Salix Pharmaceuticals exercises an inversion

Company to combine with Cosmo Technologies to form Salix Pharmaceuticals plc

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RALEIGH, N.C.—Salix Pharmaceuticals Ltd. and Lainate, Italy-based Cosmo Pharmaceuticals S.p.A. (Cosmo) have announced a definitive merger agreement under which Salix will combine with Cosmo Technologies Ltd. (Cosmo Tech), a subsidiary of Cosmo. Under the terms of the agreement, Salix will become a wholly owned subsidiary of Irish-domiciled Cosmo Tech, which will change its name to Salix Pharmaceuticals plc and is expected to have its ordinary shares listed and traded on the NASDAQ Global Select Market. The transaction is expected to be modestly accretive to Salix’s earnings per share in 2016 and increasingly accretive thereafter.
Salix Pharmaceuticals plc will own Cosmo’s U.S. patents for rifamycin MMX, methylene blue MMX and Uceris, and have specified rights of negotiation with respect to all products Cosmo or its affiliates seek to develop or commercialize in the United States. In addition, Salix Pharmaceuticals plc will acquire Cosmo’s patents for rifamycin MMX in Canada, specified Latin American countries, India, China, Japan and the rest of the Far East, excluding Australia and New Zealand, and Cosmo’s patents for Uceris in Japan.
Cosmo, the parent company of Cosmo Tech, is a publicly traded, specialty pharmaceutical company whose proprietary clinical development pipeline specifically addresses innovative treatments for the gastrointestinal (GI) tract, such as inflammatory bowel disease, colon infections and diagnostics for the colon. Cosmo is the inventor and developer of Uceris.
The transaction enhances Salix’s position as a leader in developing and marketing products in the U.S. market to treat gastrointestinal disease and disorders and establishes a corporate structure that enhances Salix’s acquisition strategy and organic growth.
Carolyn Logan, president and CEO of Salix stated, “Cosmo is an excellent company which we have known for years, so we are very pleased to announce this transaction. Combining with Cosmo Tech makes tremendous strategic and financial sense for us as it further strengthens and consolidates our position as a leader in acquiring, developing and marketing products to treat gastrointestinal disease and disorders. Uceris is an important product in our portfolio, and this transaction will improve its profitability as well as that of Salix as a whole. The new corporate structure greatly enhances our ability to compete for licensing deals and acquisitions and improves the economics of future business development opportunities for Salix. Further, by adding multiple new and complementary product opportunities, to which we will be able to bring our proven expertise in development and commercialization, we expect these new pipeline additions to diversify and grow our future revenue base. We view this transaction as an evolutionary step that should create value and higher returns for our shareholders by bolstering our competitive position in the marketplace, all within an efficient corporate structure that should increase our profitability and accelerate our long-term growth.”
Alessandro Della Chá, CEO of Cosmo, added, “It was our strategic objective to find the best possible partner to market our products in the U.S. and to have a substantial financial interest in this. This transaction allows two companies that are already leaders in GI to join their different but complementary competencies to create new products that satisfy unmet needs of patients and provide additional value for shareholders.”
Upon completion of the merger, shareholders of Salix are expected to own slightly less than 80 percent of the ordinary shares of Salix Pharmaceuticals plc, and Cosmo is expected to own slightly more than 20 percent. Shareholders of Salix will receive one ordinary share of Salix Pharmaceuticals plc in exchange for each share of Salix Pharmaceuticals Ltd. common stock they own at closing. Cosmo will have the right to designate one director to serve on the board of directors of Salix Pharmaceuticals plc and will be subject to certain standstill provisions for at least 10 years following the completion of the merger. The transaction, which will be taxable to Salix’s shareholders, is expected to close in the fourth quarter of 2014.
The current officers and members of the executive team of Salix will continue to serve in their respective capacities within Salix Pharmaceuticals plc. Salix Pharmaceuticals plc’s board of directors will consist of the current directors of Salix plus Alessandro Della Chá as Cosmo’s initial designated board member.
The transaction, which has been unanimously approved by the boards of directors of both Salix and Cosmo, is subject to approval by Salix’s stockholders and the satisfaction of certain closing conditions, including antitrust approval in the United States. The transaction does not require the vote of Cosmo’s shareholders.
Reuters reported that the merger was “the latest in a wave of overseas deal-making by U.S. companies looking to lower their tax bill” and added that “American lawmakers have expressed concern about U.S. corporations shifting tax domiciles abroad, particularly to Ireland, Switzerland and elsewhere in Europe, to avoid taxes. These deals, known as inversions, are still rare but rapidly becoming more commonplace. High-profile mergers such as Medtronic Inc. and Irish-based Covidien Plc, Pfizer’s failed $118-billion bid for British rival AstraZeneca last month and—most recently—AbbVie, which raised its offer for Shire overnight, are deals that are driven at least in part by tax considerations,” Reuters noted.
Cosmo’s shares surged on the news, in part because investors had undervalued Cosmo until now, according to dealers. The shares were 8.3 percent higher in early trading, bucking a 0.4 percent drop in the European sector.
Sterne Agee analyst Shibani Malhotra notes that “We are increasing our PT on SLXP to $165 on the very strong TARGET III data on Xifaxan, which increases the likelihood of FDA approval in the treatment of IBS-D. We now see this as a 90-percent probability. In addition, with the announced merger with Cosmo Tech, Salix’ new tax structure is highly beneficial to SLXP shareholders, despite the slight expected dilution to 2015 EPS. Salix is one of the most compelling names in our sector, both as a standalone or as a takeout candidate. Reiterating BUY.”
Malhotra adds, “We are adjusting our 2014/2015 EPS estimates from a previous $6.45/$8.15 to $6.23/$7.37, largely due to the increased fully diluted share count from the Cosmo transaction as well as the higher share price. Our price target goes from to $165 from $130.”
Reductions in tax rate alone could be worth the entire amount paid by Salix, Malhotra believes. “As we have stated in the past, Salix has an extremely high tax rate (35 percent in Q1 2014) for a specialty pharmaceutical company. Salix will now re-domicile in Ireland, which will significantly lower the company’s tax rate. With this new transaction, the company is targeting a lower long-term tax rate in the low 20-percent range, which will be highly accretive to EPS,” she states.
“The Cosmo deal is a net positive; does not change attractiveness of Salix as an acquisition candidate,” the Stern Agee analyst concludes. “There has been a sell-off of Salix after the announcement of the Cosmo transaction as many investors are focused on the lack of near-term accretion in the deal in 2015. However, the deal is highly accretive in the long term as Salix can use intra-company debt to shield U.S. earnings starting 12 months post-close and longer term ... While investors believe that the deal removes the possibility of Salix as a near-term takeout candidate, we believe otherwise. If an acquirer would like to buy Salix before tax synergies come into play, it will have to do so before the Cosmo deal closes. This is possible given the low breakup fee associated with the transaction. Longer term, Salix remains an attractive acquisition candidate given its leadership in the GI space as well is its low tax rate post-inversion.”

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