Old story of a month back, when Valeant ($1.1 B turnover) was putting up a hostile bid for Cephalon ($2.8B turnover). I had always thought that the classical reasons for M&As was better efficiency, streamlining functions, reducing overlap, economies of scale, reducting costs etc... essentially, 1+1=3.. of course this didn't quite live up to its promises, and M&As became a quick fix for sales revenue drops or less than stellar growth digits. Now it seems that the interest in this high profile hostile bid was FOR TAX REASONS-- nothing to do with pipeline, new medicines and all the good things we should be doing for the patient, while being profitable. So the story is :

Valeant's tax rate is an est.8% at the end of 2010 and 10% in 2011
Cephalon's tax rate is an est. 33% in 2010

Cephalon's 2009 income before taxes was $620 M, less income tax of $201 M, hence with a net income of $425 M ( let's forget the stray smaller digits). If Cephalon paid 10% tax like Valeant instead of 33%, they would save $139 M tax dollars. That's almost a good nichebuster.

Why does Valeant pay so little taxes? It merged with Biovail from Canada which had a principal subsidiary in Barbados, which develops the IP, funds and manages it as well as its proceeds. Taxes in paradise is 5-8%. And we all know that Canada has benefits for companies that have an operating loss- which Biovail has, since it manufactures in Canada. This then shelters Valeant's profitable Canadian business.

(Thinking back, just last year, one of my large out-licensing deals had signatures from Barbados ... )

Additionally Valeant has $3.5 B in US debt- which lowers its US taxes. So that leaves Europe to cover- which they do by integrating into newly acqquired PharmaSwiss SA ( generics and OTC)in Switzerland that has a 6% tax rate.

Apparently even big Pharma find all this too complex and they have taxes in the low to mid 20% range. Forget the biotechs who have no revenue, so a tax problem for them would be a kind of godsend!

All this leaves me with the memory of what they used to call Roche- a large bank with a small pharma department. It was said that Roche ($47.5B turnover) had such a genius CFO, they made much more money in their investments, hedges and other financial products rather than pharma products. They have cleaned up their focus since.

Does this remind you of the 'subprime' crisis of recent times. Spinning money around without real value creation for short time gains ? I do worry about the state of our industry.

Biocentury