A number of leading pharmaceuticals executives have said that recent US tax reforms will create a more conducive environment for patent transactions. Corroborating forecasts made leading industry analysts suggest that 2018 will see a significant surge in this kind of deal-making in the life sciences sector.
The comments were made at the annual JP Morgan Healthcare conference - widely thought to set the scene for the industry in the year ahead – in response to the Tax Cuts and Jobs Act, passed by the Republican-led Congress at the close of 2017. This legislation lowers the rate of corporation tax from 35% to 21%, while providing a tax break on the ‘repatriation’ of money held internationally by US companies.
These reforms will provide a large cash injection for many multinational life sciences companies, which – along with high-tech multinationals – are expected to be among the biggest beneficiaries of the changes. Analysts at Goldman Sachs predict a $160 billion windfall for the pharmaceuticals industry, with Abbott Laboratories, Johnson & Johnson, Amgen and Merck & Co named among those with most to gain.
By increasing the capital available for investment, removing uncertainty about the future US business environment and making it easier to find a favourable tax arrangements following mergers, the new law creates more conducive conditions for patent-rich pharmaceuticals transactions.
Eli Lilly’s Dave Ricks told the conference that his company would use some of its repatriated money to fund early-stage mergers and acquisitions – a focus it shares with Merck, whose CFO Robert Davis said that the new tax laws would improve his organisation’s flexibility to fund new deals.
Brett Saunders, CEO of Allergan, said that he expected to see an uptick in oncology acquisitions across the sector in response to the reform, with the possibility of an increase in large mergers later in the year. For his part, Johnson & Johnson’s CFO Dominic Caruso also implied that the new arrangements would lead to an upswing in transactions, saying that deal-making had previously been more challenging, given the need to borrow capital domestically and the difficulty of finding tax-friendly arrangements for transactions.
These comments reinforce a number of recent forecasts, such as those made by EY’s 2018 M&A Outlook and Firepower report, which suggests that tax reform will cause pharma deal-making to bounce back from its poor performance in 2017, when uncertainty saw a 20% decline in the total value of life sciences transactions compared to 2016. Similarly, a recently-released Baker & McKenzie report predicts that global healthcare M&A in 2018 will “rise to US$418 billion, up 50% from US$277 billion last year” and that other patent transactions will increase as a result of the changes.
Not all of the commentary on this subject has been in agreement, though. While acknowledging the powerful “potential M&A drivers” that exist (something I have also written about here and here) , a Bloomberg Gadfly column argued that short-term tax bills could put a dampener on biopharma companies’ desire to repatriate cash, and that repatriated capital might instead largely be used to fund shareholder dividends and buybacks. Indeed, Pfizer, one of the companies expected to be most interested in a major acquisition, recently announced a $10 billion share repurchase and 6% dividend increase.
However, the signs so far are encouraging: following $11 billion worth of biotech bids in just four days at the start of January, it was announced on Sunday that Celgene had acquired Impact Biomedicines for an initial $1.1 billion, potentially rising to $7 billion. Given the statements being made by prominent pharma executives, those involved in the commercialisation of pharma patents can look forward to 2018 with optimism.