Recently the U.S. pharma giant Pfizer announced a merger with the drugmaker Allergan, in a deal heavily motivated by tax cheating via a ‘corporate’ inversion – a corporate relocation to take advantage of (in this case Ireland’s) lax tax regime.
Much has been said on the topic, with U.S. politicians rightly calling it a scandal and a disgrace. The company tried to defend itself by saying it was competing with other drugmakers ‘with one hand tied behind its back’ because of the U.S.’ allegedly high taxes, which is utter nonsense, as we’ll explain. (And it seems that the company’s claim to be paying an effective 25 percent tax rate was a deception: the real rate was closer to 7.5 percent.)
Now the Huffington Post is carrying a superb article by Bill Lazonick, arguably the U.S.’ top expert on shareholder value, entitled Tax Dodging Just One Part of Pfizer’s Corrupt Business Model.
We’d urge you to read the whole thing – but here are a couple of excerpts.
“From January 2001 through September 2015, Pfizer paid out $95.5 billion in buybacks and $87.1 billion in dividends, representing 117 percent of its net income. Meanwhile, it booked $37.1 billion in corporate income taxes to the IRS.”
Pfizer honchos have been making out like bandits from the share price manipulation involved – at the expense of genuine innovation.
The company has said that in tax cheating it is just “enhancing shareholder value.” Lazonick calls this
“a self-serving ideology for executives whose remuneration depends on the company’s stock-price performance.”
We have said in the past that tax avoidance by large corporations is “like refined sugar in the human body: empty financial calories with adverse long-term consequences.” Shareholder value ideology is, as Lazonick patiently explains, and as we’ve often remarked, the same kind of thing.
This is wealth extraction, not wealth creation – and that is Pfizer’s core business model.
Which is why Lazonick is right to describe it as ‘corrupt.’ We firmly agree with him: offshore shenanigans not only facilitate and encourage traditional forms of corruption (such as bribery): this stuff is also corrupting markets wholesale. (We have issued a call for papers for an event on this very subject, next May.)
Now what is the actual evidence that this stuff is sapping innovation and genuine wealth-creation?
Lazonick notes that, using only Pfizer’s share price as a yardstick, it has been a success. Which is hardly surprising, given the tens of billions pumped into share buybacks and so on. But dig deeper, and the analysis changes profoundly.
Pfizer’s share price has been driven not by the creation of innovative new drugs but by three major acquisitions: of Warner-Lambert in 2000; of Pharmacia in 2003; and of Wyeth in 2009 — and now it has Allergan. Each one bringing with it a number of blockbuster drugs. But now consider this:
“From 2010 to 2014, Pfizer’s revenues fell from $67.8 billion to $49.6 billion, mainly because of the expiration of the patents on a number of the company’s blockbuster drugs. Over these four years, it slashed worldwide employment from 110,600 to 78,300. With Read as CEO, R&D spending has declined compared with the previous 15 years.
Whatever its recorded R&D spending, however, Pfizer has long since lost the capability to generate its own drug products. Since 2001 the company has had significant revenues from only four internally originated and developed products, the last one in 2005. In 2010 sales of these four products totaled $3.7 billion, but, in part because of expiration of patents on two of the drugs, by 2014 these revenues had slumped to $1.3 billion.”
Which is, on almost any measure, a failure. A titanic failure, in fact. What’s generated the cash has been the wealth extraction techniques: not just the tax shenanigans, but the jacking up of drug prices (especially in the U.S.’ unprotected market), along with the increased market power that comes from mega-acquisitions. None of this is innovative or productive.
It drives wealth upwards, from poor consumers to rich shareholders, as this graphic of the owners of U.S. corporate stock suggests.
So the tax dodging should be seen and condemned as a scourge – but it also needs to be understood as just one element in a broader – and thoroughly corrupt – business model.