Repatriation windfall could spur US M&A

Donald Trump’s election as US president and the accompanying Republican clean sweep were greeted with optimism from the biopharma industry. Among his pro-business proposals is a plan to allow companies to repatriate overseas cash at a lower tax rate, which has spurred speculation that the funds could be used for acquisitions.

A look at those in the sector holding the most money outside the US gives a hint of which companies might be involved in deal-making (see tables). They might, of course, choose to put the cash towards dividends or share buybacks, but the last repatriation holiday in 2004 provides some reasons for caution.

Last time companies were prohibited from using the repatriated money for executive compensation and stock buybacks. If the latest scheme has the same conditions this would be a disappointment to investors who have pushed up large cap US drug stocks since the election.

The 2004 programme instead encouraged use of the funds for jobs and research and development. But it did not succeed in its aim of growing American employment and investment, a 2011 report concluded – in fact, the top repatriating corporations reduced their overall US workforce.

Counterintuitively, the previous scheme was followed by an increase in dollars spent on stock repurchases and executive compensation, according to the report – perhaps showing there are always loopholes that can be exploited, which might cheer some in the sector.

Moves to get around any such conditions would no doubt be unpopular among those who hope Trump’s protectionist policies will make the US great again.

Return of the megamerger?

A surge in M&A could be another, less controversial consequence of the repatriation holiday. Analysts believe the tax break – which would see companies pay 10% tax on repatriated funds rather than the current 35% rate – will increase the odds of consolidation in healthcare.

Companies with money that could soon be burning a hole in their pockets include Johnson & Johnson and Amgen, which both hold more than 90% of their assets offshore according to an EP Vantage analysis.

Others with a high proportion of overseas cash include Bristol-Myers Squibb, which might want to make an acquisition to reduce its reliance on Opdivo, and Lilly, which will surely be looking for new growth should Alzheimer’s hope solanezumab fail later this year.

Also on the list are Pfizer and Gilead, which are already under pressure from investors to strike deals. Gilead’s proportion of ex-US cash has increased over the year – as of the third quarter it had $25.2bn offshore, or 80% of its total assets.

Pharma's offshore assets
Company Offshore cash ($bn) Total cash, equivalents and marketable securities ($bn) % total assets held offshore
Johnson & Johnson 38.2 38.4 99%
Amgen 29.0 31.3 93%
Merck & Co 22.5 26.5 85%
Bristol Myers-Squibb 7.2 8.9 81%
Eli Lilly 7.1 10.6 67%
Gilead 15.7 26.2 60%
Pfizer 13.2 23.2 57%
Biogen 3.5 6.2 57%
Mylan 0.4 1.5 24%
All figures as of YE15; Source: Company filings

The figures above were calculated using company filings, where an insight into offshore cash can be gleaned from assets classified as “permanently reinvested in foreign subsidiaries”. This was then divided by the total cash and equivalents that the companies hold.

Some groups do not give definitive numbers for offshore cash – for example Merck & Co, which states that generally 80-90% of cash and investments are held by foreign subsidiaries. Abbvie does not even do this, saying only that a “significant portion of cash and equivalents” are considered reinvested indefinitely in foreign subsidiaries – hence its exclusion from the table above.

Many of those with large offshore holdings also took advantage of the previous repatriation holiday.

Top five repatriating pharma companies during 2004 repatriation holiday
Company Repatriated amount ($bn)
Pfizer 35.5
Merck & Co 15.9
Johnson & Johnson 10.7
Schering-Plough* 9.4
Bristol-Myers Squibb 9.0
*Merged with Merck in 2009; Source: Permanent Subcommittee on Investigations report, 2011

Domestic deals

US-on-US acquisitions could rise as the policy ought to make US groups less likely to look overseas – foreign acquisitions have been used to put cash outside the country to work while avoiding a tax penalty.

Cross-border deals have also been done for tax inversion purposes although a recent clampdown on these, plus an expected cut in US corporation tax by Trump, could see these kinds of acquisitions become even rarer.

However, a recent analysis by EP Vantage suggests that foreign forays by US drug companies were not as common as some might believe – in the last five years, US companies spent less on buying European groups than vice versa (Few M&A teams venture beyond domestic borders, August 24, 2016). 

President Trump might try to hamper European companies looking to the US for M&A, especially if he feels this will lead to the country losing the jewels in its crown.

While much of this is speculation, one thing is clear: there are companies with large sums of cash that are desperate to find new growth drivers, and M&A could be one way to do this. A new era of mega-mergers might be about to begin.

To contact the writers of this story email Madeleine Armstrong or Edwin Elmhirst in London at or follow @ByMadeleineA or @EPVantage on Twitter

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