'The present government has realised that ObamaCare can't be repealed', Matt Szuhaj, MD, Deloitte
Pharmaceuticals contribute as much as 5% to all Indian exports, and US is the biggest export market for Indian pharma, contributing one-third of total pharma exports. Naturally, the big names in Indian pharma are experiencing jitters from Trump's recent protectionist utterances.
At Bio Asia 2017, in an exclusive with Matt Szuhaj, MD, Deloitte Consulting LLP, San Francisco, The Dollar Business explores the extent of disruption the new political developments in America could cause.
What is the present corporate tax scenario in USA?
Let me give you a broader context. Outside of the administration change in US, there was an effort by the OECD countries called base erosion and profit shifting. This was a process of trying to harmonise tax codes between countries. Essentially, they wanted more visibility, more transparency, and less individual agreements for specific companies. It was meant to get some of the low cost tax jurisdictions bring up their tax rates, but what actually happened was everyone brought theirs' down.
So, what you find is a lot of countries taxing corporate income at 15%-20%, especially life sciences manufacturing, and R&D. So, that happened regardless of the administration change in USA. USA still has a rate of 35%. But we always knew that something was going to have to happen with the US tax code, at some point, politically, just to be competitive. Trump has come in, and apparently, his style is to try to do things very quickly, and change things dramatically.
What could be the possible impact of Trump's import tariff hike on the global pharma industry?
So, there are a few proposals put in place. Most people believe that the program being put forward is a 'border-adjustment tax'.
A lot of people don't understand what that means, especially in USA. They think it's a tax or a tariff on products from Mexico. That's not what it is at all. The best way to explain is that it's kind of like a VAT, but not completely. Simply put, what it does is, it will make it prohibitively very expensive for you to sell in the US market without producing in the US market. So USA being the largest healthcare market, lot of products made abroad could suffer, unless you have a way to offset that, through capital investment or job creation. Some companies may be exposed. For retailers like Walmart, where products are made outside the US and then brought in, this could be a negative.
I don't think it's that significant an issue for the life sciences industry. Most global companies in the sector, because of their high margin products, figured that a long time ago. So, they have manufacturing in the US for the US. They have a tax structure that allows them to move their money without having it taxed a couple of times, which makes them tax efficient. So, although there will be some impact, it's not going to be as much as other industries.
Since USA makes for one-third of Indian pharma exports, can we expect a setback specifically to Indian pharma?
There are two things here, the tax policy, and also what happens with the Affordable Care Act. What you have in most parts of the world, like India, South America, Southeast Asia, is socialised medicines, which means that the government is the purchaser of therapies and drugs. In US, it's not that way. The consumer in America absorbs the cost of all R&D, which is why a prescription could be bought for a third of it's US cost in Canada. With the Affordable Care Act, if it stays intact, the R&D costs which are being passed onto consumers will slowly shift.
They've realised that ObamaCare can't be repealed. There are parts of it that they can change. So, the Indian healthcare companies will benefit under the Affordable Care Act because of it's focus on wellness. Traditional medicines, nutraceuticals, are all being included in the healthcare continuum. So, while you would have to pay a little more cost, the benefit is that it has opened up some of the market in US.
But it all depends on how the act is tweaked. If it goes back to being a 'pay for service', as opposed to a wellness-driven act, then that may change how the public looks at nutraceuticals. So it's hard to tell what's going to happen. I think the key competing points for India are, whether it's still focused on wellness, and whether there is a way to keep prescription prices down.
Is USA's lack of impetus to exports to be blamed for huge trade deficits?
USA has 20% of the world's population, and consumes 80% of its goods. The trade deficit is primarily due to consumption of low cost products. While the workers here want to be paid higher wages, they're also looking for inexpensive goods. So, the only way we can get these inexpensive goods, is by manufacturing outside and then importing. So, this is why we're always going to have the deficit.
So, you don't see Trump's policies correcting the balance of payments situation?
I don't think we are going to move away from free trade for more than a short period, lets say a few months. A lot of it is just campaign rhetoric, and it doesn't make sense. He can say what he wants to do, but the Congress still has to pass it. Having any legislation that curbs free trade pass, in my opinion, is very difficult, because Republicans have generally been free trade proponents, and even Democrats.
The Chinese fix their currency pricing such that it is advantageous for export, and everybody knows this. The question is whether you want to get into a trade war. Putting tariffs between Mexico, Canada and US is not in anybody's best interests.
In the same context, what does this mean for investments coming to USA from abroad?
Just from a risk perspective, if you're a producer of consumer products and US is a market for you, I think you'll come on shore for manufacturing, because you don't want any uncertainty. For instance, in the automobile industry, since there have been tariffs from time immemorial, you see that most foreign automakers have been in the US. So, they had that figured out a long time ago.