My Foolish colleague Morgan Housel had a good article yesterday about the pros and cons of a holiday on the repatriation tax that keeps companies from bringing foreign-earned funds into the U.S. without substantial taxation. Like Morgan, I'm all for it, although I have a hard time seeing it happen when politicians can't even agree to raise the debt ceiling.
Still, a biotech Fool can dream, can't he?
All that cash
The big five American drugmakers have an outlandish amount of cash sitting on their balance sheets.
Cash and Short-Term Investments at the End of Q1 (in Billions)
Long-term Investments (in Billions)
|Johnson & Johnson (NYSE: JNJ )||$26.9||$0.9|
|Pfizer (NYSE: PFE )||$24.0||$9.9|
|Merck (NYSE: MRK )||$13.0||$2.2|
|Bristol-Myers Squibb (NYSE: BMY )||$6.8||$3.2|
Source: Capital IQ, a division of Standard & Poor's.
The companies don't break out how much of the cash is held overseas, but it's safe to assume that it's a good chunk of the total. Even if they sell more drugs in U.S. than anywhere else, they're also using a lot of the stateside cash to pay for dividends to avoid the repatriation tax.
That foreign cash is useful when acquiring large corporations. Merck's acquisition of Schering-Plough, Pfizer's acquisition of Wyeth, and even the smaller Lilly acquisition of ImClone Systems all allowed the companies to bring cash home.
The foreign cash could also be used to acquire drugmakers based abroad. Ireland-based Amarin (Nasdaq: AMRN ) and Elan (NYSE: ELN ) and Israel-based Protalix BioTherapeutics (AMEX: PLX ) are all often mentioned takeover targets; the fact that the companies could be acquired with overseas funds probably won't be a major factor in the big pharma's decision to acquire them, but the ease of paying for them probably plays at least a minor role.
But what about U.S.-based biotechs? They're stuck with whatever is left after paying out dividends and whatever else the companies have to pay with their greenback-denominated cash flow.
Unless, of course, the Big Pharma players were suddenly able to bring all that cash they have stashed overseas back home. It would be payday for biotech investors.
Which companies might go first? Take a look at this article from a few months ago; all the arguments still hold. We could also see an uptick in the acquisitions of spec pharma. Pfizer's acquisition of King showed pharma's continued desire to get its hands on products already on the market.
But really, the benefit should be universal across the drug-development spectrum. From startups on up, if pharma has cash to invest, I expect they'll be apt to use it.
A New York Times article claims that during the last repatriation holiday in 2004,"Merck used the cash infusion to continue paying dividends and buying back stock for the benefit of shareholders and executives."
I'm an eternal drug-development optimist who thinks there are always areas where drug companies can invest some research-and-development dollars to make a tidy profit. Still, using the cash to buy back shares and pay a dividend isn't the worst use of cash for pharma shareholders. It certainly beats paying CEOs more.
As pharmas' major blockbusters start to see generic competition, cash flows will surely drop, especially for companies like Lilly and Pfizer that don't have the pipelines to replace them. Maintaining the dividend, even if it means using some of its nest egg, could keep investors interested until the next drug-development boom cycle.
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