"Happy Accidents" in pharma doubtful: Tax Break Used by Drug Makers Failed to Add Jobs

When the healthcare group of a technology company, Comdisco, Inc., where I worked for a short time folded in early 2000 due to the company's failed fiber/telecom/dot-com investments, I was provided with the services of a local "employee outplacement" firm as part of the severance package. Many of the others in my "cohort" at the local outplacement firm office had been pharmaceutical executives and mid-level managers who'd just been laid off from Centocor, after acquisition by pharma giant J&J.

I noted that these people looked quite shell shocked and depressed, as many were middle-aged and likely had mortgages and kids in college. I was the "odd man out", having come from a non-pharma. The services of the Employee Outplacement company were not very useful, but I did get some hints as to how to improve my resume.

I found a middle-management position at Merck within five months and thought I was set for life, as Merck had a 100+ year history substantially free of major involuntary layoffs.

I was wrong, because within three and a half years, give or take, I was handed a layoff notice along with 4,400 other people. I was sent to another employee outplacement firm (which proved equally un-useful), where I again observed shell shocked and depressed ex-pharma employees. My repeated attempts to "get back in" were unsuccessful. Layoffs and "restructuring" continue at the company, and at about every other large pharmaceutical company as well.

The New York Times posted an article entitled "Tax Break Used by Drug Makers Failed to Add Jobs" by Alex Berenson. The issue is that recent tax breaks given large corporations through a "tax amnesty" on foreign profits in order to add jobs were simply not used to add jobs.

New York Times
July 24, 2007
Tax Break Used by Drug Makers Failed to Add Jobs
By ALEX BERENSON

Two years ago, when companies received a big tax break to bring home their offshore profits, the president and Congress justified it as a one-time tax amnesty that would create American jobs.

Drug makers were the biggest beneficiaries of the amnesty program, repatriating about $100 billion in foreign profits and paying only minimal taxes. But the companies did not create many jobs in return. Instead, since 2005 the American drug industry has laid off tens of thousands of workers in this country.

And now drug companies are once again using complex strategies, many of them demonstrably legal, to shelter billions of dollars in profits in international tax havens, according to their financial statements and independent tax experts.

I am not going to go into detail about the tax amnesty, shelters and strategies here - you can read the article - but it's clear "human resources" (a dehumanizating term that as a physician I frankly abhor) comes second in this industry to other "resources."

Drug makers are not the only American multinationals using tax loopholes to declare large portions of their income beyond the reach of the Internal Revenue Service. The Brookings Institution estimates that multinational companies are using overseas tax shelters to lower their payments to the Treasury by about $50 billion a year. But the drug industry accounts for one of the biggest portions of that shortfall, according to the I.R.S. and independent tax experts.

And the nature of their business gives drug makers techniques, like sheltering valuable pharmaceutical patents in tax-friendly havens like Ireland, that many other industries cannot use. Moreover, the sheer heft of the American drug industry, which had about $60 billion in pretax profits last year, can give disproportionate weight to the economic impact of its tax sheltering techniques.

At least this phenomenon is not limited to the pharmaceutical industry, but that is no excuse for practices that the New York Times article describes. As an example:

... Lilly said in a statement that it complied with the law in taking advantage of the 2005 tax amnesty, which enabled the company to avoid more than $2.3 billion in American taxes. Lilly said it believed that the 2005 tax break had encouraged investment in the United States, noting that the company, which is based in Indianapolis, has invested $1.3 billion in the state of Indiana alone. [invested in what, I ask? Not people -ed.]

Still, since the beginning of 2005, Lilly has cut its United States work force by more than 8 percent, reducing it to 22,000 jobs by last January ... Pfizer, Merck and Amgen declined requests for comment.

In theory, companies are only deferring taxes on the profits they shelter overseas, not permanently avoiding tax. If they bring the money back to the United States to distribute to their shareholders, they still have to pay American taxes on it. But those rules were temporarily suspended when President Bush signed legislation in 2004 to let companies return overseas profits at a rate of 5.25 percent, far below the official tax rate of 35 percent, if they moved the money back by 2006.

