Trump’s corporate tax holiday could spur pharma M&A
US President-elect Donald Trump’s plan to incentivize US companies to repatriate their swelling overseas cash piles could spur a new wave of dealmaking 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 per cent tax rate.
Trump has proposed allowing repatriation of this cash at a 10 per cent 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 deal-makers 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 per cent 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 per cent 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 nonprofit 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 fuelled a wave of deal-making 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.
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-per cent tax rate.