Biopharma promises a pay day as offshore reserves open up

With the fourth-quarter reporting season over for the largest US-based biopharma groups, the impact of President Trump’s hard-won tax reform is beginning to emerge. These cash-rich drug developers all elected to pay a toll to access offshore cash reserves – how they will go on to deploy their new funds remains a burning question.

Big pharma executives in particular were vocal with pledges to invest billions in US projects in the coming years, though promises to fund M&A binges were notably absent. This disappointed some investors – a resurgence in deal making has been widely forecast this year. But with increased payouts to shareholders promised by most companies, and effective tax rates falling, it is not hard to spot the immediate beneficiaries of this new legislation (see table below).

Many of those politically opposed to the tax reforms pointed out that previous repatriation holidays had tended to benefit investors over any other interested party, such as job seekers or individual taxpayers. This time around conclusions are still hard to draw, but few could argue that corporates and their shareholders stand to benefit hugely from the new arrangements.

Tax reform and big biopharma - the impact
2018 tax guidance 2017 tax rate 2016 tax rate Repatriation comments
Abbvie 9% 19% 20% Implied majority of cash will be brought back 
Amgen 14-15% 18% 19% Implied majority of cash will be brought back 
Johnson & Johnson 16.5-18% 17% 17% Around $12bn of $16bn ex-US cash will be brought back
Pfizer 17% 20% 23% Will repatriate majority of ex-US cash, up to $24bn
Celgene 18% 16% 16% Will be accessing ex-US cash
Lilly 18% 20.5% 20% Will access its $9bn overseas reserves 
Merck & Co 19-20% 19% 22% Implied majority of cash will be brought back
Bristol-Myers Squibb 20-21% 22% 22% Implied majority of cash will be brought back 
Gilead 21-23% 24.5% 19.5% Will repatriate over time
Biogen 22.5-23.5% 25% 25% Implied majority of cash will be brought back 
Note: figures on a non-GAAP basis. Source: SEC filings.

Alongside fourth-quarter earnings most drug developers delivered happy news, though some more explicitly than others. Amgen added an eye-watering $10bn to its existing $4.5bn share-buyback scheme, while Abbvie promised to unveil a substantial giveaway this month, likely including a beefier dividend payout as well as a new buyback programme.

Both companies also offered a gesture to the tax payer, detailing US capital expenditure plans: Amgen and Abbvie intend to spend around $2.5bn each on domestic projects in the next five years. Big pharma executives, many of whom have been invited to sit around a table with President Trump, were also careful to pledge reinvestment of funds. Merck, for example, promised to invest $8bn in the US in the next five years.

It is hard to tell how much of this is new money. However, it is true that these firms will now have much cheaper access to huge resources. And it is not only the existing reserves sitting offshore that matter here – the new legislation means easier access to substantial cash flows in the future.

Pfizer’s finance chief, Frank D’Amelio, pointed out that it was not only the company’s $24bn in overseas cash in question here. The new legislation was “unfreezing permanently our access to our global capital cash flows”, he told investors last week.

Splashing the cash

Many want to see that new access to cash reinvigorate takeover activity, and much was made last year of the confluence of the troubled passage of tax reform and a moribund M&A market. With the future more knowable now – to accountants at least – buyers should enter the market again, or so the argument goes.

There is a certain logic to this and executives, including those from serial acquirer Pfizer, were to be heard blaming unknowable financial metrics for staying their hand last year.

However, had Pfizer really wanted to do a deal in 2017 it would have done one, tax reform or no, and the desire to restock pipelines will always be a huge motivator for big drug developers.

“M&A for interesting R&D assets will happen regardless of tax reform because the industry has got cash available, and putting that cash to work, by buying innovation, will produce a higher return than otherwise,” Ben Yeoh, senior healthcare portfolio manager at RBC Global Asset Management, told EP Vantage.

Still, with their newly refreshed access to cash, executives from big pharma and big biotech were pressed by analysts and investors on their acquisition plans during the recent results season. None confessed that tax reform had prompted a substantial step-up in the search for assets, although some pledged that the new cash would be spent on R&D and innovation.

Executives are always guarded as to acquisition plans, and this results season was no different. While the big beasts of US biopharma are probably feeling financially flush right now, the metrics by which they assess their targets have not substantially shifted.

Valuations of the most desirable assets remain sky-high. If the recent stock market wobbles prompt a more sustained downturn US biopharma will be primed to strike, but the urge to merge will always be driven more by need than by an advantageous tax rate. 

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow @ByAmyBrown on Twitter

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