Trump’s cor­po­rate tax hol­i­day could spur pharma M&A

Buy­ing way into growth

Kuwait Times - - HEALTH & SCIENCE -

US Pres­i­dent-elect Don­ald Trump’s plan to in­cen­tivize US com­pa­nies to repa­tri­ate their swelling over­seas cash piles could spur a new wave of deal mak­ing in a phar­ma­ceu­ti­cal in­dus­try seek­ing to buy its way into growth.

For years, big US drug­mak­ers have turned to ac­qui­si­tions of for­eign com­pa­nies to put their over­seas cash to work, rather than bring it home at a 35-per­cent tax rate. Trump has pro­posed al­low­ing repa­tri­a­tion of this cash at a 10-per­cent tax rate, hop­ing some of it will be spent on hir­ing and in­vest­ing in their busi­nesses.

How­ever, drug­mak­ers are much more likely to spend this money on ac­qui­si­tions that could re­vive their drug de­vel­op­ment pipe­line by ac­quir­ing smaller peers with promis­ing of­fer­ings, as op­posed to risk­ing more of their own dol­lars on re­search and de­vel­op­ment, cor­po­rate ex­ec­u­tives and deal­mak­ers say.

Some of these deals could even re­sult in job cuts as com­pa­nies seek to elim­i­nate over­laps. “Would we con­sider to repa­tri­ate the cash? I would say yes, and what we would look at would be first to main­tain the low­est weighted av­er­age cost of cap­i­tal for the com­pany,” Am­gen Inc chief fi­nan­cial of­fi­cer David Me­line told an­a­lysts and in­vestors on the com­pany’s most re­cent earn­ings call in Oc­to­ber. “Then we would look at cer­tainly de­ploy­ing cash to­wards ex­ter­nal op­por­tu­ni­ties, but in that in­stance we would cer­tainly lead with other strate­gic op­por­tu­ni­ties that make sense where we could get a re­turn for our own share­hold­ers from such in­vest­ments.”

Trump’s transition team did not re­spond to a re­quest for com­ment on the po­ten­tial im­pact of his pro­posed tax hol­i­day on the drug in­dus­try. Cor­po­rate Amer­ica had $1.3 tril­lion, or 74 per­cent of its to­tal cash, stashed over­seas in 2016, ac­cord­ing to Moody’s In­vestors Ser­vice Inc. That’s up from an es­ti­mated $1.2 tril­lion, or 72 per­cent of to­tal cash, a year ear­lier.

While the top five over­seas cash hold­ers are tech­nol­ogy com­pa­nies such as Ap­ple Inc and Mi­crosoft Corp , the phar­ma­ceu­ti­cal in­dus­try ac­counts for a big chunk of that cash. The five US phar­ma­ceu­ti­cal com­pa­nies with the largest cash piles, namely Pfizer Inc, Merck & Co, John­son & John­son, Am­gen and Eli Lilly and Co, hold nearly $250 bil­lion in over­seas funds, ac­cord­ing to data from US non-profit re­search and ad­vo­cacy group Cit­i­zens for Tax Jus­tice.

At the same time, big pharma is in hot pur­suit of the next block­buster drug. Many of the in­dus­try’s most suc­cess­ful fran­chises, from Gilead’s Hepati­tis C cure and Bio­gen Inc’s mul­ti­ple scle­ro­sis treat­ments, to Ab­bVie Inc’s arthri­tis drug Hu­mira, are all brac­ing for de­clin­ing rev­enues as patents age and com­pe­ti­tion heats up.

Val­u­a­tions of biotech­nol­ogy com­pa­nies that could be ac­qui­si­tion tar­gets for ma­jor drug firms are still hov­er­ing near his­toric lows af­ter be­ing dragged down by elec­tion-sea­son po­lit­i­cal crit­i­cism of high drug prices.

“Tax repa­tri­a­tion is a more likely sit­u­a­tion now, ben­e­fit­ing large biotechs and (phar­ma­ceu­ti­cal com­pa­nies) with sig­nif­i­cant off­shore cash and a de­sire to buy mid-cap com­pa­nies,” RBC Cap­i­tal eq­uity an­a­lyst Michael Yee wrote in a re­search note. The last time tax con­sid­er­a­tions fu­eled a wave of deal­mak­ing in the phar­ma­ceu­ti­cal in­dus­try was in 2014, when com­pa­nies sought to re­domi­cile abroad through ac­qui­si­tions, re­ferred to as cor­po­rate in­ver­sions. But US Pres­i­dent Barack Obama sub­se­quently an­nounced curbs to limit in­ver­sions, cul­mi­nat­ing in Pfizer aban­don­ing its $160-bil­lion agree­ment to ac­quire Al­ler­gan Plc, the big­gest at­tempted merger of all time.

Phar­ma­ceu­ti­cal M&A in­volv­ing US com­pa­nies has been around $90 bil­lion year-to-date, down from nearly $270 bil­lion the year be­fore.

On the hunt

Ex­ec­u­tives at Pfizer, which has al­ready said it is look­ing to do more deals af­ter its $14-bil­lion ac­qui­si­tion of can­cer drug­maker Me­di­va­tion Inc, have told in­vestors in pri­vate meet­ings that its M&A ap­petite would grow even big­ger if it could bring home its more than $70 bil­lion in over­seas cash, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter. Pfizer could po­ten­tially use its new­found fire­power to buy a com­pany as large as Bris­tolMy­ers Squibb Co, a $92-bil­lion mar­ket cap­i­tal­iza­tion can­cer drug­maker that fu­eled takeover spec­u­la­tion af­ter a dis­ap­point­ing drug trial in Au­gust sent its stock down more than 25 per­cent. Bris­tol-My­ers Squibb’s block­buster can­cer drug Op­divo could com­pli­ment Pfizer’s plan to be­come a leader in im­muno-on­col­ogy, which seeks to use the body’s own de­fenses to treat can­cer, in­dus­try bankers said, with­out suggest­ing that any deal is in the works.

Pfizer de­clined to com­ment, while Bris­tolMy­ers Squibb did not re­spond to a re­quest for com­ment. An­other can­cer drug com­pany that could at­tract takeover in­ter­est fol­low­ing a cash repa­tri­a­tion is In­cyte Corp, as it could make an at­trac­tive tar­get for Gilead Sci­ences Inc if it was able to bring home its nearly $25 bil­lion in over­seas cash, bankers said.

Gilead has been un­der pres­sure to find a new block­buster be­cause of de­clin­ing sales from its ag­ing Hepati­tis C fran­chise and the re­cent fail­ure in clin­i­cal tri­als of a can­cer drug that would have com­peted with In­cyte’s suc­cess­ful blood can­cer drug, Jakafi. Gilead de­clined com­ment; In­cyte did not re­spond to a re­quest for com­ment.

Be­yond can­cer drug mak­ers, other biotech­nol­ogy com­pa­nies that could at­tract takeover in­ter­est in­clude those spe­cial­iz­ing in neu­rol­ogy com­pa­nies, such as Aca­dia Phar­ma­ceu­ti­cals Inc , that have promis­ing treat­ments for ail­ments such as Alzheimer’s psy­chosis and mi­graine.

Aca­dia did not re­spond to a re­quest for com­ment. “We be­lieve the vast ma­jor­ity of in­vestors have been un­der­weight biotech all year,” said Yee in his note. “A coiled spring of money flow may need to shift back over to biotech.”

— AP

FAYETTEVILLE: In this Dec 6, 2016, photo, Pres­i­dent-elect Don­ald Trump speaks to sup­port­ers dur­ing a rally.

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