The market reacted negatively to speculation surrounding the likely retention of the alternate minimum tax (AMT) in the amended tax reform bill passed by the Senate, last Saturday. The latest draft awaits finalization by a conference committee of House and Senate members.
The inclusion of AMT in the final bill will weigh on corporate earnings as companies will have to pay tax on reinvested and deferred cash earnings. It is believed that tax reforms — which aim to lower the corporate tax rate to stimulate economic as well as employment growth — will not prove beneficial to large-cap entities.
However, the proposed tax reforms, if approved, will leave more cash in the hands of drugs/biotech companies. The cash can be invested for mergers/acquisitions, which have been relatively fewer this year compared with the last. It goes without saying that significant uncertainty regarding the timely passing of the U.S. tax reform has cast a pall on the future of the biotech sector.
In fact, the drugs/biotech space, which picked up this year after the 2016 debacle, has been witnessing a correction since October. The sector has lost 5.6% so far in the fourth quarter (Oct 1 to date). A major factor that resulted in this correction is the uncertainty surrounding the passing of the tax reform.
The drugs/biotech market has witnessed a decline of 1.6% so far this week due to the broader market pressure. The S&P 500 is down 0.1% in the same time frame.
