The US tax overhaul signed into law by President Donald Trump in December has been celebrated by US-based biopharmaceutical giants as leveling the global playing field by positioning them on equal footing with foreign competitors when it comes to dealmaking for products and pipeline assets. The industry also views it as a driver of increased domestic investment. But the immediate strategic impact is likely to be negligible, big pharma executives acknowledged during the J.P. Morgan Healthcare conference, industry's annual gathering in San Francisco in early January. In addition to changes in corporate taxation, under the law Americans are no longer required to have mandatory health insurance—the so-called individual mandate element of the Affordable Care Act (ACA)—and the value of a popular orphan drug tax credit has been reduced.

In the Oval Office of the White House, US President Donald Trump signs into law the tax reform bill stacked on his desk. Credit: ZUMA Press, Inc. / Alamy Stock Photo

US companies will benefit from a reduction in the corporate income tax from 35% to 21% under the new law. They'll also be able to repatriate profits from foreign subsidiaries “without the previously punitive system of taxation,” Johnson & Johnson (New Brunswick, New Jersey) executive vice president and CFO Dominic Caruso said during a discussion with investors at the J.P. Morgan conference. Analysts at Ernst & Young calculate that the ten largest US-based life sciences companies have more than $160 billion in overseas cash. Repatriating that windfall would theoretically increase US companies' capacity to acquire smaller biotechs. Caruso noted that although the new law would create a more “efficient capital structure,” it was unlikely to affect Johnson & Johnson's priorities. Besides investing in its core businesses, the company's primary focus will be on increasing its dividend, which it has done every year for more than 50 years, he said, followed by M&A “at the right price, at the right time, with the right party.” CEO Ken Frazier of Merck, in Kenilworth, New Jersey, pointed out that even before tax reform, the company had access to enough cash for as many acquisitions as it wanted to do. But tax reform “is a benefit in that it gives us financial flexibility,” he said during his J.P. Morgan presentation.

The entire biopharma industry isn't so sanguine. The National Organization for Rare Disorders (NORD) lobbied against the tax reform law, citing the reduction in the Orphan Drug Tax Credit, which is part of 1983's Orphan Drug Act and designed to incentivize drug companies to study rare diseases. The new law reduces that tax credit from 50% of the cost of orphan drug clinical trial expenses to only 25%, and, NORD argued in a mid-December statement, such a reduction “represents one of the most substantial rollbacks in incentives to develop orphan therapies.” NORD also claimed that repealing the ACA individual mandate would cause insurance premiums to rise substantially, potentially making coverage unaffordable for rare disease patients and their families. Others view the new tax law as a missed opportunity to fix that popular law's faults. Though the Orphan Drug Act has worked extremely well, notes Bernard Munos, a senior fellow at the research advocacy group FasterCures and an industry consultant, it has created loopholes and incentives that have been abused (Nat. Biotechnol. 35, 301, 2017). “It behooves policy makers to remove the ability to abuse the law,” he says, but using the tax law to reduce these incentives is “clumsy and ineffective.”