Warner Chilcott To Expand, Exploit Tax Base With P&G Buy

Drug maker Warner Chilcott PLC (WCRX) will exploit its own low tax rates and gain a foothold in Europe with its planned purchase of Procter & Gamble Co.'s (PG) pharmaceutical unit.

Ireland-based Warner Chilcott, which makes birth-control pills, agreed Monday to buy the P&G prescription-drug business for $3.1 billion, gaining access to P&G drugs Actonel for osteoporosis and colitis treatment Asacol.

Shares of Warner Chilcott jumped $3.86, or 24%, to $19.92 Monday morning.

The deal will triple Warner Chilcott's size and increase its share of the so-called specialty-pharmaceutical market, in which companies focus on drugs for smaller disease areas than those targeted by large-cap pharmaceutical companies. P&G's pharmaceutical unit had about $2.3 billion in sales for the 12 moths ended June 30, compared with just under $1 billion in 2008 sales for Warner Chilcott.

The deal "helps to diversify and strengthen Warner-Chilcott's portfolio," Jefferies analyst David Windley wrote in a research note.

Also, moving the P&G drugs to Warner Chilcott will make them more profitable because Warner Chilcott has a more favorable tax structure. Warner Chilcott has major operations in the U.S. territory of Puerto Rico, and it has a deal with the territory to pay only 2% income tax through 2019. Warner Chilcott has structured its business so that Puerto Rican earnings are a large component of overall earnings.

"Obviously there's a tax arbitrage," Chief Financial Officer Paul Herendeen told analysts on a conference call. He also expects the deal to help the company generate substantial cash flow over the next five years.

Warner Chilcott expects the deal to immediately add to a measure of profitability the company referred to as cash net income. It's financing the purchase with debt proceeds, and has received financing commitments from a group of six banks. The deal is expected to close by the end of the year.

Warner Chilcott was a division of Warner-Lambert until it was sold to an Irish firm in the 1990s. It was taken private in 2005 by private-equity firms, and then went public in 2006.

Until now, the company has focused primarily on the U.S. market, but the purchase of the P&G assets will expand its presence in Europe. A majority of P&G's 2,300 pharmaceutical employees will transfer to Warner Chilcott, which had about 1,100 workers as of the end of 2008.

Some analysts suggested the price Warner Chilcott is paying - less than two times sales - is a bargain. "I'm surprised to see such a good price here," Roth Capital Partners analyst Scott Henry said on the conference call.

That price could reflect the fact that drugs Asacol and Actonel won't be permanent cash generators for Warner Chilcott - their U.S. patents expire in the mid-2010s and there is always the possibility of early generic challengers. Still, P&G also has a pipeline of experimental drugs that could contribute down the line.

-By Peter Loftus, Dow Jones Newswires; 215-656-8289; [e-mail]