Warner Chilcott

Warner Chilcott

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.