Merck CEO Frazier Stands Alone As Pharma Signatory Urging Fiscal Cliff Budget Deal

Coalition of business leaders that includes Merck CEO Ken Frazier pushes for deficit deal to avert sequestration. The reason seems simple: corporate tax reform.

“I like sequestration,” says one biopharma policy expert. The reason: with mandatory across-the-board budget cuts, less palatable deficit reduction cuts like Part D rebates and reduced biologic exclusivity protections are unnecessary. (Also see "Part D Rebates and the Numbers Game: Pharma Readies for Post-Election Deficit Fight" - Pink Sheet, 1 Oct, 2012.)

There’s at least one biopharma CEO, however, who doesn’t like sequestration: Merck & Co. Inc. CEO Ken Frazier.

Frazier was one of 87 top executives on the CEO Fiscal Leadership Council to sign on to The Campaign to Fix the Debt. The New York Times was the first to report on the group.

The list is an incredibly diverse one with CEOs from very different industries (Gary Loveman CEO of Caesar’s Entertainment Corp and James McNerney, Jr. CEO of The Boeing Company, for example). There are three insurers/PBMs on the list: Aetna Inc. (Mark Bertolini), Humana Inc. (Michael McCallister), and Express Scripts Holding Co. (George Paz).

The guiding principle of any deficit reduction plan, according to the CEOs, should:

• Reform Medicare and Medicaid, improve efficiency in the overall health care system, and limit future cost growth;
• Strengthen Social Security, so that it is solvent and will be there for future beneficiaries; and
• Include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues, and reduces the deficit.

The group says the recommendations of the bipartisan Simpson-Bowles Commission, which would save $4 trillion and addressed all parts of the budget, provide an effective framework for such a plan.

The decision by the group to identify Simpson-Bowles as a benchmark looks particularly smart after Election Day: With President Barack Obama re-elected, the Democrats on Capitol Hill and in the White House are urging that the Simpson-Bowles framework serve as a starting point for deficit negotiatiosn.

In the immediate post-election climate, that emphasis is driven by one key element of the propsal: it bases its savings estimates on a baseline that assumes the Bush tax cuts are extended for all incomes below $250,000 per year – but that they are not extended for higher incomes.

That, of course, is a central goal of Obama’s budgetary approach heading into the second term.

And, as one staffer put it, thanks to the Election debates over fiscal policy, many more people have heard of Simpson-Bowles now than had heard of it even when it was released, back in 2010.

So the CEO group is starting on the same page as the returning Administration.

There is just one problem: the Simpson-Bowles framework also includes Part D rebates.

Tax Reform the Key

So what is going on? Why would a pharma company be signing on to push for a major deficit reduction legislative package that probably has a 50-50 chance of inserting rebates into the Part D drug program?

Well, in part, it is because the group isn’t endorsing Simpson-Bowles in every detail. So, no, Merck is not endorsing Part D rebates by signing onto the group. Rather, the CEO group is declaring support for the “balanced” framework of Simpson-Bowles that addresses entitlement reform and revenues along with tax policy.

And, for Merck, we suspect it is especially that part about tax policy.

Here’s the Bowles-Simpson recommendation on corporate tax reform:

Establish single corporate tax rate between 23 percent and 29 percent. Corporate tax reform should replace the multiple brackets (the top being 35 percent), with a single bracket as low as 23 percent and no higher than 29 percent.

Eliminate all tax expenditures for businesses. Corporate tax reform should eliminate special subsidies for different industries. By eliminating business tax expenditures –currently more than 75 – the corporate tax rate can be significantly reduced while contributing to deficit reduction. A lower overall tax rate will improve American business competitiveness. Abolishing special subsidies will also create an even playing field for all businesses instead of artificially picking winners and losers.

Move to a competitive territorial tax system. To bring the U.S. system more in line with our international trading partners’, we recommend changing the way we tax foreign source income by moving to a territorial system. Under such a system, income earned by foreign subsidiaries and branch operations (e.g., a foreign-owned company with a subsidiary operating in the United States) is exempt from their country’s domestic corporate income tax. Therefore, under a territorial system, most or all of the foreign profits are not subject to domestic tax. The taxation of passive foreign-source income would not change. (It would continue to be taxed currently.)

A Seat At the Table

Merck sees a need to reach a bipartisan solution to the deficit so that it addresses taxes and entitlement reform and one of the key selling points of the Fix the Debt campaign is that it is a bipartisan group, according to the company. The alternative, the company says, is continued uncertainty over the future of the economy and programs like Medicare.

“We support the general aim of the Campaign to Fix the Debt, which in its broadest sense is to find a balanced solution to debt reduction that creates a sustainable economic future for the United States while preserving the ability of companies like Merck to innovate and remain globally competitive,” Merck said. “We feel that it is better to participate in this effort, offering an informed perspective and practical solutions that will makes its recommendations stronger.”

Merck emphasizes that Frazier did not join the campaign because it's promoting the Simpson-Bowles plan as is, but rather, the plan serves as a starting point that will evolve over time. Merck remains committed to Part D and views the program as the best model for entitlement reform.

In sum, Merck’s support to the initiative does three things:

1. Assures a voice for pharma’s position in support of major deficit reduction but against Part D rebates.
2. Helps get a seat at the table of another major White House coordinated legislative deal (remember former CEO Richard Clark at the White House in support of health reform?)
3. Shows Big Pharma is aligned with other industries across the country on a critical issues facing the nation rather than being an outlier.

If biopharma loses on Part D rebates, a win on corporate tax reform would ease the pain. The question is: what if they win on both?