Repatriated cash could be happy pill for pharma
01/26/18

You can go home, after all.

At least if “you” are capital being held by a US corporation outside the country. And that could be an especially good thing for pharma stocks.

Although most coverage of the new tax law focused on its slashing of the US corporate tax rate from 35% to 21%, another key change was the reduction of the “repatriation rate”—the one-time charge for bringing overseas cash back into the US—to 15.5%. Apple (APPL), for example, recently made news by announcing it anticipated a $38 billion repatriation tax charge (which implies they were bringing back around $245 billion).1

Tech and pharma are the market sectors with the most money warehoused overseas, and some analysts think the cheaper repatriation rates could fuel mergers and acquisitions. That could help boost the pharma sector as a whole, which has seen a contraction in deals the past couple of years. But some market watchers saw biopharma firm Celgene’s (CELG) acquisition of Impact Biomedicines earlier this month as a sign things could be changing.2

With a roughly 8% gain through Thursday, Health Care had edged its way into the No. 2 position among S&P 500 sectors for the year. But the gains within the sector have varied: Pharmaceuticals, for example, are up 4.5% on the year, while Biotech is up closer to 9%.

AbbVie (ABBV) and Abbott Labs (ABT), 7/1/13 – 1/25/18

Source: OptionsHouse

AbbVie (ABBV), a biotech spinoff from Abbott Labs (ABT), has outperformed its parent since it went out on its own in 2013, thanks to a stronger 2016 and 2017, and especially because of a moonshot rally that began in late August and has extended into 2018.

The stock is also outperforming its sector so far this year. After hitting a new record high above $107 yesterday, the stock was up more than 10% on the year and 53% since August 17. Earnings are on tap this morning before the opening bell. Over its past 19 earnings releases (dating back to April 2013), AbbVie has beaten estimates 18 times, although it has outperformed revenue estimates only eight times.3

AbbVie (ABBV), 11/24/17 – 1/24/18

Source: OptionsHouse

Over this relatively small sample of earnings releases, ABBV has tended to post modest gains after a release, trading higher one week later 12 of 19 times for an average gain of 0.15%. (One interesting anomaly: The fourth day after earnings was down 14 out of 19 times.)

The stock has been very hot the past couple of weeks, but with industry momentum at its back, some traders are likely to argue that more positive earnings data could allow it to extend its gains in the near-term.

 

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1 Fortune. Apple Says It Will Bring Cash Back To U.S., Pay $38 Billion In Repatriation Tax. 1/17/18.

2 CNBC.com. Celgene deal could be the first of many for biopharma as new tax law frees up cash. 1/8/18.

3 StreetInsider.com. AbbVie, Inc. (ABBV) Earnings. 1/25/18.