Will Pfizer Be Affected By Trump Administration Tax Reform?

The Trump administration’s tax reform is eagerly awaited by the corporate world, as it proposes to lower the corporate tax rate to 15%. A lower corporate tax rate would allow companies to potentially increase investments with freed up cash, and more projects may become economically viable – as the expectation of greater future profits due to a lower tax rate will encourage risk taking. The expected benefits from any tax reform, if implemented, are likely reflected in current market prices to some extent. But for some companies, such as Pfizer (NYSE:PFE), it is less clear what impact tax reform would have on their businesses. Below we discuss whether Pfizer would be materially impacted by any significant changes in tax policy.

Pfizer has astutely managed its tax liabilities over the years, and has structured its business and subsidiaries to minimize its tax exposure in the U.S. Accordingly, we expect that any tax reform would be unlikely to have a significant impact on Pfizer’s effective tax rate, and therefore its near-term earnings. However, it could potentially encourage the company to repatriate some of its foreign cash reserves and invest more in the U.S.

Our price estimate of $33 for Pfizer is roughly in line with the market.

The graph below shows Pfizer’s international and domestic tax provisions since 2011. It is interesting to note that on average, Pfizer has paid just $700 million in taxes annually in the U.S. in the past six years – well below the average annual figure for international markets, which is above $2 billion. In addition, a significant portion of the U.S. taxes were deferred taxes, and the current tax exposure appears to be minimal. In fact, in 2015 and 2016, Pfizer’s current U.S. taxes totaled just $59 million and $290 million, respectively.

So how is Pfizer avoiding large U.S. tax liabilities? By consistently reporting operating losses in the U.S. The chart below shows the income before taxes for Pfizer’s U.S. and international operations. The company is clearly strong in financial management, and has effectively turned its U.S. operations into a cost center. One way the company has done so is by developing drugs in the U.S., manufacturing them overseas, and then buying them back from its subsidiaries at high prices.

In essence, Pfizer has insulated itself from the U.S. tax system to an extent, and may therefore be unaffected by any changes in the tax structure. However, lowering the corporate tax rate to 15% could encourage the company to repatriate some of its significant foreign cash reserves, which could then be used to invest in more facilities, return capital to shareholders or pay back outstanding debt.

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