse of taxation.”
Critics of the practice say American companies benefit from the nation’s higher-education system and from basic research paid for by the federal government. Companies that make drugs for rare diseases, like Alexion and BioMarin, also earn so-called orphan drug tax credits to subsidize research and development.
“I do think there is something problematic about the companies utilizing all of that and not paying their fair share of taxes by putting their I.P. in low-tax jurisdictions where they don’t really do much,” said Reuven S. Avi-Yonah, a professor of law at the University of Michigan, referring to intellectual property.
Biotech companies typically lose money for years, but they can be highly profitable if they succeed. Investor’s Business Daily recently cited Alexion, Celgene and Regeneron as having among the highest profit margins of any company in any industry.
The United States is also usually the most lucrative market for drugs. Nearly all of the $6 billion in sales of Sovaldi from the drug’s approval in December through June were in the United States. The drug is expected to be one of the best-selling drugs in the world in only its first year on the market.
Much of the payment for Sovaldi will be borne by taxpayers, since many people with hepatitis C are on Medicaid or Medicare, in prisons or in the Veterans Affairs health system. To some critics of the cost of Sovaldi, the fact that Gilead is paying lower taxes on the drug is even more galling.
“In addition to fleecing the government with thousand-dollar pills, that they don’t even want to pay their share of taxes is no surprise,” said Michael Weinstein, president of the AIDS Healthcare Foundation, who has frequently complained about the prices of Gilead’s drugs for H.I.V. and hepatitis.
Gilead says the price of Sovaldi is in line with some other hepatitis C treatments and is justified because the drug cures a deadly disease.
The company expects an effective tax rate this year of 17.5 to 20.5 percent. A previous forecast that excluded Sovaldi sales was for a tax rate of 28 to 29 percent.
Gilead’s overall tax bill is going up because of profits from Sovaldi. But the lower rate on the drug is saving the company hundreds of millions of dollars from what it would otherwise owe.
Experts say companies cannot just park a patent in a low-tax country, but generally have to have some other activity there, like manufacturing or distribution.
Celgene, one of the biggest biotech companies, has had an effective tax rate of only about 13 percent over the last few years. It does some research, development and manufacturing in Switzerland, where it is exempt from most income taxes under an agreement with the Swiss government.
About 60 percent of Celgene’s sales and assets are in the United States. Yet it attributed only about 2 percent of its pretax profits to the United States in 2013, according to Gradient Analytics, a research firm that recently questioned Celgene’s practices.
A Celgene spokesman said the company “pays full U.S. tax on our U.S. profits.”
Still, there is wariness about the issue at biotech companies.
When a Wall Street analyst, during a conference call in January, asked Alexion’s chief financial officer about the company’s plans to move the Soliris intellectual property to Ireland, the chief executive, Leonard Bell, jumped in to answer, apparently reading a prepared text.
“Over our 20-year history, and as we continue to grow strongly here in the United States,” Mr. Bell said, “we have been focusing on building a strong and independent organization that will always have at its core, its mission, an emphasis on patient care. In addition to our relentless focus on the development of innovative therapies, we also recognize our need to achieve increased operational efficiency in order to optimally serve patients worldwide.”
The analyst Eric Schmidt of Cowen and Company wrote in a note after the call: “The bigger news today is an Irish tax restructuring the company has just completed,” which should result in “sustainably higher profitability.”