Blue-chip drug makers holding USD 200 billion in cash, mostly overseas, will start investing more of it in mergers and acquisitions (M&A) after President Trump’s tax overhaul slashed the cost of spending the money in the US, debt-ratings firm Moody’s predicts. The ratings firm names Amgen, Pfizer, Gilead, and Celgene as some of the American outfits most likely to go on a shopping spree.
“Now that Congress has passed tax reform, buyers and sellers have clarity on tax rates and unfettered access to cash, and that makes a big difference”
Marshall Gordon, ClearBridge Investments
“For more than a year, biopharma’s M&A scouts have largely been holding fire on deal-making, partly because they’ve been waiting for tax breaks… Now that Republicans in Congress have passed their tax plan, the sector could be due for a long-anticipated rebound,” affirms FiercePharma’s Eric Sagonowsky.
The headline reform was a slashing of the corporate tax rate from 35 percent to 21 percent, but even more interesting to the pharma industry is the inclusion of a repatriation provision in the Tax Cuts and Jobs Act which permits American firms to bring home assets held overseas without incurring a penalty after paying a mandatory one-time fee of 15.5 percent on cash holdings and eight percent on the remainder.
Under the previous system, though the earnings of US companies were taxed globally, tax on overseas earnings was deferred until repatriation of the money, which incentivized companies to park their profits overseas. “Given that many American pharma groups are cash-rich, the revisions can be expected to boost the firepower for financing acquisitions, although there will be competing claims to use the money for increased dividends or share buy-backs,” notes James Baillieu, counsel for global law firm Norton Rose Fulbright.
“The impact of the new tax law may not be quite as salutary as some cheering for buyouts hope”
Max Nisen, BloombergQuint
“Now that Congress has passed tax reform, buyers and sellers have clarity on tax rates and unfettered access to cash, and that makes a big difference,” agrees Marshall Gordon, a health-care analyst at ClearBridge Investments.
Others, however, are keen to temper expectations. “The impact of the new tax law may not be quite as salutary as some cheering for buyouts hope,” warns BloombergQuint’s Max Nisen. “The average trailing 12-month effective tax rate of the 11 US-based biopharma companies with a USD 50 billion-plus market cap was 19.82 percent. Yes, overseas cash will be easier to bring home, and rates overall will go down substantially. But companies with overseas assets will have a large near-term tax bill they wouldn’t have otherwise had to pay,” he points out.
Writer: Louis Haynes