Biotech Values

[DewDiligence]

ZTS—The Barron’s piece is a reasonable overview but it overlooks what is perhaps the main impetus for upside earnings surprises: the income-tax rate.

In the pre-IPO roadshow materials, ZTS modeled a 32% tax rate because that’s the average rate ZTS has been paying as a wholly-owned subsidiary of PFE. Why such a high rate? Because a large portion of ZTS’ foreign earnings have been repatriated to help PFE pay its dividend and fund its large share buybacks.

Once ZTS becomes a standalone company, it will not need to repatriate such a large portion of its foreign earnings, and hence the tax rate should go down considerably.