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For pharma companies, GOP tax plan is mostly favorable

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Biopharma can find plenty to celebrate — and a few things to despair over — in the Republican plan to rewrite the tax code.

The long-awaited “Tax Cuts and Jobs Act,” unveiled last week, is likely to be revised significantly. But so far, here are the seven provisions with the biggest implications for the drug industry:

 The corporate tax rate would drop to 20 percent.

This is the big one for drug makers and other US businesses: The legislation would cut the top corporate tax rate to 20 percent, from 35 percent. And it’s a key part of the reason that BIO, the drug industry trade group, put out a statement saying it “applauds” Republican lawmakers who cooked up the plan, calling it “vital to maintaining American leadership in biotechnology innovation.”

 Tax credit for testing rare-disease drugs would end.

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Most of the tax bill affects biopharma just as it does other big industries. But the legislation singles out biopharma at a key point, and not in a good way for the industry, with a provision that would repeal the tax break that drug companies can get for developing so-called orphan drugs for rare diseases.

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The drug industry has fiercely defended this tax credit in the past, calling it essential to encourage investment in disease areas where patients have few options — even as it has come under attack from lawmakers and other critics who say it’s being manipulated to build monopolies.

In its statement Thursday, BIO said it wants the legislation amended to maintain the tax credit. But Rachel Sachs, a law professor who studies health policy at Washington University in St. Louis, said she was surprised by how tepid BIO’s defense of the orphan drug tax credit was. Sachs said she thought eliminating the tax credit could be a bigger problem for smaller drug companies that may have relied on it while developing products.

 The R&D tax credit would be preserved.

The beloved tax break, which companies can get for investing in research and development, stayed written into the proposed tax code Retaining this provision would be “very helpful” for drug companies, said Kathy Michael, PwC’s tax-sector leader covering pharmaceuticals and life sciences in the United States.

 Repatriated earnings would be taxed at a lower rate.

Many drug makers keep a large share of their cash overseas, Johnson & Johnson, Amgen, Gilead, and Celgene among them. So they could benefit from a lower tax rate, just one time, for corporate money repatriated from overseas. Under the proposed change, companies would pay just 12 percent on cash returns and 5 percent on noncash assets.

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A key question if the change goes through: What will pharma do with the money?

 A new tax would be levied on multinational companies.

The tax bill would, for the first time, put in place a global minimum tax of 10 percent on the earnings that American companies bring in overseas. Under the current tax code, these earnings don’t get taxed until they’re brought to the United States.

 A ‘chilling effect’ on executive compensation might result.

In an industry in which C-suite executives regularly command eye-popping compensation, a proposed change could mean bad news for those planning to buy a yacht. The legislation would prevent businesses, including drug companies, from deducting certain types of executive compensation, including performance-based pay, that’s greater than $1 million.

That could bring about “a chilling effect” on compensation packages in the drug industry, said Ben Proce, a tax partner at PwC who leads the firm’s pharmaceutical and life sciences practice in the New York City area.

 None of the extras on biopharma’s wish list were in the bill.

BIO’s statement on Thursday urged lawmakers to tweak the bill to include “incentives for pre-revenue innovation.”

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Asked for clarification, a BIO spokesman pointed to four specific changes that PhRMA wants to see in the tax bill: a relaxation of rules that prevent investors from using a company’s losses to offset their other income, a new tax credit for individual investors, a change in how companies can carry forward net operating losses, and capital-gains reform.

Rebecca Robbins
can be reached at rebecca.robbins@statnews.com. Follow her on Twitter @RebeccaDRobbins. Meghana Keshavan contributed to this report.