We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
How Will Trump's Proposed Tax Reform Impact Drug Companies?
Read MoreHide Full Article
During his presidential campaign, Donald Trump had stressed on tax reforms and promised that bringing down corporate tax would be his top priority as the President of the United States. Keeping his words, Trump proposed changes in tax rates for both individuals and corporates to stimulate economic growth as well as employment growth.
Tax Reforms
The plan proposes to lower the current corporate tax rate of 35%, one of the highest in the world, to 15%. This is expected to favorably impact the post-tax earnings of companies. A territorial tax system (tax on only domestic income) has also been proposed for American companies so as to create a level playing field. It also suggests the elimination of special tax breaks for companies. Another major reform proposed is the repatriation of trillions of dollars held as cash reserve overseas by the companies with global operations for one-time tax (reportedly 10%). A similar tax move was made for bringing in overseas cash reserves by the Bush administration in 2004 for one-time tax of 5.25%. A number of companies repatriated an amount exceeding $300 billion.
The current tax code allows tax repatriation at 35% rate. However, it gives tax credit for the amount of tax paid in overseas country.
Anticipated Impact
The reforms have been proposed to create new jobs and aid economic growth through expanded investment as more cash will available to companies through tax cuts and repatriation. However, the extent to which these steps will be successful is uncertain. A large portion of the repatriated cash in 2004 was used to fund share buybacks and dividend payments. Though the buybacks fueled a stock rally, there was no actual economic growth.
The tax reforms are expected to benefit companies which have operations around the globe. A similar buyback this time is also expected to help the stocks grow.
Large cap pharma companies based in the United Sates with major operations worldwide including J&J, Amgen Inc. (AMGN - Free Report) , Gilead Sciences and others are sitting on huge pile of cash reserves stashed in overseas countries. The repatriation will benefit these large drug/biotech companies more than the tax savings due to rate cuts
Moreover, repatriation of cash held overseas will create a surplus in domestic cash reserve, which may fuel merger & acquisition (M&A) in the sector. The industry has seen only two major acquisitions this year, Actelion by Johnson & Johnson (JNJ - Free Report) and Kite Pharma, Inc. by Gilead Sciences, Inc. (GILD - Free Report) , which is expected to close by 2017 end.
Let’s discuss the impact of tax reform on the some drug/biotech giants.
Johnson & Johnson
Johnson & Johnson is a well-known brand all over the world catering to a wide variety of medical needs. The company has paid tax at an effective rate of 16.5%, 19.7% and 20.6% for 2016, 2015 and 2014, respectively. Therefore, a revision of tax rate to 15% will not bring a huge positive change in post-tax earnings. As of June end, J&J had $12.9 billion in cash reserve, down almost 70% from 2016 year end. The company has used a major chunk of its cash reserves in 2017. Hence, J&J is expected to be least impacted by these reforms.
Amgen
The company has a strong presence in the oncology/hematology, cardiovascular disease, inflammation, bone health and nephrology markets. The effective tax rate for Amgen in 2016, 2015 and 2014 were 15.7%, 13% and 7.6%, respectively. Hence, a tax rate cut will have minimal effect. Amgen had nearly $35 billion in overseas cash as of 2016 fiscal end, per a Bloomberg report. The total cash reserve of the company has changed minimally in the first six months of 2017. So, the repatriation reform may initiate a buyback. Moreover, after 10% tax, it will have more than $30 billion in domestic cash reserve, if the total overseas cash is repatriated. This increase in domestic cash can also be used in acquiring new drug technologies like CAR-T therapy.
Gilead Sciences
Gilead recently announced its plan to acquire Kite Pharma for nearly $12 billion, adding the latter’s CAR-T therapy candidate to its pipeline. Gilead is planning to complete the acquisition through a combination of cash and debt. Per a Bloomberg report, Gilead had $29.3 billion of cash reserves in overseas countries at the end of 2016. A repatriation will help the company to pay off the debt quickly. The effective tax rate has been between 16% and 21%, which suggests a minimal impact due to tax rate cut.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
Image: Bigstock
How Will Trump's Proposed Tax Reform Impact Drug Companies?
