President Trump could shake up the pharmaceutical world. If he delivers on his promises, it means that Pfizer (PFE +1.25%), one of the biggest of the big pharma companies, is in for some significant changes. How might Pfizer fare in a Trump Administration?
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Negatives
Most of us like to hear the bad news first, so let's begin by looking at the potential negative impacts to Pfizer under President Trump. Drug pricing has been a hot topic -- and Trump made his views pretty clear. He said that pharmaceutical companies "are getting away with murder" and pledged to allow Medicare to negotiate pricing with drugmakers.
How would Pfizer be affected if President Trump's proposed change to Medicare's authority becomes reality? Less than you might think. The Medicare 2015 Drug Spending Dashboard, which lists the drugs that the federal healthcare program spent the most on, includes only three of Pfizer's drugs: Lyrica, Prevnar, and Xtandi. (Enbrel is also listed, but Pfizer only received revenue from sales of the drug outside of the U.S. and Canada.)
In 2015, Pfizer received Medicare payments of roughly $2.7 billion for Lyrica and Prevnar. That comprised less than 5.5% of the company's total revenue. Pfizer didn't own Xtandi until it acquired Medivation last year. Medicare shelled out around $791 million for Xtandi in 2015. Medivation's partner Astellas reported U.S. sales of the drug totaled $1.15 billion in 2015. That means that Medicare accounted for roughly two-thirds of the drug's total sales.
It's possible that Pfizer could depend more on Medicare in 2016 and subsequent years with the company's cancer drug Ibrance and newer drugs picking up sales momentum. However, Pfizer probably won't be too badly impacted should Medicare be allowed to negotiate drug prices.
There could also be a potential issue for Pfizer stemming from President Trump's dealings with China. Should the current verbal sparring evolve into retaliatory trade policies, Pfizer would be negatively affected.
Several of Pfizer's products are experiencing strong growth in China, including Lipitor, Norvasc, Celebrex, and Inlyta. These drugs combined for sales of $949 million in the first three quarters of 2016. Pfizer also owns 49% of Chinese drugmaker Hisun Pfizer Pharmaceuticals.
Positives
President Trump could help Pfizer in some ways, especially with corporate tax reform. During the presidential campaign, Trump proposed reducing U.S. corporate tax rates from 35% to 15%. He also promoted allowing a one-time repatriation of cash held in other countries at a much lower tax rate of 10%.
Pfizer desperately wants to lower its taxes. The big drugmaker had plans to acquire Allergan last year to cut its taxes. Pfizer initially intended to merge with Allergan then relocate to Ireland (where Allergan is based) to enjoy the country's much-lower tax rate. However, the U.S. Treasury Department changes rules in an attempt to prevent these kinds of tax inversion deals.Although the potential Allergan merger was abandoned, Pfizer might not have to look for buyouts to improve its tax situation with President Trump in office.
Let's do a back-of-the-napkin-style calculation of the tax benefits Pfizer might receive under President Trump's proposed rate reduction. The company provided guidance for full-year 2016 revenue of at least $52 billion. Using Pfizer's 2015 results, around 44% of its total revenue stems from U.S. sales. That would translate to U.S. federal tax payments of roughly $8 billion on 2016 revenue at the current tax rate.
Under President Trump's proposed corporate tax rate of 15%, Pfizer would only have to pay $3.4 billion or so. That's close to $4.6 billion extra money in one year.
Then there's the repatriation factor. Pfizer's cash, cash equivalents, and short-term investments total a little over $14.4 billion. The company has stated in the past that it typically holds up to $10 billion in U.S. tax jurisdictions. That leaves at least $4.4 billion or so parked overseas.If Pfizer could bring much of this money back into the U.S. at a low tax rate, it would be significant.
Overall impact
I think that the overall impact of President Trump's proposals will be positive for Pfizer. Medicare changes could hurt the company somewhat, but not as badly as they will some other drugmakers. Potential trade skirmishes with China could also put a dent in Pfizer's revenue, but how big of a dent is uncertain.
What is clear, though, is that Pfizer stands to benefit tremendously from Trump's corporate tax plans. As Pfizer CFO Frank D'Amelio said at the J. P. Morgan Healthcare Conference, these plans would give the company "huge capital firepower."That's a good adjective to use. Huge.
