Now that biotechnology has become a truly global enterprise, a significant number of U.S. biopharmaceutical companies are generating revenues in addition to their U.S. operations . . . and these overseas cash reserves are piling up.

At the present time, this state of affairs is likely to remain given the fact that if they did tap into these resources for use in their domestic operations, the amounts used would be subject to corporate tax at the hefty rate of 35 percent. Instead it remains parked in jurisdictions where it is taxed at a much lower rate. Ireland is a good example, where the nation's corporate tax bill is a generous 12.5 percent.

Not surprisingly, this favorable rate has attracted companies to set up shop in the country. (See p. 2 for "Others Could Follow Perrigo into Ireland for Lower Tax Bill.")

The fact that U.S. companies in all sectors are able to take advantage of lower rates of corporate tax via their foreign enterprises has drawn heated criticism.

Repatriation Back on Agenda

The mere thought of companies being allowed to repatriate their foreign-based cash at favorable taxation rates is an anathema to many – yet it appears to be creeping back onto the political agenda. Although not mentioned specifically, a proposed corporate tax overhaul referred to by President Obama in a speech a few weeks ago has got people believing that he may willing to entertain a one-time special tax on the repatriation of corporate cash held overseas.

Such a tax holiday could do wonders for the biopharmaceutical sector, which was similarly buoyed by a repatriation holiday back in 2004, where companies were allowed to bring cash back into the U.S. at an effective tax rate of 5.25 percent.

"The potential tax repatriation could further drive longer-term biotech M&A," wrote analyst Michael Yee, of RBC Capital Markets in a research note.

He cites leading biotech firms such as Gilead Sciences Inc., Amgen Inc., Biogen Idec Inc. and Celgene Corp. that collectively hold an average of approximately 63 percent of their cash resources overseas. That is a lot of cash.

Untouched Cash

According to the second quarter 2013 financial reports, these four companies, as of June 30, 2013, had cash totaling almost $30 billion, with the lion's share of $22 billion being held by Amgen.

Since these four companies generate enough cash from domestic operations to run their businesses effectively they note that for the foreseeable future they will be leaving their foreign cash largely untouched.

"Of the total cash, cash equivalents and marketable securities at June 30, 2013, approximately $1.33 billion was generated from operations in foreign jurisdictions and is intended for use in our foreign operations. We do not rely on unrepatriated earnings as a source of funds for our domestic business as we expect to have sufficient cash flow and borrowing capacity in the U.S. to fund our domestic operational and strategic needs," noted Gilead Sciences in its latest 10-Q.

Celgene, which has $3.9 billion in cash, Yee added, has expressed in its latest second quarter financial results that it intends to repatriate approximately $900 million, or 33 percent of foreign cash of $2.7 billion, and has recorded a $317 million of potential tax liability. "The remaining foreign earnings are unremitted and expected to be permanently reinvested outside the U.S. We do not rely on these earnings as a source of funds for our domestic business as we expect to have sufficient current cash resources combined with future cash flows in the U.S. to fund our U.S. operational and strategic needs," Celgene writes in its 10-Q.

Political Debate

The ongoing political debate over tax reforms in general means that it is unlikely that we will see a tax holiday bill introduced anytime soon. This means that overseas cash will not be available just yet for biotechs to foster an elevated number of partnerships and mergers and acquisitions.

It may not, however, be needed anytime soon.

Recap's first dive into the biopharma dealmaking landscape since its acquisition in June by Thomson Reuters (the parent company of BioWorld Today) revealed the sector was on the move with a 39 percent surge in license and joint venture transactions during the first half of 2013, compared to the first six months of 2012. (See BioWorld Today, Aug. 7, 2013.)

According to Chris Dokomajilar, Recap manager and senior biopharma deals analyst, in addition to the uptick in licensing and JV transactions, "we finally are three-quarters into a return of heavy M&A activity," following five consecutive quarters of lackluster interest.

The data on M&A activity could be padded very shortly as Reuters and other news outlets reported that Amgen Inc. may be close to acquiring Onyx Pharmaceuticals Inc. following an improved offer of $130 per share, up from $120 per share in their original unsolicited bid in late June. This would value Onyx, of South San Francisco, at about $9.5 billion based on its outstanding shares. (See BioWorld Today, Aug. 8, 2013.)

If the transaction goes ahead, it will reinforce our own view that there will be a number M&As announced before the end of the year. Both pharmas and large biotechs have large cash bank balances, which can be deployed to strengthen product pipelines through strategic acquisitions. (See BioWorld Insight, July 22, 2013.)

Speaking of bank balances, an in-depth BioWorld Insight analysis of the 50 biopharmaceutical companies with current market caps of greater than $1 billion, found that they collectively have almost $50 billion in cash according to their most recent financials. Nine of these companies have more than $1 billion in cash, according to data from BioWorld Snapshots.

Certainly the future looks bright for the sector, which still remains on its incredible tear – with the average share values of the 252 public biopharmaceutical companies that are tracked by BioWorld Snapshots up almost 40 percent year to date.