(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The year 2018 may be tremendous for M&A activity among drug makers and biotechnology stocks, should the repatriation tax on off-shore cash holdings go into effect.
The website Axios provided a chart of the top 30 S&P 500 companies with cash offshore; 11 of them are pharmaceutical or biotechnology companies. Johnson & Johnson (JNJ), Amgen Inc. (AMGN), Gilead Sciences Inc. (GILD), Pfizer Inc. (PFE), and Merck & Co. (MRK) have nearly $150 billion parked overseas that could be put to better use by acquiring smaller, fast-growing drug makers.
Johnson & Johnson, Pfizer, Amgen, and Merck have seen revenue either plateau or fall over the past few years. And Johnson & Johnson isn't expected to see revenue re-accelerate over the next two years, either. This lack of growth has hurt these companies' stock prices during the past three years, with only J&J barely outperforming the S&P 500 Index during that time.
No Revenue Growth
Moreover, Pfizer, Merck, and Amgen are expected to have no top-line revenue growth over the next few years. Amgen's revenue is not likely to grow through 2019, with analysts forecasting revenue of $23.01 billion, up marginally from $22.99 billion in 2016.
Merck's revenue is expected to grow only 5 percent to an estimated $41.82 billion in 2019, from 39.81 billion in 2016. Meanwhile, Pfizer's revenue is projected to increase by just 2 percent to $54.15 billion from $52.82 billion.
Gilead's Declining Revenue
Gilead needs to find a way to reverse its plunging revenue due to falling sales of its hepatitis C drugs. Gilead already made a move earlier this year when it acquired Kite Pharma, but Gilead's revenue is still expected to drop nearly 21 percent in 2017 to $25.81 billion from its peak in 2015.
Analysts see Gilead's revenue falling another 15.5 percent to $21.83 billion through 2019. (See more: Why Gilead's Highly Touted Stock Has No Upside.)
Poor Stock Performance
The lack of top-line revenue growth is reflected in the companies' stock prices, with only Johnson & Johnson just barely outperforming the S&P 500 over the past three years, climbing by nearly 30 percent, versus the S&P 500 gain of just over 28 percent.
The best-performing company after Johnson & Johnson is Pfizer, whose stock price is up only 14 percent. Meanwhile, Gilead shares have plunged by nearly 30 percent.
These are some of the largest drug makers in the world, and they need a jump-start to their top-line revenue. That may come by using some of the cash the companies have parked offshore to make acquisitions to boost revenue and revive their flailing stocks.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.