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U.S. has Funded Worldwide Drug Innovation, Yet Lost Jobs, Domestic Manufacturing and Tax Receipts

The United States pays more for prescription drugs than any other nation — nearly $500 billion annually, or 40-45% of the global drug spend, despite having just 4% of the world’s population. The U.S. receives relatively little in return in the form of biopharma manufacturing jobs or corporate tax revenue. This mismatch is no accident. It is the consequence of decades of well-intentioned but often counterproductive policies on trade, taxation and intellectual property.

The current state of drug manufacturing and taxation, and how decisions made in the 1990s and 2000s — while aimed at improving access, supporting innovation, or boosting global development — have encouraged pharmaceutical companies to offshore manufacturing and intellectual property while benefiting disproportionately from the U.S. market. The economics have become negative for the American economy, bringing drug safety and supply risks to the forefront of policy debates.

1. Building a Global Pharma Engine: India, Patents and Manufaturing

On Nov. 21, 2003, former President Bill Clinton traveled to India to thank Ranbaxy Laboratories for agreeing to supply deeply discounted HIV medications for low-income countries. That agreement, brokered by his foundation, became a symbol of India’s rise as a generic pharmaceutical powerhouse.

India joined the WTO in 1995 and, by 2005, amended its domestic laws to fully recognize pharmaceutical patents. At the time, U.S. drug companies viewed these reforms as a victory. Yet the real winner was India’s manufacturing base. Today, India produces about 50% of the generic drugs consumed in the U.S. (with China supplying an additional 9%), and over 60% of global active pharmaceutical ingredient (API) production occurs in those two countries.

Until the FDA's recent announcement to implement unannounced international inspections, foreign manufacturing sites were not held to the same level of scrutiny as domestic facilities. While U.S. sites were subject to surprise inspections, international sites typically received advance notice — sometimes as much as 12 weeks — due to logistical and diplomatic considerations.

2. The Tax Code's Blind Spot: “Check-the-Box” and Global Profit Shifting

In 1997, the U.S. Treasury introduced the “Check-the-Box” regulations, which allowed companies to form entities offshore with the intent of providing administrative relief. Instead, these regulations quickly became a powerful tool for multinational tax avoidance. By allowing companies to disregard certain foreign subsidiaries for U.S. tax purposes, the rule encouraged pharmaceutical companies to shift intellectual property and profits to low-tax jurisdictions.

Cash flow and earnings benefitted from moving patents to foreign affiliates, while U.S. entities paid royalties to their overseas entities, sharply reducing domestic taxable income. Though companies generate most of their profits in the U.S. market, many pay little or no income tax to the U.S. Treasury.

3. The Numbers Today: Profits Generated Domestically, Taxed Elsewhere

• The U.S. government spends $265 billion on prescription drugs annually, representing 4–5% of total federal outlays.
• Across all payers (government, insurers, consumers), U.S. drug spending exceeds $500 billion.
• In a 2018 study, 64–78% of global pharma profits were attributable to the U.S. market, according to a Brookings Institute report.
• In 2024, the top 10 U.S.-based biopharma companies had a combined negative domestic income tax expense. Foreign peers, while less transparent, likely booked little or no U.S. tax.
• Of the approximately$60–70 billion in total income taxes paid globally by the top 20 drug companies in 2024, most was paid overseas.

Source: SEC filings, Annual Reports, Frost Investment Advisors

4. Manufacturing: Offshore by Design

Like tax structures, drug manufacturing has followed the logic of cost minimization:

• 60–70% of branded drugs consumed in the U.S. are manufactured overseas.
• More than 80% of generics are foreign-made.
• 90% of U.S. prescriptions are for generics, though they account for only ~18% of total drug spending.
• 70-80% of API production occurs overseas, heavily concentrated in India and China

In short, while the U.S. funds R&D and buys the most drugs at the highest prices, the actual jobs and tax revenue overwhelmingly accrue to other countries.

5. How has the U.S. Responded?

Several legislative efforts have been enacted to level the playing field:

• 2004 American Jobs Creation Act, and Treasury guidance in 2014 and 2016, curbed tax inversions.
• 2017 Tax Cuts and Jobs Act lowered corporate tax rates and introduced measures such as Global Intangible Low Tax Income (GILTI) to tax foreign income for non-US companies and corporations controlled by US entities or individuals.
• 2022 CHIPS and Science Act, plus Biochemical Advanced Research and Development Authority (BARDA) investments, provide incentives for domestic pharmaceutical manufacturing.

These acts have slowed, but have not reversed, the trends of tax avoidance over the past thirty years. Inversions declined after 2016, but global profit shifting and offshore production remain the industry’s dominant strategies.

6. Policy Proposals Under Consideration Include:

1. Most Favored Nation (MFN) Pricing Peg U.S. drug prices to the lowest price charged in peer nations.
   Risk: Drugmakers may pull products from lower-income countries.
2. Targeted Tariffs on Drug Imports Incentivize onshore manufacturing. Ireland, in particular, accounts for approximately 50% of top 20 biopharma cost of goods sold.
   Risk: Trade retaliation, price hikes, or temporary shortages.
3. Tax Law Reform

• Eliminate offshore IP deductions.
• Limit use of foreign tax credits.
• Tax profits based on location of economic activity (e.g., formulary sales, R&D use).
  Risk: Difficult to pass effective legislation and subject to the law of unintended consequences.

Each option brings trade-offs — potentially impacting innovation, global access and costs. However, the current system is lopsided: U.S. consumers drive global drug profits while bearing the highest prices and receiving few of the jobs or tax benefits.

Conclusion: Rethinking the Biopharma Bargain

We applaud the large biopharmaceutical companies for their role in saving lives and compounding capital, but their successes have been dependent on U.S. patients, pricing and R&D subsidies. Over time, U.S. policies meant to support global access, IP protection and competitiveness have inadvertently hollowed out domestic benefits.

A recalibration is overdue. Whether through pricing reform, tax restructure or reshoring incentives, policymakers must ensure that the country underwriting global biopharma profits receives an appropriate return.

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