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The Pulse of the Pharmaceutical Industry

Medical marketing escapes ad tax, for now

Written by: | | Dated: Friday, February 16th, 2018

Although the passage of the 2017 tax bill was a victory for pharma and medical marketers, major challenges are ahead for those of us inside the Beltway for the foreseeable future.

First, let’s take a victory lap to celebrate what’s not in the bill, namely a provision that would have reduced the tax deductibility of all marketing costs. In the months leading up to the bill’s introduction, members of The Advertising Coalition (TAC) were told unconditionally by senior members of the Trump tax team that marketing expenses would not be fully deductible under the administration’s proposal. Instead, only half of those expenses would be deductible in the year spent, and the other half would be amortized over the next five or 10 years.

Under that provision, ROI on marketing would have plummeted. Indeed, according to the Congressional Budget Office, it would have increased the taxes of advertisers $169 billion over 10 years. Even in Washington, $169 billion is real money.

In the pharma industry, the provision would have led to a 12 percent increase in the cost of marketing in just the first three years after enactment. In practical terms, fewer dollars likely would have been spent, coming right out of the profits of marketing agencies and media companies. Layoffs would have ensued.

Fortunately, that didn’t happen. TAC members, major news media, and advertising trade associations fought back aggressively in grassroots and Hill meetings and by facilitating constituent calls, emails and letters to members of Congress.

The Coalition for Healthcare Communication worked through the 4As and TAC to advance the cause. If you initiated some of those contacts, then thank you!

The driving force behind the marketing tax change of heart in the Trump administration and Congress was not the biopharma industries but the media and advertising industries. It’s a great example of the importance of having many friends in Washington, as well as recognizing that you need an independent voice to protect your interests.

Meanwhile, major biopharma companies reaped a windfall of other benefits from the tax overhaul. In addition to reducing the corporate tax rate from 35 percent to 21 percent, the bill retains the R&D tax credit and eliminates the corporate alternative minimum tax.

That’s not all. Multinational companies are aided by the establishment of a modified territorial system that taxes domestic profits only, and by a new program to enable foreign profits to be brought back to the United States at lower rates. Big pharma alone is estimated to have more than $100 billion of such profits.

That said, two provisions in the tax bill hurt biopharma a bit. First, the act reduces the orphan tax credit from 50 percent to 25 percent for qualified research and testing. Second, and perhaps more concerning, under the elimination of the individual mandate in the Affordable Care Act (plus other administration efforts to undermine the ACA), fewer citizens will be covered by insurance, leading to fewer prescriptions. Still, on balance, the industry fared well.

 So, what’s up next that might spoil the victory party? Two things: lower drug prices and the lingering idea that tax deductibility subsidizes drug marketing.

First, let’s be real about drug prices. The pricing flexibility of the life science industry is eroding. Public polls and press coverage of price issues is fueling price pressures, even among Republicans. Indeed, Trump administration appointees, including Scott Gottlieb, Commissioner of the FDA, and newly named Secretary of the Department of Health & Human Services Alex Azar, are advancing free market incentives to lower prices. Increasing generic competition and reducing government red tape on intellectual property protections is just the start.

If Democrats significantly advance their ranks in the midterm elections coming up in November, Katie bar the door from more direct price controls, including direct negotiation of prices by the government in Medicare Part D purchases and further reductions in patent protections.

Meanwhile, states, including California, Oregon, Nevada, and Massachusetts are putting pressure on drug pricing through “transparency” and other measures.

Second, if Democrats gain more control, expect to hear more about “tax subsidies” of pharma advertising, again based on the fact that marketing costs are fully deductible. Sen. Claire McCaskill (D-Mo.) raised the issue most vociferously at the recent Azar confirmation hearing, asserting that pharma receives an “outrageous” tax subsidy because of the deductibility of “DTC advertising.”

It is pretty clear that McCaskill would like to eliminate the deduction entirely. And, if the idea catches on and follows earlier Congressional iterations, her “solution” would apply to all pharma marketing and communications, not just DTC.

So, while “things are looking up,” now is not the time to become complacent. Drug marketing is not off the radar screen in Washington. Indeed, it could be back big time after the midterm elections, if not before.

Stay tuned. 


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