Pharma 2020: Taxing times ahead Which path will you take? Pharmaceuticals and Life Sciences Table of contents Previous publications in this series include: All these publications are available to download at: www.pwc.com/pharma2020 Pharma 2020: The vision # Pharma 2020: The vision Which path will you take?* Pharmaceuticals *connectedthinking Pharma 2020: Challenging business models Which path will you take? Pharmaceuticals and Life Sciences Pharma 2020: Virtual R seven of the top 10 companies are based in the US, but their average ETRs range from 24% to nearly 39.2%, a span of 15.2 percentage points. In short, governments urgently in need of additional tax revenues may conclude that some sub-sectors are shouldering a smaller share of the burden than others. And they may pursue companies in such sub-sectors particularly those that appear to be paying much lower taxes than their peers more vigorously. The prospect of “green” taxes The “Green” agenda could add to these pressures. The EU introduced a carbon trading scheme some years ago. It has also undertaken to reduce its greenhouse gas emissions by 20%, to improve its energy efficiency by 20% and to ensure that 20% of its energy consumption comes from renewable sources, all by 2020. The US is currently exploring various options, including a carbon tax; the UK recently set legally binding targets for the reduction of carbon emissions, to be measured on a four-year budgetary cycle; and several emerging economies have been equally proactive.15 However, two other issues could have an even bigger impact on the sector. The rules governing the use of chemicals are becoming much more stringent. In July 2007, for example, the EU launched a new set of regulations on the registration, evaluation, authorisation and restriction of chemicals (REACH).16 There is also a growing body of opinion that the industry should be held accountable for the indirect environmental effects of its products. Residual traces of hormones and other medicines have been detected in drinking water supplies throughout the world.17 Some governments might respond by taxing pharmaceutical manufacturers to fund the development of more effective wastewater treatments. Competing tax incentives That said, greater competition for companies engaging in R South Korea spends 3.2%; and Chinas investment has risen from 0.9% to 1.4% of GDP in less than a decade.19 Most developed countries offer tax credits or deductions on eligible R Canada offers a credit of 35% on qualifying expenditure up to a maximum of CAN $3 million and 20% thereafter; and Japan offers a credit of between 8% and 10% on gross R IMS Health Market Prognosis (March 2009); and PricewaterhouseCoopers analysis. Note: IMS Health has produced lower and upper projections for the growth of the global pharmaceutical market over the next five years. We have extrapolated from these projections to estimate the regional split in 2020, using the midpoint between the upper and lower ranges. 2020: The vision”, where we estimated that the E7 markets Brazil, China, India, Indonesia, Mexico, Russia and Turkey could grow by between 10% and 15% a year.31 Given that the North American, European and Japanese markets are growing much more sluggishly, the Asian, African, Australian and Latin American markets will thus account for a much greater share of the industrys revenues by 2020. Indeed, we project that they could collectively be worth about $571 billion or nearly 40% of the total market (see Figure 7). Clearly, some pharmaceutical companies may choose to serve certain countries by using independent intermediaries domiciled in other jurisdictions. A company that wants to target Latin America might, say, use an agent based in Brazil to market its products throughout the region. The countries in which a company earns an income and those in which it makes a profit may also be different and for the purposes of taxation, it is the latter that counts. Even so, it seems likely that a greater presence in the emerging markets will boost the proportion of the industrys profits that is generated in high-tax locations because some of these countries have relatively high tax rates. Further compounding the challenges involved in ensuring compliance, most emerging nations have tax regimes that are less fully developed and less clearly articulated than those of the industrialised economies. The bifurcation of the supply chain The emerging countries are not only becoming more attractive places in which to sell medicines; they are also playing a more prominent role in the 2008 46.5 90.8 76.6 247.5 311.8 North America Europe Japan Asia/Africa/Australia Latin America 2020 425.5 335.9 377.6 104.5 193.4 US$bn US$bn manufacturing process. The global market for pharmaceutical contract manufacturing is expected to rise from about $20.4 billion in 2008 to more than $31 billion by 2012, with much of the increase concentrated in Asia, where the market is growing at a