- U.S. pharma will have more cash at its disposal in 2018 and the near future, as the corporate tax overhaul enacted earlier this year makes it cheaper for drugmakers to repatriate financial resources held abroad.
- Industry investors are most keen on the prospects for increased M&A. Yet a key selling point for lowering U.S. corporate taxes was the impact it would have on investment in the U.S., particularly in manufacturing.
- So far, Pfizer Inc., AbbVie Inc. and Merck & Co. have each laid out specific sums they intend to spend on capital investment in the U.S., separately announcing plans to invest a combined $15.5 billion on domestic projects over the next five years.
Most drugmakers that have reported 2017 earnings anticipate materially lower tax rates this year and beyond.
Notably, AbbVie says it will pay an estimated effective tax rate of 9% in 2018 — less than half the rate it reported in 2017. Shares in the Chicago drugmaker promptly soared to an all-time high, adding more than $23 billion in market capitalization in a day's trading (or roughly the equivalent of Mylan N.V.'s market value).
AbbVie's peers will also benefit, although not to the same degree:
Changes in U.S. law will lower effective tax rate for many pharmas
|J&J||17.2%||16.5% to 18.0%|
|Biogen||25.0%||22.5% to 23.5%|
SOURCE: Figures from company presentations
It remains too early to tell the degree to which changes in tax law broadly boosts U.S. capital investment by the drug industry as whole. Pfizer, Merck and AbbVie, however, have so far led the way, announcing plans to spend substantial sums in capital spending over the next half decade.
Merck is perhaps the most ambitious, setting a target of $12 billion in spending on capital projects over the next five years (with $8 billion coming in the U.S.). Pfizer will spend $5 billion during the same time period, and AbbVie $2.5 billion.
Yet details are scant.
Pfizer says the spending will include strengthening its manufacturing presence in the U.S. and AbbVie similarly noted it is considering expanding its facilities.
"For AbbVie, the recent passage of U.S. tax reform enables more efficient access to our foreign cash and the ability to deploy it in the United States," said AbbVie CEO Richard Gonzalez on a Jan. 26 call with analysts. "Over the next five years, we plan to invest roughly $2.5 billion in capital within the U.S. and are currently evaluating additional expansion of our U.S. facilities."
Eli Lilly & Co. hasn't divulged any specific sum it intends to spend as a result of the lower tax rate, but noted in an earnings call this week it now can access about $9 billion in cash — one use of which could be new capital investment. Last year the company dedicated $850 million on expanding and upgrading its U.S. operations, although that didn't greatly increase its overall capital expenditures for the year.
Prior to the passage of the Tax Cuts and Jobs Act this year, industry watchers noted that when the U.S. passed a temporary tax break on repatriated cash in 2004, much of the money went to stock buybacks and dividends, citing a 2011 Congressional study.
This time around, supporters of tax cuts argued that a permanent fix to the corporate tax code would give businesses the certainty they need to invest directly in the U.S. While there is some early evidence that companies are doing so, stock buybacks will still be a tempting option for pharma leaders.
Pfizer's board in December, for example, authorized $10 billion for new share repurchases, $5 billion of which will come in 2018.
Editor's note: This article has been updated to add details from Merck & Co.'s fourth quarter earnings presentation on Feb. 2.