LAVAL, Quebec—A funny thing happened on the way to Valeant Pharmaceuticals International Inc. buying Raleigh, N.C.-based Salix Pharmaceuticals…well, actually a few things happened. First, Valeant tried to carry out a hostile takeover of Allergan Inc. last year for $54 billion and lost out to Actavis in November when it swooped in with $66 billion. Then Valeant announced the acquisition of almost all the assets of Dendreon Corp. for $400 million. Right after that came the news in late February of a deal with Salix to buy the gastrointestinal (GI) therapeutics company for $10.1 billion and the assumption of more than $4 billion in debt, for a total enterprise value of $14.5 billion.
Then, surprisingly, Irish company Endo International PLC showed up and tried to thwart Valeant in the Salix deal by offering $175 a share in a combination of cash and stock—or $11.2 billion based on then-current shares outstanding—to trump Valeant’s all-cash $158-per-share offer. That got Valeant to bump up its offer to $11.1 billion, and Endo quickly dropped out of the picture. Not that many market-watchers were placing any bets on Endo successfully wrenching Salix away from Valeant, since Endo’s offer was 25 percent cash/75 percent stock, and thus wouldn’t have filled Salix’s coffers as soundly. It also didn’t help that Endo’s share price dropped slightly after it made the bid for Salix.
Valeant closed the Salix deal April 1, thus continuing its tradition of growth through acquisitions—and this marks Valeant’s largest deal since its acquisition of eye-care company Bausch & Lomb in 2013 for $8.7 billion.
So, what does it all mean? Well, for the United States, since it was pretty much a foregone conclusion that either a Canadian company or an Irish one would win Salix, it means a bit less tax income. What about for Valeant, though, who came out the victor over Endo?
First, it means a broadening of the company’s portfolio from what had been largely dermatologic, ophthalmic, neurologic and infectious disease-oriented, since Salix is very much known for its role in the growing gastrointestinal (GI) market in the United States, with its best-known product being irritable bowel syndrome drug Xifaxan. However, the company’s portfolio of 22 total products also includes such prescription brands as Uceris (for controlling mild or moderate ulcerative colitis), Relistor (for opioid-induced constipation) and Apriso (for ulcerative colitis), “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.”
As for shareholders’ and market-watchers’ opinions, the value of Valeant’s shares surged Feb. 23 in the wake of the deal’s announcement, but Zacks Investment Research noted that the Salix acquisition wasn’t the only factor in that boost, as Valeant also reported better-than-expected earnings that Monday, nearly twice the 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.
Zacks also noted that the acquisition is expected to yield more than $500 million in annual cost savings thanks to synergies that should be realized within six months of closure of the acquisition, “primarily from reductions in corporate overhead and R&D rationalization expenses.”
The analyst firm did add, however, “We note that Salix has been plagued with inventory issues for some time now, which affected the company’s third-quarter results adversely. The CEO of the company stepped down last month owing to these issues. Consequently, Valeant expects to work down wholesale inventory and plans to target two months or less of wholesale inventory by 2015-end. Net impact of excess inventory on 2015 revenues is expected to be above $500 million.”
The Motley Fool wrote in a note Feb. 23 about the original $10.1-billion offer, “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.”
Hedge fund firm Paulson & Co. expressed enthusiastic support of the acquisition, calling the deal “very accretive to Valeant,” while also noting that the merger “removes near-term uncertainty for Salix.” In recent months, Paulson & Co. had built up a leading 9.1-percent stake in Salix; it also holds 520,700 Valeant shares.
However, despite all the good vibes, the deal more or less doubles Valeant’s debt to $31 billion, Pearson has acknowledged, though he also points out that estimates put the overall U.S. market for GI treatments at $5 billion and growing 5 percent a year—and Salix’s sales are growing at an even faster rate.
As for specific changes to Salix post-merger, the companies had said that they would “determine how best to integrate the two companies to leverage the combined strengths of both while ensuring a smooth and orderly transition.” Based on news April 2, this includes cutting nearly a third of Salix's workforce, the vast majority of them from its North Raleigh location.
According to Valeant, consistent with its approach to integrating Bausch & Lomb, there were no planned reductions to Salix’s specialty sales forces or hospital, key account and field reimbursement teams.
“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, after the boards of both companies had approved the original Valeant offer.
The all-cash offer for all of the outstanding shares of Salix common stock was 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. As a result of the plan to reduce wholesaler inventory levels related to Salix 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.