Gut-check time

RALEIGH, N.C.—In early November, Salix Pharmaceuticals Ltd. announced that it had entered into a definitive merger agreement under which it will acquire Santarus Inc.’s outstanding common stock for $32 per share—an all-cash transaction that values San Diego-based Santarus at approximately $2.6 billion.

 

Salix, which is focused on treatments for gastrointestinal (GI) needs, sees this as a way to strengthen its foothold in the GI drug market, as the acquisition gives Salix access to Santarus’ two GI drugs, two diabetes drugs and one cholesterol drug.

 

“We are extremely pleased with the Santarus acquisition, which is transformative for Salix both commercially and financially, fulfilling many of our strategic needs while providing immediate and significant accretion in 2014 and beyond,” noted Carolyn Logan, president and CEO of Salix, in the news release about the deal. “We are very pleased to be able to merge our sales forces, combine two complementary product portfolios, expand our pipeline, diversify revenue, access healthcare providers in primary care, add a significant number of healthcare prescribers to our called-on universe and to better position Salix for success in the present as well as the future.  Additionally we look forward to all of our stakeholders—patients, healthcare providers, employees and stockholders—benefiting from the increased scale created by a larger, even stronger Salix.”

 

The $32-per-share price represents an approximately 36-percent premium over Santarus’ Nov. 6 closing price of $23.53 per share and an approximately 39-percent premium over Santarus’ average closing stock price for the prior 30-trading day period.  The deal has been unanimously approved by the boards of directors of Salix and Santarus, and the companies expect to close the transaction in the first quarter of 2014.

 

According to Gerald T. Proehl, president and CEO of Santarus, the “timing is right for this strategic combination with Salix,” adding that the North Carolina company is “highly respected” and “uniquely positioned to expand the commercialization of Santarus’ marketed products and to continue to advance the development of our pipeline products.”

 

Logan points out that in addition to generally solidifying her company’s position as a leader in the GI market, the combined company will have a strong portfolio of  22 marketed products, including Xifaxan, Uceris, Glumetza, Apriso, Zegerid, Moviprep, Relistor, Solesta, Fulyzaq, Cycloset and Fenoglide. More importantly, though, while both companies are specialty focused, there is no overlap in marketed products and the combination of the two opens up new pipeline opportunities

 

Uceris, Glumetza and Zegerid in particular are seen to have the potential “to meaningfully diversify Salix’s product offering and revenue base,” Logan notes, and Uceris in particular, which launched fairly recently, is expected to provide increased revenue diversification if it achieves the potential for growth that the companies expect. And even though a few products stand out particularly, Logan notes that no product is expected to account for more than 50 percent of the combined company’s revenue, based on pro forma estimates.

 

According to Logan, both Salix and Santarus share a commitment to integrity, ethics, teamwork, accountability and innovation, and the pairing will create a company with greater scope and impact than either company could offer independently.

 

The deal is expected to be significantly accretive in 2014 and between growth prospects and synergies, is anticipated to result in even more accretion to earnings per share in 2015.

 

In connection with the merger agreement, Salix and Santarus entered into an agreement with Santarus’ licensor Cosmo Pharmaceuticals, restructuring certain aspects of Santarus’ relationship with Lainate, Italy-based Cosmo. Under the terms of the agreement, Salix will be returning rifamycin SV MMX to Cosmo effective with the closing of Salix’s acquisition of Santarus, and any further milestones related to Uceris will be paid in cash.

 

“We trust that the excellent relationship we built up with Santarus will continue under Salix and are convinced that this transaction further enhances the market potential of Uceris,” said Mauro Ajani, chairman and CEO of Cosmo.

 

Salix intends to finance the acquisition of Santarus with a combination of approximately $800 million cash on hand and $1.95 billion in committed financing from Jefferies Finance LLC.  Jefferies also has committed to provide an additional $150 million revolving credit facility.

 

In a conference call to investors, Salix’s chief financial officer, Adam Derbyshire, said that “Our philosophy about business development is we never stop looking; we can’t afford to stop looking” and, as such, Salix will continue to look for “tuck-away” acquisitions. “Clearly we’re not looking to do anything along these lines,” he said in reference to the $2.6 billion Santarus deal, but he noted that a late-stage company requiring minimal upfront spending could be an attractive opportunity down the road.