Despite Crisis, U.S. Drug Companies’ Cash Is Safe*
Posted by Jacob Goldstein
October 14, 2008, 4:28 pm
At a time when a frightened world is stuffing money under the mattress, U.S. drugmakers’ huge piles of cash and short-term investments look pretty safe, the rating agency Moody’s says in a report out today.
But there’s an asterisk here: Most of the money is sitting overseas, so companies would have to take a big tax hit to spend it in the U.S. And the industry seems increasingly inclined to borrow money rather than repatriate cash.
That could be especially important at a time when lots of drug companies are looking to shell out for biotech companies in order to acquire new drugs and strengthen their pipelines.
“Because the industry faces so many patent expirations, it’s probably going to conduct more M&A and it’s probably going to need more debt,” Moody’s SVP Michael Levesque told the Health Blog this afternoon.
Eli Lilly, for example, is borrowing $2 billion to $3 billion to finance its $6.5 billion acquisition of ImClone, the WSJ reported last week.
The Moody’s report tracks nine companies: Johnson & Johnson, Pfizer, Eli Lilly, Merck, Genentech, Bristol-Myers Squibb, Amgen, Wyeth and Schering-Plough. (The report doesn’t break out figures for individual companies, but we looked at Pfizer’s overseas cash issues earlier this year.)
blogs.wsj.com
In the 18 months leading up to June 30 of this year, those companies’ cash and investments rose $18 billion, to $105 billion. And, while much of that is stored in short-term investments, the holdings haven’t yet suffered the damage that’s hammered many companies’ short-term investments. (One notable exception: Bristol’s $300 million write down on auction-related securities.)
But 68% of that money is offshore, Moody’s estimates, and to bring it back to this country could cost a company some 30% in taxes.
The overseas cash piles come from strong sales in foreign markets; the rising debt goes to to finance acquisitions in the U.S., where sales have been more sluggish. These are long-term trends unlikely to change anytime soon.
“You’ll see gross debt levels continue to rise over time, unless there’s some change to the tax code here,” Levesque said. “The cash is likely to keep growing and the debt is likely to keep growing.”
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