Biotech Eyes Tax Revamp as Next Chance to Shake Its Recent Woes

(Bloomberg) -- Biotechnology investors who saw their portfolios stumble after a late-summer bull run may refocus on a key reason that the group took off: the U.S. tax overhaul and repatriation.

As Republicans move closer to passing the Senate's tax bill, investors in biotech will remain focused on the possibility of a lower tax rate for repatriation of funds. The prospect of large companies, including Amgen Inc. and Gilead Sciences Inc., bringing cash back to the U.S. may spur some highly anticipated deals in a space that has been tracking this year to the lowest volume of transactions since 2013, according to data compiled by Bloomberg.

The market will be favorable for biotech companies, at least in the short-term, with tax repatriation a tailwind that could stimulate a more positive view for both large and small companies, Jefferies analyst Michael Yee wrote in a note. Gilead and Amgen both hold more than $20 billion outside of the U.S., so the ability to employ that capital in a domestic setting via mergers and acquisitions, dividends and repurchases is a “win-win for large and small biotech.”

A spike in deal activity within the health-care space has been highly anticipated since Gilead's purchase of Kite Pharma Inc. for $12 billion in August was seen as a promising sign. Some health-care investors, including Orbimed founding partner Sven Borho, say it's “prime time” for biotech and pharma deals with further tax clarity paving the way for large, transformative moves.

While biotech's heavyweights “all have warts,” shown by the group's disappointing third quarter, the positives of the potential tax reform are likely to outweigh the negatives to create an environment that is quite favorable for specialist investors after generalists exited their positions, Cowen's biotech team wrote.

The Nasdaq Biotechnology Index ended November up less than 1 percent after the group was whipsawed by a large-cap earnings selloff that wiped more than $61 billion from the group's market capitalization in October. The earnings letdown triggered generalist investors to move their chips to the sidelines as they exited the group that struggled to find its footing last month.

While most fundamental catalysts aren't expected until early 2018, namely JPMorgan's annual San Francisco health-care conference and potential approvals from U.S. regulators, the prospect of some form of tax relief for companies will likely give the group the slight bump it needs heading into year-end.

The passage of a tax bill will likely occur between the middle of December and early 2018 and will be an important macro tailwind for the biopharma space over the next one to two years, Credit Suisse analysts led by Alethia Young wrote in a note.

“With so much cash overseas, we do believe that tax reform policies will indeed drive future merger and acquisition decision making,” the analysts said, noting that Pfizer Inc. and Merck & Co. may also benefit on the pharmaceuticals side.

--With assistance from Cristin Flanagan

To contact the reporter on this story: Bailey Lipschultz in New York at blipschultz@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Jeremy R. Cooke, Morwenna Coniam

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