Salix acquisition brings Valeant back to big-time buying

After failing to snag Allergan last year, Valeant to acquire Salix Pharmaceuticals for enterprise value of about $14.5 billion

Jeffrey Bouley
LAVAL, Quebec—Well, it isn’t anywhere near what Valeant Pharmaceuticals International Inc. tried to buy Allergan Inc. for last year ($54 billion in an unsolicited and ultimately failed takeover bid), but Valeant just made its biggest acquisition deal ever this month, announcing a $158-per-share offer for Salix Pharmaceuticals, a major player in the growing U.S. gastrointestinal (GI) market, that has been accepted by the boards of both companies. That’s an all-cash deal for $10.1 billion, plus the assumption of more than $4 billion in debt, for a total enterprise value of $14.5 billion, the two companies announced Feb. 22.
 
That clearly trumps Valeant’s acquisition of eye-care company Bausch & Lomb in 2013 for $8.7 billion. Salix is best known for its irritable bowel syndrome drug Xifaxan. However, the company’s portfolio of 22 total products also includes such prescription brands as Uceris, Relistor and Apriso, “as well as a strong near-term pipeline of innovative, new assets,” according to Valeant.
 
“Salix’s market-leading gastrointestinal franchise is an ideal strategic fit for Valeant’s diversified portfolio of specialty products,” according to J. Michael Pearson, Valeant’s chairman and CEO. “The growing GI market has attractive fundamentals, and Salix has a portfolio of terrific products that are outpacing the market in terms of volume growth and a promising near-term pipeline of innovative products. With strong brand recognition among specialist GI prescribers, a highly rated specialty sales force, and a significant product and commercial presence across the undertreated and underserved gastrointestinal market, this acquisition offers a compelling opportunity for Valeant to create a strong platform for growth and business development.”
 
The combination is expected to yield more than $500 million in annual cost savings from the cost base of the combined company. Synergies are expected to be achieved within six months of close, primarily from reductions in corporate overhead and research and development rationalization, with the cost to achieve these synergies said to be approximately 65 percent.
As for specific changes, the companies say at this point that they “will determine how best to integrate the two companies to leverage the combined strengths of both while ensuring a smooth and orderly transition.”
 
According to Valeant, consistent with its approach to integrating Bausch & Lomb, there are no planned reductions to Salix’s specialty sales forces or hospital, key account and field reimbursement teams, “and we will determine the optimal size of primary care sales force through the integration process.”
 
“We are pleased to have reached an agreement with Valeant, which is a logical partner and importantly, creates immediate value for our shareholders. Combining Salix’s leading market position in gastroenterology with Valeant’s scale and resources will create a stronger and more diverse business committed to providing better health solutions to healthcare providers and their patients,” said Thomas W. D’Alonzo, chairman and acting CEO of Salix.
On Nov. 6, 2014, Salix reported five- to nine-month wholesaler inventory levels for its top four products. Valeant says it has conducted extensive due diligence on Salix’s standalone wholesaler inventory levels, standalone inventory work-down plan, and associated potential litigation and regulatory exposure. Valeant expects to work down wholesale inventory and plans to target two months or less of wholesale inventory by the end of this year. The net impact of the excess inventory on 2015 revenues is expected to be greater than $500 million.
 
The all-cash offer for all of the outstanding shares of Salix common stock will be financed through a combination of bank debt and bonds. As a result of the need to draw down inventories, Valeant says that earnings before interest, taxes, depreciation and amortization will be artificially low in 2014 and 2015, resulting in the initial net leverage ratio of approximately 5.6. Valeant says it is committed to reducing its net leverage ratio to be below 4.0 by the second half of 2016. As a result of the plan to reduce wholesaler inventory levels in 2015, the transaction is expected to be modestly accretive to 2015 cash earnings per share, but more than 20-percent accretive to 2016 cash earnings per share.
 
Valeant says it does not expect any change to its credit ratings as a result of the transaction, which is expected to close in the second quarter of this year, subject to customary closing conditions and regulatory approval.
 
Value of Valeant’s shares surged Feb. 23 in the wake of the deal’s announcement, but Zacks Investment Research notes that the Salix acquisition wasn’t the only factor in that boost, as Valeant also reported better-than-expected earnings that Monday, nearly twice amount projected by the Zacks Consensus Estimate. Also, Zacks notes, revenues rose 10.5 percent in that reported quarter compared with the quarter a year earlier.
 
The Motley Fool wrote in a note Feb. 23, “Investors are clearly excited about the excellent bargain Valeant struck for Salix, as the purchase price is a mere $2 per share above Salix’s current price after a slight drop in shares today.”
 
We will have additional coverage of this deal in our April issue of DDNews, examining some of the implications of the acquisition and its market impact.

Jeffrey Bouley

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