Don’t just report whatever corporations say!

By the Editor

A big problem with keeping tabs on corporate power is that society relies heavily on business reporters to tell us what corporations are up to from day to day.

The main job of reporters (I’ve been one) is not to “speak truth to power”, as some like to imagine: it’s just to accurately report what important people say.

There are many important people in big business, however, and they talk all the time, and journalists often don’t have the time or inclination to dig deeply into the context of what they say.

A business story based on the words of a corporate executive might also include a balancing quote or two from a commentator with specialist knowledge, but such people tend to work in industry or the financial markets and may have the same biases and blind spots as the executive. (As do some journalists).

Investigative journalism is a different story, but that’s time-consuming and costly work and there are far more things that need looking into than there are investigators to look into them.

So corporate executives can often get away with saying things in the media which influence public policy and which may be correct in terms of fact, but which leave out the bigger picture that could emerge if journalists dug a little deeper.

 

The UK’s Big Pharma saga

An example of this problem is the Big Pharma drug price saga in the UK. Critical Takes doesn’t do news or investigation so I’m only using this case to make a general point about how the media covers business stories.

The United States is the world’s biggest market for pharmaceuticals and, thanks to famously high US drug prices and aggressive tax planning, Big Pharma can often make spectacular profits there.

In the UK and some other European countries, on the other hand, public health services curb their costs of buying medicines by imposing a rebate or price cap.

Now the UK’s rebate rules may be changed to make it easier for companies to sell more expensive drugs to our public healthcare system, the National Health Service (NHS).

As explained in this Politico article, the UK’s government hopes that enabling US Big Pharma to make more money from the NHS in this way will dissuade President Trump from imposing tariffs on the export of medicines to the US from the UK.

Against this backdrop, the UK government has been the target of a lobbying campaign by Big Pharma companies from the US, Europe and the UK itself. Executives of several companies have been pushing the same message in the media: the UK’s rebate is too high, compared to other countries, and the UK will miss out on new drugs and investment unless the NHS spends more on medicines.

To quote the Financial Times (paywall) last month:

“[Eli] Lilly, Merck and AstraZeneca have all said in recent weeks that they plan to pause or scrap investments in the UK, as talks over the [rebate] scheme fell apart, while Bristol Myers Squibb has threatened not to sell a new schizophrenia drug in the country.”

One of those speaking out was Dave Ricks, the chief executive of Eli Lilly, a US multinational which sells the popular weight-loss drug Mounjaro. He told the Financial Times: “They say, ‘well, why are you cancelling your investments?’ It is not an attractive environment.”

 

Eli Lilly’s low UK profit margin

If Big Pharma is claiming that business conditions in the UK do not allow a reasonable return on their investments, shouldn’t we know how much money they are making in the UK already, to put that claim into context?

So I looked at the most recent accounts of Eli Lilly and Company Limited, a UK company which sells drugs here and in Ireland for the global Eli Lilly group and carries out research and development on behalf of the group. (The accounts are free to download here).

And I found something interesting: despite its sales having doubled in 2024 to £889 million on the back of demand for Mounjaro, this UK company makes very little profit in the UK.

You might be thinking: aha, so maybe Big Pharma has a point about the UK. But I mean: far less profit than you might expect for a company selling one of the world’s more popular consumer drugs in one of the world’s wealthier economies.

You can’t draw long-term conclusions about a company from a single year’s accounts so I downloaded two decades’ worth of the accounts of Eli Lilly and Company in the UK and added up its turnover, profits and income tax charge for each year of those two decades.

This isn’t a perfect method, for various reasons, but it does offer some sense of how a company has been doing over the long term.

What I found is that Eli Lilly was very profitable in the UK until a decade or so ago. In the ten years from 2005 to 2014, the company made total profits before tax of £2.5 billion on a turnover of just over £9 billion. That gives a profit margin of 27 per cent for that decade.

The company incurred UK corporate income tax on this profit at a rate of around 27 per cent, adding up to £672 million in those ten years.

But in the last ten years from 2015 to 2024, the picture has been very different.

In this last decade Eli Lilly and Company has made total profits before tax of £326 million on turnover of £6.6 billion, which gives a much lower profit margin of just under 5 per cent.

In the decade since 2015, the company has only paid £55 million in income tax. This is partly because the UK’s official corporation tax rate has been lower for most of that decade, but also because there was less profit in the UK to tax.

I estimate that if the profit margin since 2015 had remained as high as in the previous decade then, all other things being equal, it might have paid around £30 million a year in UK income tax on average, rather than £5.5 million a year.

Eli Lilly and Company in the UK is not only much less profitable than it used to be. It’s also much less profitable than the global Eli Lilly group, whose profit margin before tax for the decade from 2015 to 2024 I estimate to have been 21 per cent, based on its US filings.

