Big pharma holds its breath as Trump plots his revenge

 A string of pharmaceutical bosses attended a three-hour dinner at Donald Trump’s Mar-a-Lago resort in Florida in December. Multibillion-dollar investment pledges were not the only sign that they were willing to kiss the US president’s ring.

They also reportedly had to endure his iPad Spotify playlist. Jesus Christ Superstar and Sinéad O’Connor’s Nothing Compares 2 U were said to be among his favourites.

But needs must for “big pharma”, which is doing all it can to appease the president before he unleashes his vengeance against the industry in the form of tariffs.

It will no doubt be an uphill battle, as Trump’s antipathy towards the sector has not cooled since he accused firms such as Pfizer of helping Joe Biden win the 2020 election by delaying positive news about the Covid-19 vaccine.

Pharma has so far been protected from Trump’s volatile trade war, although executives know the writing is on the wall.

“We’re going to be announcing very shortly a major tariff on pharmaceuticals,” Trump told the National Republican Congressional Committee dinner on Tuesday.

“Once we do that, they are going to come rushing back into our country because we are the big market. The advantages we have over everybody is that we’re the big market.”

The threat was made in one of the most turbulent weeks of the Trump administration so far, as he escalated his trade war with China while pausing higher tariffs on other countries.

The spat with Beijing has already prompted the US to slap tariffs on Chinese pharmaceutical exports.

However, broader and more damaging drug levies are on the horizon, as the US president said in February that he is prepared to impose a 25pc tariff on all American drug imports, which last year totalled $213bn (£163bn).

Bitter pill to swallow

The prospect of paying $53bn in tariffs is not the only thing big pharma has to fear.

Trump’s health secretary is Robert F Kennedy Jr, a vaccine sceptic who has promoted conspiracy theories, including that the Covid vaccine was developed as a way of using microchips to control people.

Not only this but the White House administration has also hit out at the pharma industry’s tendency to base its manufacturing operations in low-tax jurisdictions before charging higher prices in the US.

“We’re going to try to fix a whole bunch of these tax scams,” commerce secretary Howard Lutnick said on a recent podcast.

Collectively, the policies from Trump’s administration pose a massive threat to the sector, which has retaliated with a vast lobbying drive.

After the December Mar-a-Lago dinner, Albert Bourla, the Pfizer chief executive, took his top management back to the president’s Palm Beach resort the following month for several days of further meetings.

Drugmakers Bayer, Johnson & Johnson and PhRMA were also among those to have each donated $1m to Trump’s inauguration.

But this is chicken feed compared to the investment pledges being made.

In November, AstraZeneca said it would spend $3.5bn on new investments in the US, while Eli Lilly said in February it would invest an additional $27bn in US manufacturing.

A month later, Johnson & Johnson said it would spend $55bn in the US over the next four years.

“That was a big wow,” says Trung Huynh, head of pharma analysis at UBS investment bank.

Henry Levy, a life sciences expert, says: “Lobbying has been going on for a long time, but lobbying of this type is different. It’s not something I have ever seen.”

However, drug chiefs are waking up to the painful reality that even this may not be enough.

When Trump first told reporters on a Tuesday in February that he planned to introduce 25pc tariffs on drug imports, the timing was not by chance.

“He was sitting down with the pharma lobby on the Thursday,” says Courtney Breen, a senior analyst at Bernstein, part of Société Générale Group. “That was him setting the tone to make them appropriately scared.”

Sir John Bell, one of the UK’s leading life sciences figures, says pharma bosses are increasingly resigned to the fact that new taxes are coming, even if they do not know when or what shape they will take.

“There will definitely be tariffs,” he says.

Michel Demaré, the AstraZeneca chairman, has urged Trump to change course as he warned of the potential impact on patients.

He told shareholders last week: “Medicines should be exempted from any kind of tariffs, because [in] the end, this is just harming patients, health systems and restricting health equity.”

Meanwhile, Dame Emma Walmsley, GSK’s chief executive, tried to appear positive last week when she said the situation remained “very fluid”.

However, she accepted that the threat of tariffs was something the company had been expecting for some time.

Instead of trying to block the levies altogether, many in the sector are hoping they can be delayed or phased in gradually.

NHS headache

The introduction of such tariffs would be a watershed moment for the sector, which for three decades has been protected from levies under an agreement with the World Trade Organisation.

As a result, companies are scrambling to “game plan” various scenarios, while share prices have tanked.

In the last month, Pfizer’s share price has dropped by nearly 19pc, while Eli Lilly, AstraZeneca and GSK were down by 13pc, 14pc and 19pc respectively.

The seismic impact of tariffs will be felt globally.

More than half of America’s drug imports – around $127bn – come from the EU, while Japan, China and India are also significant trading partners. The UK would also feel the pain.

