The great billion dollar drug scam

Published on Pambazuka News, by Khadija Sharife, July 7, 2011.

The pharmaceutical industry uses dirty tricks to maximise profits at any cost, hurting sick people and taxpayers. Khadija Sharife examines the methods used by multinational drug corporations to control markets – and lives …

… The US Office of Technology Assessment (OTA) revealed: “The net cost of every dollar spent on research must be reduced by the amount of tax avoided by that expenditure.” The authors used data from official sources such as the Tax Policy Center, to reveal additional tax savings of 39 per cent. Cumulatively, taxpayer subsidies and credits reduced the overall costs from $403 million to $201 million.


Moreover, as this Ernst & Young “Tax Planning” article explains, R&D costs are usually shifted to high tax jurisdictions to offset costs. Meanwhile, profits generated by patents are often “re-located” to low-tax jurisdictions. Pharmaceutical companies prefer to generate R&D “expenses” in high-tax jurisdictions such as the US in order to offset the costs against taxable income. Yet the cost of R&D does not included “avoided” tax. Not surprisingly, most pharmaceutical companies are also based in low-tax secrecy jurisdictions such as Delaware in the US, where profits can be shifted into passive profit and intellectual holding companies.

In an article [originally printed in the New Age newspaper, published online here] I wrote with John Christensen, the founder of the Tax Justice Network and a former economic advisor to Jersey, one of the UK’s top tax havens, we revealed how tax secrecy and intellectual property (IP) was being exploited to profit drug corporations, rather than serving the needs of vulnerable people.

“Pfizer, Novartis, GlaxoSmithKline – as well as over 60 per cent of Fortune 500 multinationals, all maintain entities in Delaware, taking full advantage of legal and financial opacity tools. In addition to banking secrecy and zero disclosure of beneficial owners, Delaware allows for parent companies to establish holding companies within two days, producing nothing, conducting no economic activity in the state, and generally hosting just one shareholder (the parent company). Such entities, allowing the parent company to pay the newly created entity a “fee” for use of IP, serves as a passive conduit converting taxable income to passive non-taxable profit. The entity’s sole purpose is to own and ‘manage’ laundered income generated from IP.”

The gigantic legal expenses incurred by specialists for developing patents, legal defence, sourcing the tax havens and other IP-related issues constitute more costs – included as R&D. This tax optimisation strategy closely resembles that of “high-tech” companies depending on intangible capital for the bulk of their wealth. According to Forbes magazine, by 1999, three of the four richest people in the world made their fortune from intellectual property rights. They owed their fortune, said Michael Perelman, to “Microsoft, one of the major holders of intellectual property rights, befitting the so-called New Economy in which ‘DOS Capital’ has supplanted Das Kapital”.


Intellectual property rights management can be a lucrative business indeed. The first HIV/AIDS treatment, azidothymidine [AZT], sold under the brand name Retrovir, was manufactured by the company Burroughs Wellcome, later incorporated into GSK. In 1983, two years after AIDS was first reported, the US National Institutes of Health and the Pasteur Institute in Paris identified its cause – the HIV retrovirus. In that same year, Samuel Broder, head of the National Cancer Institute (an NIH branch), established a global team to screen antiviral tools, including the AZT molecule discovered by the Michigan Cancer Foundation, subsequently acquired by Burroughs Wellcome.

Broder’s NIH-NCI team, alongside scholars at Duke University, discovered the effectiveness of AZT against the AIDS virus and conducted early clinical trials in 1985. As Marcia Angell explained in her illustrative book, The Truth About Drug Companies, Burroughs Wellcome immediately patented the drug and “carried out the later trials that enabled it to receive FDA approval in 1987″ after a review of only a few months. The corporation charged patients upwards of $10,000 per year for treatment and heavily congratulated themselves on the achievement of life-saving medicine.

After one such self-congratulatory letter by Burroughs Wellcome’s CEO to the New York Times, Broder and his colleagues from the NCI and Duke University responded angrily, stating: “The Company specifically did not develop or provide the first application of the technology for determining whether a drug like AZT can suppress live AIDS virus in human cells, nor did it develop the technology to determine at what concentration such an effect might be achieved in humans. Moreover, it was not first to administer AZT to a human being with AIDS, nor did it perform the first clinical pharmacology studies in patients. It also did not perform the immunological and virological studies necessary to infer that the drug might work, and was therefore worth pursuing in further studies. All of these were accomplished by the staff of the NCI working with the staff of Duke University.”

Driving the point home, they added: “Indeed, one of the obstacles to the development of AZT was that Burroughs Wellcome did not work with live AIDS virus, nor wish to receive samples from AIDS patients.”
Killer tactics

Paradoxically, the drug Retrovir was classified by the company as an “orphan drug” ie: a drug where there exists a market of fewer than 200,000 people – and therefore not likely to be commercially profitable. This was done to claim 50 per cent credit from the government for the costs of clinical trials. In 2005, GSK was accused of artificially boosting their short-term profit by not increasing production to meet drastically increasing demand – thus creating “scarcity” for their patented product. This was seen as a last bid attempt to milk the patent which was to expire in September 2005. Shortly thereafter, the US government approved generic versions of the drug … (full long text).

Comments are closed.