During his presidential campaign, Donald Trump had stressed on tax reforms and promised that bringing down corporate tax would be his top priority as the President of the United States. Keeping his words, Trump proposed changes in tax rates for both individuals and corporates to stimulate economic growth as well as employment growth.
Tax Reforms
The plan proposes to lower the current corporate tax rate of 35%, one of the highest in the world, to 15%. This is expected to favorably impact the post-tax earnings of companies. A territorial tax system (tax on only domestic income) has also been proposed for American companies so as to create a level playing field. It also suggests the elimination of special tax breaks for companies. Another major reform proposed is the repatriation of trillions of dollars held as cash reserve overseas by the companies with global operations for one-time tax (reportedly 10%). A similar tax move was made for bringing in overseas cash reserves by the Bush administration in 2004 for one-time tax of 5.25%. A number of companies repatriated an amount exceeding $300 billion.
The current tax code allows tax repatriation at 35% rate. However, it gives tax credit for the amount of tax paid in overseas country.
Anticipated Impact
The reforms have been proposed to create new jobs and aid economic growth through expanded investment as more cash will available to companies through tax cuts and repatriation. However, the extent to which these steps will be successful is uncertain. A large portion of the repatriated cash in 2004 was used to fund share buybacks and dividend payments. Though the buybacks fueled a stock rally, there was no actual economic growth.
The tax reforms are expected to benefit companies which have operations around the globe. A similar buyback this time is also expected to help the stocks grow.
Large cap pharma companies based in the United Sates with major operations worldwide including J&J, Amgen Inc. (AMGN - Free Report) , Gilead Sciences and others are sitting on huge pile of cash reserves stashed in overseas countries. The repatriation will benefit these large drug/biotech companies more than the tax savings due to rate cuts
Moreover, repatriation of cash held overseas will create a surplus in domestic cash reserve, which may fuel merger & acquisition (M&A) in the sector. The industry has seen only two major acquisitions this year, Actelion by Johnson & Johnson (JNJ - Free Report) and Kite Pharma, Inc. by Gilead Sciences, Inc. (GILD - Free Report) , which is expected to close by 2017 end.
Let’s discuss the impact of tax reform on the some drug/biotech giants.
Johnson & Johnson
Johnson & Johnson is a well-known brand all over the world catering to a wide variety of medical needs. The company has paid tax at an effective rate of 16.5%, 19.7% and 20.6% for 2016, 2015 and 2014, respectively. Therefore, a revision of tax rate to 15% will not bring a huge positive change in post-tax earnings. As of June end, J&J had $12.9 billion in cash reserve, down almost 70% from 2016 year end. The company has used a major chunk of its cash reserves in 2017. Hence, J&J is expected to be least impacted by these reforms.
Amgen
The company has a strong presence in the oncology/hematology, cardiovascular disease, inflammation, bone health and nephrology markets. The effective tax rate for Amgen in 2016, 2015 and 2014 were 15.7%, 13% and 7.6%, respectively. Hence, a tax rate cut will have minimal effect. Amgen had nearly $35 billion in overseas cash as of 2016 fiscal end, per a Bloomberg report. The total cash reserve of the company has changed minimally in the first six months of 2017. So, the repatriation reform may initiate a buyback. Moreover, after 10% tax, it will have more than $30 billion in domestic cash reserve, if the total overseas cash is repatriated. This increase in domestic cash can also be used in acquiring new drug technologies like CAR-T therapy.
Gilead Sciences
Gilead recently announced its plan to acquire Kite Pharma for nearly $12 billion, adding the latter’s CAR-T therapy candidate to its pipeline. Gilead is planning to complete the acquisition through a combination of cash and debt. Per a Bloomberg report, Gilead had $29.3 billion of cash reserves in overseas countries at the end of 2016. A repatriation will help the company to pay off the debt quickly. The effective tax rate has been between 16% and 21%, which suggests a minimal impact due to tax rate cut.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>