Valeant Tells Congress a Different Tax Tale Than Investors

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Valeant Pharmaceuticals International Inc. told U.S. lawmakers on Thursday that it doesn’t consider tax savings when the company -- one of the industry’s most acquisitive -- is making deals.

“Valeant does not take into account tax synergies in either identifying or pricing potential acquisition targets,” Howard Schiller, Valeant’s former chief financial officer, said to the Senate Permanent Subcommittee on Investigations. Schiller now serves on Valeant’s board.

Yet the company’s past public comments tell a different story. In calls with investors and in a letter to one acquisition target, Valeant executives touted the company’s tax advantages for acquisitions, most recently during a $50 billion-plus attempt to buy Allergan Inc.

“No other potential acquirer of Allergan has the operational and tax synergies that we have,” Valeant Chief Executive Officer Mike Pearson said in an October 2014 letter to Allergan, announcing plans to raise its bid to $200 a share and urging Allergan to take the offer.

“While we often realize tax synergies from acquisitions, we do not take into account tax synergies when pricing deals,” said Laurie Little, a Valeant spokeswoman. “Our target IRRs assume local statutory tax rates.”

New Leadership

The U.S. Senate Permanent Subcommittee on Investigations held its first hearing under new leadership on Thursday with a dive into the U.S. corporate tax code. Congress has been considering an overhaul of the code, prompted in part by U.S. companies shifting their legal addresses abroad to take advantage of lower corporate tax rates.

Senator Claire McCaskill, a Missouri Democrat, read Schiller a quote from Pearson, talking about how the company reduced its tax rate to 3.1 percent and was trying to go lower.

“Do you understand how that infuriates Americans?” she said.

Schiller said the company’s tax rate is now about 4 percent

Valeant’s failed offer for Allergan was only one of many times the company touted its tax advantages in pursuing or completing an acquisition. While Valeant is managed from the U.S., the drugmaker merged with Biovail Corp. in 2010 and moved its legal address to Canada.

Biggest Deal

In 2012, Valeant made what was its biggest deal at the time -- a $2.44 billion takeover of Medicis Pharmaceutical Corp. “On the tax front, we will be able to migrate Medicis into our structure and achieve substantial tax synergies,” Schiller told investors on a conference call announcing the deal. Schiller stepped down as CFO last month. He’s also the former chief operating officer for investment banking at Goldman Sachs Group Inc.

In fact, Valeant’s foreign tax advantage has forced other drugmakers to pursue similar strategies of moving their legal address outside the U.S. Allergan Plc, then called Actavis, bought Warner Chilcott Plc for $8.5 billion in 2013 in part because the company couldn’t compete on deals with the likes of Valeant.

On a conference call, then-CEO Paul Bisaro called his company “handicapped because we’re competing against companies that have those tax structures already in place.” Actavis later beat out Valeant for Allergan in a $66 billion deal.

“Allergan today would have remained an American company” if not for the foreign tax advantages of potential buyers, former Allergan CEO David Pyott told lawmakers at the hearing.

Shift Legal Address

Last year, the Obama administration announced plans to develop rules designed to stop U.S. corporations from moving overseas. The companies were buying smaller, foreign-domiciled targets and using the transaction to shift their own legal addresses and cut their tax rates.

In October 2014, on a call with investors, Schiller was asked whether the proposed U.S. rules would give Valeant an advantage in buying companies since it already had a low tax rate and competitors didn’t.

“Those Treasury regulations have zero impact on our tax status, our tax rate,” Schiller said. “Obviously, clearly, if others are prevented from reducing their tax rates through an inversion, that gives us an advantage.”

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