Donald Trump being named the U.S. president-elect has created loads of uncertainty, but there could be billions in upside for pharma companies – more specifically billions of dollars in ex-U.S. cash.
The pharma sector is known for the large amounts of money it keeps offshore and for the various high-profile attempts that companies such as Pfizer have made trying to bring that cash back into the U.S. without facing U.S. corporate tax rates.
The money that companies earn from international subsidiaries, particularly in places with low tax rates such as Ireland, are usually considered permanently reinvested offshore so that companies don't have to pay U.S. taxes on these profits.
While inversions have become a thing of the past, a new world under Trump could open a whole realm of possibilities for a tax holiday or even complete tax reform (which the Republican candidate was outspoken about during the election cycle), resulting in circumstances that could have pharma bringing home the green.
Moving this money back into the U.S. could mean a variety of developments for pharma – including all the M&A, from bolt-on deals right up to megamergers and asset swaps, as well as share repurchase programs and paying down debt.
Show me the money
While many biopharma companies don't disclose the mix of cash and where it's kept, analysts estimate that large-cap pharma alone could have as much as $98 billion overseas.
Of the major biopharma companies, the big biotechs are keeping far more money offshore than their big pharma counterparts. Amgen has approximately $34 billion outside the U.S., while Gilead has approximately $25 billion offshore, according to Evercore ISI analyst John Scotti.
Conversely, Bristol-Myers Squibb, Eli Lilly & Co., Celgene, AbbVie and Biogen have less than $10 billion in foreign capital each.
Perhaps the most interesting fact is the percentage of total cash some companies keep ex-U.S. In Amgen's case, the big biotech keeps 91% of its money overseas. Lilly is close behind at 88% and recently acquisitive Pfizer has one of the lowest percentages, with only about 49% of its money ex-U.S. Meanwhile, Jefferies analyst Jeffrey Holford estimates that Johnson & Johnson keep 100% of its cash offshore.
Scotti points out to investors that the amount of cash a company has overseas doesn’t necessarily correspond to the amount it can bring back to the U.S.
"For example, as a historical precedent, at the time of the previous repatriation tax holiday in 2005 (the Jobs Act, which granted a 5.25% tax rate on earnings brought to the US), Pfizer repatriated about $37 billion while having only about $24 billion of cash and cash equivalents on the balance sheet by the end of 2004," he wrote the day after the election results were in.
"The reason for this is that in some cases company treasuries can have access to low-cost financing overseas just for the purposes of repatriation, and companies can repatriate historical earnings that previously were generated ex-US but were not brought to the U.S.," Scotti added.
As you can imagine, pharma companies are eager to get their hands on the funds that they earn elsewhere. Pfizer has attempted – and failed – two ill-fitting megamergers in recent years in an effort to conduct a tax inversion. This cash and a lower tax rate, in general, are two developments in which pharma is keenly interested.
During the recent spate of third-quarter earnings calls, plenty of companies had the issue top of mind.
Amgen, which has a lot at stake here, was quick to point out that it doesn't need the money right now, but would certainly like it.
"And what we've seen thus far is that we're able to fund all of the requirements of the business without having to repatriate the cash and pay a current, very unfavorable tax rate," said Amgen CFO David Meline. "So I think the point is, should we see tax reform in the U.S., would we consider to repatriate the cash? I would say yes."
Meline said the company would be interested in paying down debt, but would also use the funds for "external opportunities" and buying back shares.
Pfizer CEO Ian Read has been outspoken on the topic. "I would hope that Congress, with the administration, will reform the international tax code as soon as possible next year. I think it is entirely uncompetitive and negative for businesses and jobs in the United States. So I would hope they would reform it in terms of not only repatriation, but going to a territorial system or another type of system that permanently puts us on a level playing field with foreign companies," Read said.
The dark side
This wouldn't be the first time a Republican has helped major corporations return foreign profits, the 2004 Repatriation Act under George W. Bush gave companies that opportunity. In hindsight, critics called the tax holiday a failed policy, and they had statistics to back up that position.
According to a report released in 2011 from the Democratic staff of the Senate Permanent Subcommittee on Investigations, the 15 companies that were able to benefit the most from the act then cut U.S. jobs and research funding, while also increasing executive pay.
Pharma and tech were the sectors that took the greatest advantage of the tax holiday, with Pfizer, Merck & Co and Johnson & Johnson amongst those top benefiting companies.
"In 2004, when the U.S. enacted a repatriation tax holiday, the goal was to encourage U.S. multinationals to pay bigger cash dividends from their overseas subsidiaries and use the cash to make investments in the United States. Unfortunately, there is no evidence that it increased U.S. investment or jobs, and it cost taxpayers billions," said a 2011 note from the U.S. Department of the Treasury.