During that period, multinational companies of all stripes moved a total of about $300 billion into the United States, avoiding about $90 billion in taxes. Among them, the pharmaceutical industry was the largest single beneficiary. Leading the pack was Pfizer, the world’s largest drug company, which repatriated $36 billion.

The quid pro quo was supposed to be that the drug industry would invest some of its tax windfall in American operations and jobs. Instead, struggling with a dearth of new blockbuster drugs, they have had mass layoffs. Again, Pfizer has been the leader, reducing its work force by about 8,000 in 2006 and saying early this year that it would lay off an additional 10,000 employees.

Indeed, there's this news just on the wires:

J&J to cut 3-4 pct of work force in restructuring
Tuesday July 31, 8:55 am ET

NEW YORK (Reuters) - Johnson & Johnson (NYSE:JNJ - News) on Tuesday announced plans to eliminate 3 percent to 4 percent of its global work force of about 120,500 people as part of an effort to improve its cost structure.

The diversified health care company, whose shares rose nearly 2 percent in premarket trade, said it expected the cost cuts to generate pretax savings of $1.3 billion to $1.6 billion in 2008.

J&J plans to seek savings from its pharmaceuticals division, becoming the latest large drug maker to restructure in response to patent expirations to major products.

That's 4,000-5,000 people. Considering the previously mentioned massive tax breaks on overseas profits, this is not the ethics one would like to see from corporate pharma. Now, it is a company's prerogative to hire and fire as they see fit. However, what the companies are missing is the human toll on both those laid off and those remaining.

In case any corporate execs are reading this posting, let me remind them of what happens after a layoff:

• The stress of losing a job is like the stress of a death in the family or a divorce.
• It involves loss of wages and benefits, role as worker and provider, dignity and self esteem, loss of the "American Dream", loss of trust, loss of control over your life, loss of the pattern of daily life, and loss of the "work family. "
  
• The laid off employees feel resentment, betrayal, hostility, denial, depression, and other emotions that certainly do not endear them to their former employers. They may speak or act negatively against their former companies in numerous venues, no matter how well-written the severance agreement (if they elected to sign one, which basically is a gag agreement that says we'll give you a severance if you stay silent.)
• Many of these employees carry corporate wisdom with them that is lost; and many may carry proprietary knowledge that they share with others, including later employers, no matter how "secure" is the confidentiality agreement. You cannot keep track of everyone all of the time.
• Many employees are forced to sell homes, relocate, pull children out of school, face humiliation in front of their families, and go out hat in hand for new jobs.
• Going out for new jobs carries traumas in and of itself, especially when one is confronted by arrogant and insensitive hiring managers, such as the Sr. VP of Biometrics at a CRO, himself recently laid off from Novartis and rehired by the CRO, who told me "there was nothing in my resume of value to a CRO", the former FDA drug safety official who told me "we don't need medical informatics here", and other minor (e.g., never hearing back after an interview) and major (insults such as above) humiliations that in a bar might earn a person a black eye.
• Remaining employees become overworked, burned out, extremely unhappy and put in a position of fear and uncertainty (I live near my former employer and repeatedly hear this about them in places where the information is likely to be accurate: my local barber shop, my family medicine physician's office, and my car dealer).

To make matters still worse, company management and Human Resources "Catberts" still tout themselves in its hiring ads and eRecruiting sites with puffery that might have been true in past decades, i.e., we are a wonderful place to work and a great place for a career.

Catbert is a typical cat, in the sense that he looks cute but he doesn't care if you live or die. As Human Resources Director at Dilbert's company, he teases employees before downsizing them.

