Biotech Values

[DewDiligence]

Re: This Merck restructuring really pisses me off

I hadn’t made a connection between the AJCA tax break and MRK’s restructuring because they strike me as disparate issues.

Because money is fungible, I’ve always considered the AJCA a scam, but I’m not complaining because biotech investors figure to be among the beneficiaries.

The bigger issue is the transfer-price scheme you touched on in your post. This is the source of perennial—and in some instances titanic—battles between the IRS and Big Pharma. We can grumble about the unfairness of it all, but closing these tax loopholes is a political matter and I don’t see how complaining about it on this board accomplishes much.

As the Forbes article depicted, MRK—and much of the rest of Big Pharma—need to fundamentally “restructure,” regardless of the tax rate they pay. If these companies do not drastically cut marketing expenses, the tax rate may be almost academic within a decade because there won’t be enough pre-tax income for taxes to be consequential.

What’s needed is what I called the Fallacy of Composition in Reverse (FoCiR). In the ordinary Fallacy of Composition we learned in Economics 101, what’s good for an individual company if they are the only one to take action—e.g. raising marketing expenses to gain market share—backfires if other companies do the same thing. With FoCiR, what’s bad for an individual company if they are the only one to take action—e.g. lowering marketing expenses and incurring a drop in market share—works out well if other companies follow suit.

It looked as though the virtuous cycle of FoCiR had begun within the past year but, alas, it turned out to be a mirage. I still think it’s coming, although I’m not sure that MRK’s “restructuring” signifies that MRK will be on the leading edge. Regards, Dew