PHARMACEUTICAL COS. TAXES STUDIED

WASHINGTON (AP) -- Pharmaceutical companies pay significantly less in
taxes than any other U.S. industrial sector despite charging higher
prices for drugs in this country than overseas, according to a new
congressional study.

The study comes as Congress prepares to again confront the cost of
drugs, responding to complaints that medicine is cheaper in Canada and
Mexico and that seniors do not get most drugs paid for under Medicare.

Drug makers paid an effective U.S. tax rate of 16.2 percent from 1993
to 1996, according to the nonpartisan Congressional Research Service.
That compares to an average tax rate of 27.3 percent paid by all other
major industries, including mining, construction, services, retail and
agriculture.

At the same time, American consumers pay more for the same drugs than
people in much of the developed world. For example, prices in the
congressional district of Rep. Fortney ``Pete'' Stark, D-Calif., are
twice as high for five common prescription drugs than in Canada and
Mexico.

``It is totally unfair for U.S. taxpayers to subsidize drug companies
to develop products, and then have those new, life-saving products
sold for a cheaper price in rich foreign nations,'' said Stark, the
senior Democrat on the House Ways and Means health subcommittee, who
requested the study.

A White House budget official, Daniel N. Mendelson, said the
pharmaceutical industry's higher profits and lower taxes could lead to
price controls, although he said there are no plans to propose such a
solution.

But prescription drugs are sure to be in the political crosshairs when
Congress reconvenes in January.

Although drugs are an essential tool of medicine, Medicare does not
cover them for patients outside a hospital. And drug companies oppose
adding a Medicare drug benefit, arguing it could lead to price controls.

Many Democrats, including Stark and President Clinton, are pushing for
a universal prescription drug benefit for Medicare recipients, while
many Republicans are backing a private-sector alternative focused
mainly on the poorest elderly.

Stark is also drafting legislation to deny tax credits to companies
that charge more in the United States than other countries.

Mendelson said the administration's proposals haven't gone behind the
Medicare benefit, but said it's his personal view that ``if we fail to
enact it, there will be pressure on the price side. There's a lot of
pressure building up. Seniors are a group that is strong
politically.''

Drug companies are a force in campaign fund-raising, contributing
$13.1 million in the 1998 election cycle to House and Senate
candidates, according to the Center for Responsive Politics, a
campaign finance watchdog group. The top donor was Pfizer Inc. at
$1.13 million, followed by Bristol-Myers Squibb at about $820,000 and
Eli Lilly & Co. at $787,000.

The overall health industry, of which drug companies are a part,
contributed $58.8 million in unregulated ``soft money'' to both
political parties during the 1998 election. And drug makers spent $71
million to lobby Congress that year.

The Congressional Research Service study shows that the pharmaceutical
industry was able to reduce its tax bill through a variety of legal
credits by almost $3.8 billion in 1996. That's 50 percent less than
the industry's tax before the credits were applied to $24.8 billion in
taxable income.

Meanwhile, after-tax profits for drug companies as a percentage of
sales averaged 17 percent from 1994 to 1998, compared to 5 percent for
all other industries.

Foremost among the tax breaks is the research and development tax
credit -- just renewed by Congress for five more years and extended to
Puerto Rico -- that pays 20 percent of qualified research costs.

Other tax provisions that particularly benefit drug companies, the
study found, are a credit intended to offset foreign taxes, another
credit for companies located in Puerto Rico that ends in 2006, a
credit for drugs developed for rare diseases and a research expenses
deduction.

For the pharmaceutical industry, these tax breaks are an investment in
better, longer lives. In 1999, the industry expects to spend some $24
billion on R&D and estimates a single drug can cost $500 million to
bring to market.

``We've earned those tax savings,'' said Jeff Trewhitt, spokesman for
the Pharmaceutical Research and Manufacturers of America. ``We are one
of the most innovative, productive industries in this country. You see
millions of patients benefitting from this research.''

As for the higher U.S. drug costs, Trewhitt said many developed
nations have strict price controls and government mandates, which the
industry contends do not help poorer people but can slow down drug
availability.

He noted that only one out of every five drugs ultimately wins
approval for sale, driving up the cost of those that do.

``The real kicker is that until the end of the process, you don't know
whether you're going to have a product or not,'' Trewhitt said.