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Pharma Takes A Hit: Reform Taxes Overseas Prescription Profits

With health care reform likely off the table this year, aside from a few legislative tweaks for health insurance companies, one of the biggest former beneficiaries of what was to become a major overhaul of the U.S. health care system will be feeling the pain.

Big U.S. pharmaceutical companies learned Friday that they will most likely face huge new taxes on what was once untouchable profit: overseas sales of presciption medications. New York-based Pfizer, the largest medical research and manufacturer in the U.S., will be hit the hardest. With nearly 90 percent of its income residing from overseas sales, the company and other large medicine makers are staring down the barrel of a corporate tax gun. Current proposals in Congress call for as much as a 35 percent tax on at least some of its foreign profit if President Obama’s idea gains traction.

Pharmaceuticals are often criticized for holding lengthy rights on patents for the drugs they manufacture. Since generic drugs are cheaper for those with and without affordable health insurance, the pressure is on the pill makers to shorten their exclusive rights on the drugs they sell since Obama is also looking at generating tax revenue by penalizing companies that park on their patents too long. The proposals seemingly shocked big pharma, dragging down Wall Street stocks for a bit on Friday morning.

In an interview with the New York Times, economist and former Treasury Department official Martin Sullivan said pharmaceutical companies will soon suffer the same chokehold that many lucrative and wealthy Americans parking money overseas suffered soon after Obama took office.

“Typically when a pharmaceutical company develops a new drug, it transfers it to a holding company in a tax haven like Bermuda or the Cayman Islands, usually on very favorable terms,” said Sullivan. “it pretty much came out of the blue…There’s a tremendous amount of income taken out of the U.S. and put into the tax haven. This proposal seems targeted to just that type of situation.”

The change in tone over health care reform was perhaps the biggest about-face for pharmaceutical companies, who agreed under the original health care reform bill to pay $8 billion per year in drug discounts in exchange for getting access to new business from tens of millions of uninsured Americans who would have received access to more affordable health insurance. The pharmaceutical industry is an estimated $246 billion business, according to the government statistics.

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