NEW YORK – The global financial crisis, government pressure, changing market dynamics for an industry experiencing significant change, and rapidly evolving healthcare reforms are likely to drive up taxes for the pharmaceutical and life sciences industry, according to a new report.

The report by PricewaterhouseCoopers, titled "Pharma 2020," says the industry's response to these trends, including diminishing reliance on the 'blockbuster drug model,' will make tax planning more complicated and challenging for tax executives working for pharmaceutical and life sciences companies.

In a poll of 35 senior tax executives from pharmaceutical, biotech and medical device companies conducted last month by PricewaterhouseCoopers, 62 percent agree that an increase in the effective tax rate for the pharmaceutical and life sciences industry is inevitable.

Sixty-three percent of the poll participants agree that the cost of increased taxes on their organizations might eventually be passed to consumers unless they find ways to operate more efficiently and transform their approach to R&D and sales and marketing.

"To continue to deliver value to shareholders and society, pharmaceutical and life sciences companies must make strategic decisions about how they will drive innovation and profitability, but as they do so, each company's top tax executive needs a prominent 'seat at the C suite table,'" said Michael Swanick, global pharmaceutical and life sciences tax leader at PricewaterhouseCoopers. "Tax planning will be a critical consideration, not an afterthought, of long-term business plans to grow, buy, merge or sell and it will be one of the most important considerations in deciding where to locate IP, manufacturing and service delivery."

Results from the poll include:

• 62 percent of tax executives polled said they are looking to maximize tax credits and other incentives for research and development.
• Virtually all executives polled said they believe the demand for tax specialists will grow substantially as tax issues for the industry become more complex.
• More than half of the respondents said they are being consulted early on by senior management in strategic business decisions, and thus have influence over the direction of the company. Still, 34 percent said they are consulted late in the game, and 9 percent said they are informed after the fact about strategic business decisions that have tax implications for the organization.

According to Swanick, if pharmaceutical companies increase service delivery and locate manufacturing closer to patients, or the end market, both the supply chain and intellectual property will be geographically dispersed. Pharmaceutical and life sciences companies not only could face new and higher taxes as a service provider, but they will have less ability to allocate profits to lower-tax rate locations.

The report notes that a decision to locate service providers in end markets could create permanent establishments in multiple tax jurisdictions, increasing the risk of double taxation disputes involving international or intra-company allocations around pricing, royalty rates, interest, management fees, business expense and gross revenue.

The need to fill the shrinking drug pipeline has fueled a resurgence in mergers and acquisitions. in-licensing arrangements and formation of partnerships and joint ventures, a trend PricewaterhouseCoopers expects to continue.

Each of these strategies comes with significant tax implications, depending on how a company accounts for acquisition-related items, structures royalty payments and shares profits and losses among different legal entities and locations.

Pharmaceutical and life sciences companies are interested in locating intellectual property development in areas that offer economic and tax incentives and expanding their presence in emerging markets that promise growth potential. International competition is intensifying to attract new investment by pharmaceutical and life sciences companies, particularly from emerging markets such as China.

According to PricewaterhouseCoopers, this trend may further drive profit growth to Asia, but companies will need to balance increased income with higher tax rates and potential price controls.

"To manage effective tax rates, pharmaceutical and life sciences companies will need to develop tax planning consistent with their new business models and carefully balance risk with opportunity," said Simon Friend, global pharmaceutical and life sciences leader at PricewaterhouseCoopers. "Tax will need to be involved sooner and up front, a trend we already are seeing throughout the industry."