Troubles Ahead for the Pharmaceutical Industry
Give Pfizer credit for doing what no one thought could be done: It has united the fractured landscape of American politics. There was not a hint of disagreement among the presidential candidates—who can agree on nothing else—in responding to the company’s decision to move its tax domicile to Ireland. Donald Trump called it “disgusting.” Bernie Sanders deemed it “disastrous.” Hillary Clinton said the company is leaving “U.S. taxpayers holding the bag.”
It’s almost—almost—possible to feel sorry for Pfizer (PFE) CEO Ian Read. After all, his is a rational response to the irrational tax laws that the politicians have put in his way. My colleague, Geoff Colvin, defends him by saying he is simply fulfilling his “fiduciary duty to serve his shareholders’ interests.” And that argument holds, if you look only at the short term.
But here’s the problem. Pfizer exists at the intersection of two muddled messes of American public policy—our corporate tax system and our drug-pricing system. The first hurts the company by combining one of the highest corporate tax rates in the world (35%) with a global reach that leaves American companies at a serious disadvantage against their foreign competitors while it drives them to park billions of dollars in overseas earnings outside the U.S. to escape punitive taxation. The second, however, works greatly to Pfizer’s benefit. The U.S. alone among major nations prohibits the government from regulating or negotiating drug prices, allowing companies to reap their greatest profits in the American market.
Both policies need to be fixed. And however unlikely it may seem at the moment, both will be fixed, eventually. The status quo—with more companies fleeing the country every year while pharmaceutical corporations like Turing and Valeant (VRX) jack up drug prices to obscene levels—is unsustainable.
The real question is how they will be fixed. Will Congress attempt to build a Berlin Wall around U.S. companies and impose heavy-handed regulation on drug prices? Or will it find a way to allow American pharmaceutical companies to compete fairly in the world and earn sufficient profits in the U.S. to incentivize research? It’s in Pfizer’s interest, the industry’s interest, and the nation’s interest that we take the second path. But Pfizer’s desertion—and there’s no other word for the 160-year-old company’s decision to change tax domiciles—will inflame the growing antibusiness elements in both political parties and increase the likelihood of following the first, counterproductive path. In that respect the company is selling its future. It’s a bad decision, and the consequences will be long-lasting.
A version of this article appears in the December 15, 2015 issue of Fortune with the “Pfizer’s Desertion.”