Valeant agrees $10 billion takeover of Salix

Last year’s rumour of a Salix acquisition by Valeant proved well-founded, with the two companies announcing a $10 billion deal over the weekend.

Canada’s Valeant is paying $158 per share for the US gastrointestinal therapy specialist – and will also take on another $4.5 billion in debt – in order to get its hands on a portfolio of 22 products headed by Xifaxan (rifaximin), an antibiotic used to treat traveller’s diarrhoea and a rare brain disorder caused by liver failure, that is expected to have revenues of around $750 million this year.

Michael Pearson, Valeant’s chief executive, said that Salix’ portfolio included products that were outstripping the background market growth and were “an ideal strategic fit for Valeant’s diversified portfolio of specialty products”. There was also around $500 million in cost-cutting opportunities, he added.

Valeant is said to have been under pressure from some investors to do another deal in the wake of its thwarted takeover attempt last year of Allergan, which eventually threw its lot in with Actavis, although others have reportedly urged the company to put its M&A on hiatus in order to improve its debt position and boost shareholder returns.

Allergan had claimed Valeant’s financial model was risky because it resulted in high levels of debt and cut into R&D investment. The Canadian company had more than $16 billion in debt as of September 2014, although it has since trimmed that to a little over $15 billion.

The Canadian company certainly has a history of growth by acquisition – and cost-cutting – having spent almost $30 billion on M&A since 2008. Most recently it cut a deal to buy Dendreon’s struggling prostate cancer vaccine Provenge, along with some other corporate assets for $400 million.

Salix was eyed as a takeover target by Allergan during its defence against Valeant, although that deal hit the buffers after Allergan concluded that there were irregularities in Salix accounts.

Meanwhile, Salix’ announcement that its top-selling drugs had several times the company’s targeted inventory with wholesalers has also raised eyebrows, and led to the departure of the firm’s chief financial officer and chief executive in rapid succession. The company had to scale back reported sales and earnings for 2013 and is due to report re-calculated 2014 figures on 2 March.

Valeant is undeterred by the over-supply problems, saying that these will have an impact to the tune of around $500 million in 2015 but will be back to normal inventory levels by the end of 2015.

Xifaxan has upside potential with its possible US FDA approval later this month as a treatment for irritable bowel syndrome, while the company is also awaiting a regulatory verdict for an oral formulation of its injectable Relistor (methylnaltrexone bromide) product for opioid-induced constipation.

For Salix, the deal comes in the wake of an attempt to take over Italy’s Cosmo Pharmaceuticals in a tax inversion deal that was aborted following a clampdown by the US Treasury. The Valeant deal will provide an opportunity to trim the company’s tax liabilities from its current rate of around 35 per cent.

Meanwhile, Valeant has reported revenues of $2.28 billion for 2014, an 11 per cent increase on the prior year, with revenues more than quadrupling to $534 million.

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