Companies should brace for change.
Republicans in Congress passed a sweeping tax code overhaul this week, and biotech and pharma companies are big winners.
The bill slashes the corporate tax rate to 21% from 35%, and also includes massive changes to how income earned or kept offshore is treated.
Here's a 60-second overview of the benefits for the sector and several related fields:
IMPACT: The GOP tax plan is largely a win for pharma and biotech companies, which stand to benefit from a lower tax rate on cash they have parked abroad.
POSITION: The trade group BIO backed the Senate version of the bill, praising the corporate tax rate cut. Plenty of big pharma CEOs have publicly stated their support for tax reform.
ANALYSIS: The industry will benefit in large part due to a reduced tax rate on foreign income, allowing companies to repatriate cash. Analysts estimate that large-cap pharma alone keeps nearly $98 billion offshore. The new plan lowers that rate from 35% to 15.5%.
During a 2005 tax holiday allowing companies to bring some profits back at a 5.25% tax rate, Pfizer Inc., Merck & Co. and Johnson & Johnson were among the biggest beneficiaries. A study later found companies tended to cut jobs and use the money for stock buybacks.
Indeed, a day before expected passage Pfizer announced a share buyback.
Some top pharma players, including Pfizer, have said they were holding off on any meaningful M&A this year until they had clarity on tax reform, since they can use the offshore cash for such transactions.
The new bill cuts the overall corporate tax rate to 21% from 35%. Yet, most biopharmas typically pay far less than the statutory rate already. Data compiled by a professor from NYU recently showed that across 164 drugmakers, the aggregate effective tax rate was 19.41% — so for most big pharmas, in particular, the lower rate will be a neutral/negative development.
Orphan drug credit: The final bill also trims the 50% write-off enjoyed by companies that develop orphan drugs to 25%. One version of the bill cut it altogether, so the trim is a win. The credit applies to R&D for rare disease drugs with the intent of spurring development in orphan indications.
Lisa LaMotta / BioPharma Dive
THE BIGGER PICTURE
The tax overhaul does not just affect biotech and pharmas. Here's how the bill may alter other industries.
IMPACT: Repeal of the Affordable Care Act’s individual mandate is likely to upset payer risk pools and ripple to other players, but hospitals averted elimination of their ability to use tax-exempt bonds.
POSITION: Hospitals and insurers overwhelmingly oppose repealing the individual mandate, but in general the industry stands to gain substantially from the bill’s cut to the corporate tax rate.
ANALYSIS: Repealing the individual mandate would result in about 14 million fewer people with coverage in 2026 and premium increases of about 20%, according to the Congressional Budget Office. Fewer people with health plans means fewer people seeking care services. Mandate repeal is likely to pull younger and healthier consumers out of the market, resulting in higher premiums and an increase in high-deductible health plans. The rate of insured could also be compromised if the changes to the tax code trigger automatic cuts to Medicare that could reach $25 billion a year under congressional budget rules.
One big win for industry: The final bill kept back the ability of hospitals to use so-called private activity bonds to finance infrastructure and other investments.
Healthcare companies will also be pleased the final product retained the deduction for certain medical expenses and also lowers the threshold from 10% to 7.5% for two years.
Republican leaders have said separate budget legislation will address destabilization of ACA exchange markets by funding CSRs and a reinsurance program. Analyses, however, have shown those measures aren’t enough to give the market a sound structure.
Shannon Muchmore / Healthcare Dive
IMPACT: A likely flurry of investments in short-term infrastructure upgrades could lay the foundation for the next big leap in digital disruption where powerful online access and sophisticated data-mining become so prevalent that customized, service-driven engagements are possible just about anywhere consumers are.
POSITION: The marketing industry has largely remained silent on the tax bill, in part because the impact won’t be clear until the final version receives approval.
ANALYSIS: The proposed corporate tax cut may be minimized for businesses like Google, Facebook, Amazon and Procter & Gamble — the world’s largest advertiser — as they’ve already taken steps that reduce their effective tax rate in the U.S.Despite this mitigating factor, the tech giants will still see savings as high as $2.28 billion for Google, $1.56 billion for Facebook and $723 million for Amazon, per Cowen senior research analyst John Blackledge. This windfall coupled with a provision that would allow any company to write off capital expenditures — costs that are currently written off over the course of several years — could result in a jump in investment in short-term infrastructure upgrades, as the provision expires after five years. In fact, Blackledge predicts that Google, Facebook and Amazon will spend a combined $234 billion in capital expenditures from 2018 to 2022 because of the expensing provisions in the bill, with Facebook having already announced plans to double its reinvestment next year.
The introduction of a territorial tax system, which the bill is likely to include, means U.S.-based companies with overseas operations would no longer be required to pay U.S. corporate taxes on a portion of or possibly all foreign profits. As a result, some of the infrastructure investments could take place outside the U.S. as these companies look to bolster their international operations. Already, we’ve seen Facebook announce that it’s shifting how it records advertising revenue — by and far its biggest source of revenue — to a local selling structure. While positioned as a move to provide the kind of transparency local governments are demanding about how much revenue local ad sales generate, the move also appears to better position Facebook to increase overseas investments and take advantage of a territorial tax system.
Retailers and telecommunications companies are among those who could take a hit from the bill as many carry a significant amount of debt, and the bill is likely to cap the amount of deductible debt interest at 30% compared to the 100% now allowed. This could undermine an already-fragile brick-and-mortar retail sector.
Chantal Tode / Marketing Dive
IMPACT: A cut in the corporate tax rate could increase cash flow, allowing more investment in technology, business expansion and new jobs along the supply chain.
POSITION: Manufacturers and freight industries are for the bill, but ports and airlines have some reservations.
ANALYSIS: For business, the tax reform bill appears to deliver. Increased cash flow from a lower tax rate could prompt the different modes of freight and 3PLs to invest more in supply chain visibility tools, predictive analytics and blockchain alliances.
But if signed into law, the bill would also tax companies for making payments to foreign companies, which could hurt the global supply chain.
In that respect, the bill is a bit of a mixed bag. While the bill may spur expansion and job growth for big and small American businesses, the bill’s “America First” slant could pose serious difficulties for supply chain managers dealing with foreign suppliers, 3PLs or carriers.
The bill will disrupt supply chains, affecting the flow of supplies and products and potentially making it more expensive for American companies to do business and trade with foreigners. While it’s too soon to know whether the lower tax rate will compensate for that provision, supply chains are in for a shakeup in 2018.
Kate Patrick / Supply Chain Dive