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 The $1.5-trillion bill, which U.S. President Donald Trump signed
into law in December, lowers the income tax rate for U.S. companies
to 21 percent from 35 percent, encourages them to repatriate cash,
and modifies numerous deductions.
Brent Saunders, chief executive officer of Allergan Inc, expects tax
reform to finally clear the decks for big industry consolidation.
Such moves will likely materialize over months as companies study
the new bill and devise appropriate strategies.
In the first half of the year, he expects to see more oncology deals
like the one Celgene Corp announced on Sunday, a smaller acquisition
of cancer drug developer Impact Biomedicines.
Bigger, transformative deals - like the ones where large-cap
pharmaceutical companies consolidate with rivals and biotechnology
players - will likely take longer, bankers said.
"I think the industry ultimately consolidates," Saunders said in an
interview at the J.P. Morgan Healthcare Conference in San Francisco.
"I have a sense, though, in terms of a bigger wave of (mergers), it
will either happen in the back half of 2018 or in 2019."
The U.S. pharmaceutical industry has been consolidating for years
even without tax reform. Large companies like Merck & Co Inc,
Bristol-Myers Squibb Co and Johnson & Johnson regularly buy or do
licensing deals with small companies to help maintain a continuous
pipeline of new medicines.
But large-scale deals – like Merck’s $41.1-billion acquisition of
Schering Plough in 2009, or Pfizer Inc's $68-billion purchase of
Wyeth – have dried up.
In early 2016, the Obama administration introduced rules that would
punish companies for so-called inversion deals, in which a
U.S.-based acquirer bought a smaller firm overseas and moved the
combined corporate headquarters abroad to benefit from lower tax
rates. The move scuttled Pfizer Inc's proposed $160-billion purchase
of Dublin-based Allergan.
Saunders said Allergan would only begin to look at smaller deals in
the second half of the year as the company, known for its Botox
anti-wrinkle treatment, as it is currently focused on cost cutting.
BRINGING BACK THE CASH
Saunders' comments echo those of healthcare industry bankers, who
say that uncertainty around the tax bill, drug pricing and
Republican efforts to repeal Obamacare had cooled merger activity in
2017.
Now that the tax law is in place, these bankers say, it should
provide a catalyst to drugmaker deals by allowing them to repatriate
billions of dollars in foreign profits held abroad, and by making it
easier to agree on a value for their acquisition targets since they
have a better idea of the company's tax rate.
Several drugmakers have already announced plans to bring overseas
cash into the United States, including Amgen Inc and Bristol-Myers,
incurring some short-term charges.
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Horizon Pharma CEO Tim Walbert said that when larger companies
benefit from that repatriation of cash, they are likely to lift the
whole market.
"To the extent that you see acceleration of large cap deals ... that
will bring more confidence in the sector and allow for more
strategic opportunities for everyone," Walbert said.
Horizon does not have substantial money parked overseas, and expects
to continue its current strategy of small- and medium-sized
acquisitions for drugs treating rare diseases, its primary focus.
DEALS TRENDED LOWER
Drug industry deals have been trending lower for the past two years.
Thomson Reuters data shows that in 2017, there were $52 billion
worth of pharma and biotech deals, less than 25 percent of 2015's
$212 billion in deals and down from 2016's $54 billion.
Johnson & Johnson Chief Financial Officer Dominic Caruso said during
a conference session that one reason deals were not getting done was
that companies needed to borrow money in the United States, and
because it was difficult to structure a deal with low enough taxes.
And Eli Lilly & Co CEO Dave Ricks said that among the uses for cash
it repatriates - it has $10 billion overseas - would be more
business development including the small, early-stage mergers and
acquisitions that are typical of the Indianapolis-based drugmaker.
Merck said that tax reform could spur large deals among companies
that are focused on general cost savings. However, that is not
Merck's deal focus: CFO Robert Davis said the company will continue
to seek smaller acquisitions to enhance its portfolio of medicines.
"That being said, getting access now to foreign cash, in a way where
you don't have to worry about the location of the cash will improve
our flexibility," he said.
"We're not planning a large one-time repatriation. We will
repatriate in a normal course as we see what the needs are for the
business."
(Reporting by Caroline Humer and Carl O'Donnell; Editing by Nick
Zieminski)
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