Not dry January, but no M&A cash flood either

Data Insights

Much has been made of the frenetic deal-making that characterised the first month of 2018, with some in the industry claiming the strongest start to M&A in a decade following acquisitions by Celgene and Sanofi. However, for those with memories that stretch back a mere 12 months, supporting data from EvaluatePharma confirm that January 2018 has fallen short of the $39.6bn raised in January 2017 (see chart below).

Obviously the January 2017 figures were substantially flattered by Johnson & Johnson snapping up Actelion for $30bn. But 2016's first month also yielded a bigger spending spree than the $29.1bn splashed out in January 2018. And while it seemed like deals were flying thick and fast last month, the January 2018 M&A count was the lowest in five years. Those trying to usher in a golden era of deal-making might at least want to see what the rest of the quarter holds.

And in any case, the past three years saw a rush in M&A in the first quarter only to tail off over the remainder of the year (M&A: 2017 proves snooze-worthy on the acquisition front, January 10, 2018). 

So far much of this year’s nascent M&A activity has been driven by companies with a greater need than most to do deals, Sanofi’s January double tap being the most obvious example. So talk about a 2018 deal bonanza might be a little premature. It should be noted that this analysis only covers companies developing human therapeutics and excludes medical device and other healthcare companies.

Wider market factors could also see M&A fail to live up to the spin being put on the first month of 2018.

Taxing times

This year had been trailed as the one to watch owing to the one-off repatriation of overseas cash for US companies following the long-awaited tax reforms. But as the fourth quarter earnings season has unfolded no pharma companies have committed to big-ticket acquisitions, with most talk focusing on bolt-ons to beef up existing units.  

Now they are here the much touted tax changes have also turned out to be a double-edged sword for big pharma companies.

US big-cap biopharma tax effective tax rates
2018* 2017 2016 2015 2014
Abbvie 9% 19% 24% 23% 25%
Johnson & Johnson 17% 17% 17% 20% 21%
Pfizer 17% 20% 13% 22% 26%
Celgene 18% 16% 16% 21% 14%
Lilly 18% 21% 19% 14% 20%
Biogen 24% 25% 25% 24% 25%
Amgen Reports 1 Feb** 16% 13% 8%
Gilead Reports 6 Feb 21% 16% 19%
Bristol-Myers Squibb Reports 5 Feb 24% 22% 15%
Merck & Co Reports 2 Feb 15% 17% 31%
*guidance; **post market. Source: Company releases.

As can be seen many companies have at some point in the last five years either reported tax rates at or below the level unveiled during the recent crop of fourth quarter earnings reports. So while the two to three percentage point drop experienced by most companies will be welcome, for most it is a long way from the single-digit figures forecast (How low can you go? US Pharma already shoulders light tax burden, April 27, 2017).

The exception to the business-as-normal tax rate is Abbvie. Last week the group reported a staggeringly low 9% rate, which after initially being celebrated has caused other big pharma groups considerable share price pain due to their inability to match this number.

Yesterday saw a big drop in big pharma stocks, some of which was attributed to the much higher tax rates reported by everyone, while uncertainty around political interference in drug pricing also played its part.

Pfizer’s woes in particular were directly related to tax and M&A. Previously the group's chief executive, Ian Read, had said his company would wait for a resolution to the tax reform question before making any major strategic decisions; his silence yesterday on M&A was rewarded with a 2% drop in Pfizer shares.

Market caution

As such the current uncertainty in the industry and a lack of ongoing super-low tax rates might prevent companies going on huge M&A spending sprees, instead finding more conservative uses for excess cash, including buybacks or dividends – or as has already been seen, high-profile announcements of payments to ordinary employees.

The latter strategy will almost certainly help keep the current US president onside; Donald Trump again rattled the market this week with talk of drug pricing.

The biopharma industry is also still enjoying unprecedented cash levels, which has made raising money easy and companies less inclined to lose their independence, as seen by Ablynx’s confidence in twice rebuffing Novo Nordisk, before accepting what looked like an overly generous offer from Sanofi.

This financial strength on the part of smaller companies is contributing to the high valuations bemoaned by big pharma groups and could be the real deciding factor in whether 2018 turns out to be the record year for M&A that some are already proclaiming.

To contact the writer of this story email Lisa Urquhart in London at lisau@epvantage.com or follow @ByLisau on Twitter

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