An example of this might be GlaxoSmithKline, where as I understand it from former employees, during a downsizing people are required to justify their position and/or "bid on their own job" in a competitive fashion. If they fail and cannot then "find another position in the company" (after losing your own job that you may have had for years, what's the likelihood that will happen?), then it's out the door. IMO that is simply horrible management of those "precious" "human resources." What could be more humiliating than bidding on your own job?

But all the while, of course, the companies are committed to advancing peoples' careers and curing the ill ... scanning the "career site" web pages of major pharmas, I find statements like this:

We recognize that people are the cornerstone of Pfizer's success, we value our diversity as a source of strength, and we are proud of Pfizer's history of treating people with respect and dignity ... We play an active role in making every country and community in which we operate a better place to live and work, knowing that the ongoing vitality of our host nations and local communities has a direct impact on the long-term health of our business.

And this:

When people notice your hard work and achievements, the satisfaction is hard to contain—and that rings as true on a corporate level as to an individual. That’s why Merck is justifiably proud of our reputation as an organization and employer. The wonderful thing about working here is being part of an exceptional team that not only makes strides in global health, but also in diversity, corporate responsibility and quality.

... At Merck, we’ve received many awards and accolades from industry experts and business partners—for diversity, business ethics and philanthropy. So, if being successful and making an impact matters to you, you’ll be in like-minded company here ... Consistent with our desire to maintain a creative environment that will stimulate individuals to achieve their potential, we take pride in the programs and resources that we offer our employees to help them achieve professional growth, career development and advancement.

The people who actually write this copy must understand the shallowness of their words.

Employees who read this rhetoric fall into one of two groups: those who believe it, and thus are deluded, and those who don’t believe it, and thus may easily become demoralized and cynical.

Environments of the deluded, demoralized and cynical are not the best for leading-edge drug R&D in the opinion of this author. Pharma R&D as in any sophisticated industry is primarily a complex social endeavor. Although many excuses can be offered for making employees feel they are "short timers", expecting high levels of creativity when little heed is paid to human nature is, quite frankly, ludicrous. The culture itself has become sick.

The need for creativity has been observed by others:

Philadelphia Inquirer, July 30, 2007, book review (reviewed by Jen A. Miller):

"Happy Accidents, Serendipity in Modern Medical Breakthroughs" By Morton Meyers, Arcade. 408 pp.

... The biggest breakthroughs in medical history weren't discoveries found on a preordained track but the blessings of "the muse of serendipity." "The heroes of the stories told in this book ... are not scientists who merely plodded rationally from point A to point B, but rather those who came upon X in the course of looking for Y, and saw its potential usefulness, in some cases to a field other than their own."

Consider some of the most groundbreaking, and lifesaving, medical discoveries that were Eureka moments - the X found on the path toward Y: X-rays, penicillin, chemotherapy drugs, and treatments for syphilis, schizophrenia, depression, lymphoma, leukemia, tuberculosis, ulcers and erectile dysfunction. These medical breakthroughs were all found by people looking for something else, usually by people Meyers calls "mavericks" - scientists, doctors, researchers and sometimes even amateurs not at the center of their respective fields of study.

I believe demoralization is not conducive to serendipity. Serendipity, "happy accidents", and "eureka moments" generally require a clear mind. Today's research environments are more likely conducive to nervous breakdowns, not "happy accidents" and serendipitous discovery.

... Meyers also takes an abrupt turn at the book's conclusion. Through most of Happy Accidents, the tone is light and almost funny, but Meyers then makes a vicious attack - not entirely without merit - on the current state of medical research and the pharmaceutical industry ... [Meyers] points out that the pharmaceutical industry, which spends $4.2 billion a year in direct-to-consumer advertising (those "ask your doctor" commercials), isn't helping.

Instead of investing in finding new drugs for conditions that need treating, it instead focuses on "me too" and lifestyle drugs, making slight variations of ones that already exist and still work ... Of the ten top-selling drugs in the world, half offer almost no benefit over drugs marketed previously."

The environment for more "happy accidents" looks grim, at least in the United States.

Indeed.

-- SS