In 2024, the big year of Mounjaro, I make the UK company’s profit margin to have been less than 6 per cent while the group’s global profit margin was 28 per cent.

Why should the UK be so much less profitable for Eli Lilly than the world as a whole? I wrote and asked them this question. They didn’t answer it. Instead they pointed me to their Taxation Principles. Which brings us to …

 

Tax!

Why did Eli Lilly and Company’s profits shrink so much in the UK in the last decade or so, resulting in a much smaller UK tax bill?

I can’t be sure, just from looking at the accounts. But a plausible explanation is that the Eli Lilly group moved intangible assets (such as marketing rights to its drugs) into a jurisdiction with a lower tax rate and started to charge royalties to its UK subsidiary to use these assets.

This would have the effect of shifting a large chunk of sales revenue out of the UK, which would reduce the UK company’s profits and tax payments in the UK and increase the profits of its fellow-subsidiary in the lower-tax jurisdiction.

This is a plausible explanation because it’s a very well-known practice in the pharmaceutical industry and many others.

I asked Eli Lilly to say how much money flows in royalties or similar fees from the UK company to other parts of the global group. The group did not respond other than to direct me to its tax principles which are reasonable-sounding but to my eye, do not preclude it from shifting profits out of the UK in this fashion.

It’s not illegal or criminal for a multinational to shift profits in order to cut its tax bill. On the contrary, the point is to lower that tax bill without breaking any laws.

 

People create profits

The phenomenon of profit-shifting is more complex than British political rhetoric about “cracking down on tax dodging” might suggest. Although hiring more tax inspectors and giving them political backup is necessary, that’s not a sufficient solution.

Despite recent reforms, international tax norms still allow a lot of corporate profit to be attributed to intangible assets like intellectual property (IP), marketing rights and knowhow, which are easily moved to wherever the tax rate is lowest.

(If you want an egregious example of a multinational legally exploiting its IP to get a huge tax break, read this new report by TaxWatch which I contributed to).

Yet profits are not really created by a patent or a marketing licence, which is just some ones and zeros sitting on a server, but by people: the experts who design the products, the workers who manufacture them and the consumers who buy them.

So if we want to stop profits piling up in low-tax jurisdictions, then it’s necessary to redesign corporate taxation to better reflect this reality. ICRICT has detailed ideas for how to do this.

Back to the UK. It’s been dismaying to see so much of the media just repeating the claims of Big Pharma about the unfavourable business environment in this country.

All those media reports are likely to have piled pressure on the UK’s government to take measures which will end up making public healthcare more expensive for the country. Yet no-one seems to have tried to put those claims into context by looking at the companies’ accounts to find out how much money they’re currently making.

Drug pricing is not my area, so I can’t claim to offer any kind of expert assessment of what Eli Lilly says about the UK compared to other countries.

But the accounts suggest – and journalists might get to the bottom of this, if they looked into it – that there’s a bigger picture which ought to be considered. It might be that Eli Lilly is actually making quite a lot of profit from its UK business. Just not all of it in the UK.

 

 

Postscript for readers who are interested in the nitty-gritty of corporate taxation.

So after publishing this, I did a little more digging. There was no particular reason to, since the general point has been made in what's written above, but once I start unpicking these threads, I find it hard to stop.

Eli Lilly makes drugs in Ireland and Switzerland, among other places: Mounjaro is reportedly made at its Irish factory in Cork.

The Irish and Swiss subsidiaries are owned by a Dutch holding company called Lilly Holdings BV which had a turnover of nearly US$35 billion in 2023 and a pre-tax profit margin that year which I calculate to be a whopping 38 per cent – a much higher profit margin than in the UK, which is one of the countries where the drugs are sold.

All this profit was taxed at an effective rate of only 13 per cent in 2023 and 10 per cent in 2022, according to the Dutch company’s accounts. This is quite a lot lower than the average tax rate of Eli Lilly and Company in the UK across the last decade, which I estimate to have been around 17 per cent, and this makes clear why the sales are structured in this way.

This is only one part of a more complicated global picture: it’s not clear to me where the group’s intellectual property is held, for instance, or how exactly income flows from one place to another. 

But it points to profit-shifting arrangements that are common among big pharmaceutical companies (and in other industries): the product is made in places with low tax rates and sold to places with higher tax rates in such a way that much of the profit ends up in a tax haven.

I’m obliged to point out once again that nothing about this is illegal or even inconsistent with Eli Lilly's tax principles. Indeed, the norms of international taxation effectively encouraged it until quite recently.

The European Union passed a law in 2022 which requires corporate profits to be taxed in EU countries at a minimum rate of 15 per cent. This directive was introduced precisely in order to prevent multinationals from enjoying very low tax rates. The EU law should apply to profits made in 2024 and it will be instructive to see what happens to Eli Lilly’s tax rate when that happens.