Repatriation of offshore cash could make a slew of dealmaking and share buybacks possible
The prospect of tax reform has had drugmakers and Wall Street salivating for months.
Repatriation of cash held outside the U.S. could be the most important part of the Republican tax bill for the sector, according to a recent Credit Suisse report, which found that American biopharma companies make up one-third of the top 30 U.S. companies with the most offshore cash.
The final version of the tax bill, which could be passed by the end of the year, is expected to reduce the tax rate for repatriated offshore cash from 35% to 10% or 14% — a major tax break that could make a slew of dealmaking and share buybacks possible.
The biggest potential winners are drugmakers Amgen Inc. (AMGN) ($39 billion offshore), Gilead Sciences Inc. (GILD) ($32 billion), Pfizer Inc. (PFE) (about $22 billion) and Merck & Co. Inc. (MRK) (about $20 billion), according to the report, which used offshore cash counts as of the third quarter.
Related: Senate passes tax bill, advancing top Republican priority
Other drugmakers with a lot to gain may include Johnson & Johnson (JNJ), Bristol-Myers Squibb Co. (BMY), AbbVie Inc. (ABBV), Celgene Corp. (CELG) and Biogen Inc. (BIIB), the report concluded, based on overseas cash figures from the end of 2016.
Of course, should the tax bill go through, there’s no guarantee as to what will be done with that money, which could be used for such things as share buybacks, mergers and acquisitions or special dividends, said the Credit Suisse report.
“We hope that our companies would pursue M&A aggressively rather than buying back shares,” the report said, naming such examples as Puma Biotechnology Inc. (PBYI), Tesaro Inc. (TSRO), Clovis Oncology Inc. (CLVS) and BioMarin Pharmaceutical Inc. (BMRN).
Credit SuisseU.S. biopharma companies with the largest overseas cash balances as of the third quarter include Johnson & Johnson, Amgen and Pfizer.
The Republican tax bill was recently passed by Senate Republicans, though the Senate and House versions of the bill still need to be melded into one. The final bill could be passed by the end of the year.
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The tax bill should also include a lower corporate tax rate, which is set to benefit Bioverative Inc. (BIVV) (36% effective tax rate), United Therapeutics Corp. (UTHR) (37%), Regeneron Pharmaceuticals Inc. (REGN) (33%), Gilead Sciences Inc. (GILD) (26%) and Biogen (24%), which pay high effective tax rates and have lower foreign income, according to the Credit Suisse report.
Offshore cash and the corporate tax rate, both of which are in the tax bill, have effectively been tangled together over the years because many companies pay lower tax rates by holding cash “offshore.”
In spite of the moniker, offshore cash tends to be booked to a non-U.S. business unit and held in a U.S. bank invested in Treasurys.
The SPDR S&P Pharmaceuticals ETF (XPH) has surged nearly 9% over the last three months and the SPDR S&P Biotech ETF (XBI) has declined 2.6%, compared with a 7.7% rise in the S&P 500 (^GSPC) and a 11.7% rise in the Dow Jones Industrial Average (^DJI).
Emma Court covers healthcare for MarketWatch from New York. You can follow her on Twitter @EmmaRCourt.
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