JP Morgan: Will US tax reforms drive pharma M&A in 2018?

The overhaul of the tax system will allow US pharma firms to access billions in capital, but J&J and Merck & Co. play down any changes in their M&A strategy.

On December 22, the ‘Tax Cuts and Jobs Act’ was signed into US law by president Donald Trump.

The Act overhauls the US tax system, and while it could add as much as $2tr to the federal deficit, it is expected to be a boon for industry due in part to the slashing of corporate tax rates from a top level of 35% to 21%.

It is, therefore, no surprise the Act has been a talking point at this year’s JP Morgan Healthcare Conference in San Francisco this week and analysts suggested it could even be a trigger for a flurry of M&A activity in 2018.

“It's been 31 years since we've had a meaningful change to corporate tax reform,” said Johnson & Johnson CFO Dominic Caruso. Caruso – who was involved in crafting the legislation – added the reforms would make US pharma companies such as his own “more competitive on a global scale.”

It was suggested the Act will allow J&J to access around $16bn previously trapped outside of the US though Caruso said this would not change in the company’s capital allocation strategy.

Instead “it provides for more flexibility in capital allocation and it provides for incentives instead of disincentives for innovation in our country and job creation in our country as well,” he continued.

“We have a 53-year track record of consecutively increasing the dividend for 53 consecutive years. That's always first followed by M&A at the right price, at the right time with the right party creating value for shareholders.”

Meanwhile, Merck & Co. (known as MSD outside North America) CEO Ken Frazier said the tax reform and strong company pipelines are among the factors likely to drive M&A over the coming year.

“I think there are a lot of forces that could drive consolidation including large deals,” he told investors. However, he added Merck will “continue to be focused on innovation not consolidation as a strategy.”

“When we look at opportunities, while we don’t rule anything out we look across the whole spectrum of opportunities. Our focus is really, as I said before, on doing the kind of deals that will allow us to bring great drugs to the market.”