President Trump made sweeping changes to U.S. tax policy in December, the most significant since 1986. Industry commentators have said this is likely to drive increased M&A activity in the U.S, including within the Pharma industry.
The reforms drop the top rate of corporation tax from 35% to 21%, increasing cash available to U.S. firms for investment and acquisitions. Good news considering recent investments announced by large U.S. Pharma businesses Merck & Co and Johnson & Johnson into the UK. International appetite is likely to be boosted even further by a change in U.S. policy on global tax. Previously, U.S. businesses had to pay tax on profits made abroad that they repatriated; now dividends from foreign subsidiaries will be repatriated tax-free, making UK investment income far more attractive.
The U.S. focused assessment is a red herring though; a key element of the Act is a one-time tax break for repatriated cash - instead of charging the 35% that companies would have had to pay historically to bring foreign profits back into the U.S., they will be allowed to pay 15.5%. The immediate reaction has been an assumption that U.S. businesses will take the opportunity to move large swathes of cash back into America - paying down debt, buying back shares and driving domestic M&A. Why wouldn't they? However, a closer read of the Act gives a different picture. This is not a repatriation tax but a "deemed" repatriation tax - companies will pay the 15.5% whether or not they take the cash back into the U.S. The net effect is that U.S. businesses have more to spend and no tax going forward on foreign-owned subsidiaries that pay dividends to U.S. owners.
At a time when the UK government has announced that the Life Sciences and Pharma sector is a key industry requiring focus, and is in talks with a number of U.S. businesses and funds, we can expect this to contribute to a boost in U.S. acquisitions in the UK.
The Trump administration's tax overhaul should accelerate major acquisitions by drugmakers in 2018