Abbvie reaps tax-cut bonanza, but what of the rest of biopharma?

Analysis

Abbvie’s incredible $24bn rise in valuation on Friday came thanks in no small part to the effects of US tax reform. Its relatively high 18% rate is due to drop to the single digits in 2018, allowing the group to forecast earnings growth of at least 13-15% even as Humira starts to see biosimilar competition.

Wrapping up the first week of biopharma’s year-end earnings report season, Abbvie delivered the best 2018 tax guidance so far as rivals Johnson & Johnson, Biogen and Celgene said their rates would stay stubbornly in the mid-teens or higher (see table below). With Pfizer and Lilly due to report shortly, a clearer view of the tax benefit for US big caps is likely to emerge by the end of the week.

We’re in the money

Without providing much detail, Abbvie said its 9% tax rate forecast in 2018 came thanks to a “one-time net tax benefit related to the timing of the phase-in of provisions of the new legislation on certain subsidiaries”.

This was quickly followed with a promise to invest $2.5bn in the US, which could include expanding US facilities, accelerate pension funding by $750m, and budget $350m in charitable contributions. Meanwhile, the company estimates that its tax rate will rise to 13% over five years.

The optics of the use of the tax windfall are important, of course: Abbvie does not want to make it look like investors will be keeping it all. A major criticism of the last big revision of US corporate tax law was that companies used cash repatriated from overseas at a low rate to buy back shares and make acquisitions, rather than investing in US facilities.

Indeed, Abbvie’s promise to invest in US capital projects is clearly aimed to flatter the Trump administration and Republican leaders who pushed for corporate tax cuts under the guise of job creation. Abbvie will also be very mindful that the White House has backed off on threats to impose restrictions on drug prices.

Abbvie's chief executive, Rick Gonzalez, disclosed to analysts that the company was preparing a new programme to return cash to shareholders. Conveniently, the details cannot be revealed until after the Abbvie board meets in February, and thus will not be so tightly linked with the tax rate guidance.

Abbvie’s magic in knocking its tax rate to single digits does not appear to be shared by the big-cap US companies that have reported so far.

Tax outlook for big-cap biopharma
2018 guidance 2017 2016 2015 2014 2014-17 avg
Abbvie 9% 19% 24% 23% 25% 23%
Johnson & Johnson 17-18% 17% 17% 20% 21% 19%
Celgene 18% 16% 16% 21% 14% 17%
Biogen 24-25% 25% 25% 24% 25% 25%
Source: company releases.

The tax law signed in December 2017 lowers the corporate rate from 35% to 21% and allows for repatriation of overseas cash at a 15.5% rate. Related to the latter, J&J, Biogen and Abbvie reported special charges of $13.6bn, $1.2bn and $4.5bn respectively in the fourth quarter – Celgene did not report anything specific.

High bar

Leerink analyst Geoffrey Porges wrote that Abbvie benefited more than others because it “appears to maintain the majority of its drug IP portfolio in foreign jurisdictions, and to keep most of its overhead domestically”. This allows it to run its US business at a loss and avoid subjecting profit at the US rate, while reporting profits at an overseas effective rate of around 10.5%.

The rise in Abbvie’s five-year tax rate to 13% will occur as a growing part of the company’s revenue begins to shift to partnered and acquired products like Imbruvica, Venclexta and risankizumab.

US big cap biopharma's reported effective tax rate*
2016 2015 2014 Avg
Amgen 16% 13% 8% 12%
Lilly 19% 14% 20% 18%
Gilead 21% 16% 19% 19%
Bristol-Myers Squibb 24% 22% 15% 20%
Pfizer 13% 22% 26% 20%
Merck & Co 15% 17% 31% 21%
Average 18% 17% 20% 18%
*Companies that have not yet reported year-end earnings. Source: SEC filings.

Now that Abbvie has set the bar on tax benefit, guidance from the rest of the big biopharma companies should be closely watched as more of them report earnings. Executives might be forced to explain why they have not scored the same post-tax reform win that Abbvie did, and what they can do to get their taxes down further.

Leerink’s Mr Porges wrote that tax reform would increase the company’s cash flow by 10-15% , giving it greater firepower in an M&A game that has recently heated up. Pfizer's chief executive, Ian Read, notably said last year that his company would not make any strategic moves until tax reform was passed. Mr Read could find a worthy competitor in Abbvie as 2018 progresses.

To contact the writer of this story email Jonathan Gardner in London at jonathang-us@epvantage.com or follow @ByJonGardner on Twitter

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