Could a Trump-mandated cash repatriation spur pharma M&A, or just share buybacks?

With the failed attempt to repeal and replace Obamacare in the rearview mirror, President Donald Trump and members of Congress are moving on to other issues, including tax reform. Just exactly what changes to the tax code might look like has yet to become clear, but one thing can be said for certain: Trump wants to lower the tax burden for companies bringing cash back to the U.S. from overseas accounts.

This so-called tax holiday on cash repatriation would be a net positive for biopharma companies, to be sure. Trump has proposed a one-time mandatory repatriation of cash held overseas at a 10% tax rate, as opposed to the 35% rate companies currently pay in the U.S. For the top 10 biotechs and the top six pharma companies, that could result in $146 billion in cash coming back to the U.S., according to an analysis by SunTrust Robinson Humphrey.

But will repatriation spur the next Big Pharma megadeal? The answer isn’t so clear, wrote SunTrust analyst Yatin Suneja in a recent note to investors. “In our view, any company that has cash that needs to be repatriated most likely has a very healthy balance sheet, and additional cash is not what is needed to make management pull the trigger on acquisitions,” he wrote.

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In reaching that conclusion, Suneja took a close look at the last repatriation tax holiday, passed as part of the American Jobs Creation Act in 2004. Pharma companies repatriated about 60% of their overseas cash, amounting to more than $90 billion, but there was no massive wave of M&A. In fact, only three U.S. companies consummated deals in excess of $1 billion the following year: Amgen picked up Abgenix for $2.1 billion, Pfizer bought Vicuron for $1.9 billion and OSI Pharma acquired Eyetech for $1 billion.

Past history notwithstanding, several companies holding hoards of cash overseas are facing pressure from investors to find new avenues for growth. They include two of the big buyers from the last tax holiday, Amgen and Pfizer. So it’s no wonder Wall Street analysts have been asking executives from those companies whether they might deploy newfound cash from overseas toward making new deals.

During Amgen’s second-quarter earnings call, one analyst challenged the company to explain what it’s planning to do with its $39 billion in cash, in light of previous comments by executives dismissing the need to take part in M&A.

David Meline, Amgen’s chief financial officer, pointed out that most of the cash was being held overseas “and we don't see right now that it would be appropriate to repatriate it under the current U.S. tax system.” He added that if legislators “make it more reasonable to consider repatriation,” the company will “start providing some commentary on how we might deploy that.” More than $37 billion of Amgen’s cash is held overseas, SunTrust estimates.

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Pfizer was also questioned about tax reform during its second-quarter earnings call, when analysts pressured the company to explain how M&A might play into ongoing efforts to maintain sales and earnings growth. Rumors have been circulating that the company might even buy Bristol-Myers Squibb so it can leap to the top of the hot market for immuno-oncology drugs. SunTrust estimates that more than half of Pfizer’s $22 billion in cash is in overseas accounts.

Pfizer CEO Ian Read said during the call that the company is always on the lookout for potential deals that will boost its established vaccine franchise, as well as its competitiveness in therapeutic areas such as inflammation and oncology. Tax reform, he said, including a repatriation holiday “will make us more competitive” and “help us access our global capital.”

Another company under pressure to drive growth through M&A is Gilead, which is holding $29 billion of its $34 billion in cash reserves overseas, SunTrust estimates. After Gilead introduced disappointing guidance for 2017 earlier this year, in the wake of plummeting sales of its hepatitis C blockbusters Sovaldi and Harvoni, one analyst asked CEO John Milligan to “riff” on the question of whether the company could grow at all without deploying some of that cash toward an acquisition. Milligan replied that any potential addition would have to boost the company’s long-term pipeline.

Still, said SunTrust’s Suneja in his report, “cash is just one piece of the puzzle for M&A.” What he has taken away from his discussions with pharma executives is that they’re unlikely to wait for repatriation to make deals, he said. Furthermore, the tax rate would have to be less than the 10% Trump is proposing to drive significant repatriation.

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Companies are more likely to use repatriated cash on share buybacks and dividends, Suneja projects, unless Trump seeks to spur job growth by restricting use of the money to R&D and capital expenditures.

If any mergers do happen in response to a repatriation tax holiday, they would likely be “in the mega-cap range,” Suneja wrote. (Think Pfizer + BMS.) The reason: Such “transformative” deals might not be possible without a cash infusion from overseas. And if it happens, it won’t just be Big Pharma doing the deals, he predicts. The biotech sector has matured since the last wave of repatriation, he points out, so “it is not outside the realm of possibility that some of these biotechs might even be active participants in these large-scale acquisitions.”