“There’s definitely a big element of risk here because we import a lot and we export a lot,” says Sir John.

The pharma sector is the UK’s second-largest for exports to the US, coming only after cars.

Around £7.2bn worth of medicines and pharmaceutical products were sent over to America from UK ports in the 12 months to the end of October, while £4.5bn worth of stock was imported from the US.

“Pharmaceuticals is one of our biggest manufacturing sectors,” says Sir John. “That means if there’s an aggressive deal on pharmaceuticals, it will be really problematic for the UK economy.”

Trump’s problem with the pharmaceutical industry goes beyond America’s trade deficit.

Much of big pharma’s business model relies on companies basing their operations in low-tax jurisdictions, which enables them to make hefty profits when selling drugs for higher prices in the US.

“In the US, the majority of these companies don’t post a profit,” says Huynh. “In general, companies manufacture their products in a low-tax jurisdiction.”

They are then able to charge high import prices, known as transfer prices, which are often close to the retail price of a product.

If a drug costs $10 to produce, for example, a company might sell it to a US subsidiary at a transfer price of $100, says Huynh.

Instead of paying America’s 21pc corporation tax rate on the $90 profit, the company then pays a US Global Intangible Low Taxed Income (Gilti) tax rate of 10.5pc.

Breen says: “They can say, well, the US actually isn’t doing that much, they’re just a sales and distribution function and therefore you minimise the risk exposure to [US] taxes.”

Concerns over this model have existed long before Trump.

Senate finance committee (SFC) member and Democratic senator Ron Wyden is currently overseeing an investigation into tax evasion across the pharmaceutical industry.

At the end of March, he accused Pfizer of “what could be the largest tax-dodging scheme in the history of big pharma.”

In 2019, the company sold drugs worth $20bn to Americans but claimed that 100pc of its profits were earned outside of the US, according to the SFC.

Pfizer has rejected this portrayal and claimed that the company has paid $12.8bn in income taxes in the US over the last four years.

Yet this level of scrutiny is particularly problematic given Trump’s desire for US companies to pay their fair share.

The president has already complained that drugs in the US currently cost far more than those sold elsewhere.

And he does have a point. On a net basis, pharmaceutical companies charge Americans 3.5 times as much for drugs as they do in other rich countries, says Breen.

Most large pharmaceutical companies generate between 50pc and 75pc of their revenues from the US, even though typically less than 20pc of their sales volumes are reported there, says Breen.

In some geographies, pharma companies are limited in what they can do on prices. In Australia, for example, prices for medicines are capped. US drug firms have raised this with Trump, claiming such “egregious and discriminatory” policies are hurting their profits.

UK health insiders are also wary that Trump could turn his gaze to how other countries are securing lower prices.

“These other countries are smart,” Trump said on Tuesday. “They say you can’t charge more than $88 otherwise you can’t sell your product and the drug companies listen to them.”

The concern is that this could shine a light on the NHS, which is among the toughest negotiators on medicine pricing. Drug companies are also required to pay sales rebates to the NHS if the health service ends up spending more on drugs than expected.

“Trump could argue that we’re imposing a sort of tariff by grinding down the prices of drugs,” says one senior UK health figure.

US tariffs on imports have been viewed as potentially helping to even the playing field, forcing prices down in America, too.

David Mansdoerfer, the former deputy assistant secretary for health in the first Trump administration, says: “By limiting pharma’s ability to cheaply produce overseas and then mark their prices up in the American market – like they do with insulin – Americans could see a significant benefit.”

However, drug chiefs are concerned that Trump could seek to take a dual approach to tackle the problem, introducing tariffs as well as taking steps to attack their pricing models.

“He’s going to potentially try to whack them with a double header,” says Huynh. “They’re all worried about it.”

Breen says the pharma sector is keeping quiet for now, but claims that inside “these companies, there is a lot of stress testing of their supply chains, of their tax exposures.”

Trump’s gripe

For Trump, pharma is a personal sore spot, having clashed with industry chiefs during his first tenure as president.

As early as 2017, Trump found himself butting heads with industry heavyweight Ken Frazier, then chief executive of drug giant Merck, over the US president’s response to violence in Charlottesville.

Frazier opted to resign from the American Manufacturing Council in protest, fuelling a bitter tirade from Trump on Twitter, where he claimed Frazier “will have more time to LOWER RIPOFF DRUG PRICES!”

In late 2020, during the pandemic, Trump was said to be furious with vaccine chiefs over the slow pace of jab rollouts.

The US president claimed that drugmakers, including Pfizer, sat on positive Covid jab test results until after he had lost the election, writing on Twitter at the time: “They didn’t have the courage to do it before.”

The Food and Drug Administration also came in for a bashing, with Trump claiming the US regulator delayed approvals because it did not want to give him a “vaccine win prior to the election”.