12:00 AM
 | 
Apr 11, 2011
 |  BioCentury  |  Finance

Playing tax arbitrage

Valeant's tax structure would boost to earnings from takeover target Cephalon

Cephalon Inc. rejected Valeant Pharmaceuticals International Inc.'s hostile bid last week as too low, but the advantages Valeant's tax structure provides make it hard to see how Cephalon can compete for the affections of shareholders. Thus the response may just be a tactical move to nudge up the offer of $5.7 billion, or $73 per share in cash.

Valeant anticipates a tax rate of about 8% in 4Q10 and has estimated a tax rate of around 10% for 2011. In contrast, Cephalon expects its 2010 tax rate will be about 33%.

Last year, Cephalon had $618.8 million in income before taxes. It accounted for $201.1 million in income tax expense, leaving it with net income of $425.7 million, including $8 million in income attributed to a minority ownership stake.

If Valeant's 10% tax rate had applied instead, there would have been an income tax expense of $61.9 million, leaving net income of $556.9 million. The tax savings: $139.2 million.

Valeant owes its tax advantage to its merger with Biovail Corp. last June. A Canadian company with a subsidiary in Barbados, Biovail had a historical tax rate of 5-8%. The merger was structured to retain those tax advantages (see BioCentury, June 28, 2010).

On a conference call at the time of the merger, Biovail CEO William Wells explained how Biovail's corporate structure worked. "We are a Canadian company; our principal subsidiary is...

Read the full 1147 word article

User Sign in

Trial Subscription

Get a 4-week free trial subscription to BioCentury

Article Purchase

$150 USD
More Info >