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How Donald Trump’s Corporate Tax Holiday Could Spur a Pharma M&A Boom

December 6, 2016, 11:30 AM UTC
Courtesy of Amgen

U.S. President-elect Donald Trump’s plan to incentivize U.S. companies to repatriate their swelling overseas cash piles could spur a new wave of dealmaking in a pharmaceutical industry seeking to buy its way into growth.

For years, big U.S. drugmakers have turned to acquisitions of foreign companies to put their overseas cash to work, rather than bring it home at a 35% tax rate. Trump has proposed allowing repatriation of this cash at a 10% tax rate, hoping some of it will be spent on hiring and investing in their businesses.

However, drugmakers are much more likely to spend this money on acquisitions that could revive their drug development pipeline by acquiring smaller peers with promising offerings, as opposed to risking more of their own dollars on research and development, corporate executives and dealmakers say.

Some of these deals could even result in job cuts as companies seek to eliminate overlaps.

“Would we consider to repatriate the cash? I would say yes, and what we would look at would be first to maintain the lowest weighted average cost of capital for the company,” Amgen (AMGN) chief financial officer David Meline told analysts and investors on the company’s most recent earnings call in October.

“Then we would look at certainly deploying cash towards external opportunities, but in that instance we would certainly lead with other strategic opportunities that make sense where we could get a return for our own shareholders from such investments.”

Trump’s transition team did not respond to a request for comment on the potential impact of his proposed tax holiday on the drug industry.

Corporate America had $1.3 trillion, or 74% of its total cash, stashed overseas in 2016, according to Moody’s Investors Service. That’s up from an estimated $1.2 trillion, or 72% of total cash, a year earlier.

While the top five overseas cash holders are technology companies such as Apple (AAPL) and Microsoft (MSFT), the pharmaceutical industry accounts for a big chunk of that cash.

The five U.S. pharmaceutical companies with the largest cash piles, namely Pfizer (PFE), Merck (MRK), Johnson & Johnson (JNJ), Amgen and Eli Lilly (LLY), hold nearly $250 billion in overseas funds, according to data from U.S. non-profit research and advocacy group Citizens for Tax Justice.

At the same time, big pharma is in hot pursuit of the next blockbuster drug. Many of the industry’s most successful franchises, from Gilead’s Hepatitis C cure and Biogen’s multiple sclerosis treatments, to AbbVie’s arthritis drug Humira, are all bracing for declining revenues as patents age and competition heats up.

Valuations of biotechnology companies that could be acquisition targets for major drug firms are still hovering near historic lows after being dragged down by election-season political criticism of high drug prices.

“Tax repatriation is a more likely situation now, benefiting large biotechs and (pharmaceutical companies) with significant offshore cash and a desire to buy mid-cap companies,” RBC Capital equity analyst Michael Yee wrote in a research note.

The last time tax considerations fueled a wave of dealmaking in the pharmaceutical industry was in 2014, when companies sought to redomicile abroad through acquisitions, referred to as corporate inversions. But U.S. President Barack Obama subsequently announced curbs to limit inversions, culminating in Pfizer abandoning its $160-billion agreement to acquire Allergan, the biggest attempted merger of all time.

Pharmaceutical M&A involving U.S. companies has been around $90 billion year-to-date, down from nearly $270 billion the year before.


On the Hunt

Executives at Pfizer, which has already said it is looking to do more deals after its $14-billion acquisition of cancer drugmaker Medivation, have told investors in private meetings that its M&A appetite would grow even bigger if it could bring home its more than $70 billion in overseas cash, according to people familiar with the matter.

Pfizer could potentially use its newfound firepower to buy a company as large as Bristol-Myers Squibb (BMY), a $92-billion market capitalization cancer drugmaker that fueled takeover speculation after a disappointing drug trial in August sent its stock down more than 25%.

Bristol-Myers Squibb’s blockbuster cancer drug Opdivo could compliment Pfizer’s plan to become a leader in immuno-oncology, which seeks to use the body’s own defenses to treat cancer, industry bankers said, without suggesting that any deal is in the works.

Pfizer declined to comment, while Bristol-Myers Squibb did not respond to a request for comment.

Another cancer drug company that could attract takeover interest following a cash repatriation is Incyte (INCY), as it could make an attractive target for Gilead Sciences (GILD) if it was able to bring home its nearly $25 billion in overseas cash, bankers said.

Gilead has been under pressure to find a new blockbuster because of declining sales from its aging Hepatitis C franchise and the recent failure in clinical trials of a cancer drug that would have competed with Incyte’s successful blood cancer drug, Jakafi.

Gilead declined comment; Incyte did not respond to a request for comment.

Beyond cancer drug makers, other biotechnology companies that could attract takeover interest include those specializing in neurology companies, such as Acadia Pharmaceuticals (ACAD), that have promising treatments for ailments such as Alzheimer’s psychosis and migraine.

Acadia did not respond to a request for comment.

“We believe the vast majority of investors have been underweight biotech all year,” said Yee in his note. “A coiled spring of money flow may need to shift back over to biotech.”