Salix Pharmaceuticals announced a definitive agreement to combine with Cosmo Pharmaceuticals’ Irish subsidiary in an all-stock deal the company said will establish a “tax-efficient corporate structure” and boost its US-market position for products treating gastrointestinal (GI) diseases. Salix CEO Carolyn Logan added that “the new corporate structure greatly enhances our ability to compete for licensing deals and acquisitions, and improves the economics of future business development opportunities.” The transaction, which was unanimously approved by both boards, is expected to close in the fourth quarter.
Under the terms of the deal, Salix will become a wholly-owned subsidiary of Irish-domiciled Cosmo Technologies, which will change its name to Salix Pharmaceuticals. Salix shareholders are expected to own nearly 80 percent of the merged company’s stock after the deal is finalised, with Cosmo shareholders holding the remaining stake, which is valued at $2.7 billion based on Salix’s closing share price on July 8. The US company said shareholders of Salix will receive one share of the combined company for each share they own at closing. Meanwhile, Cosmo will be permitted to appoint one member to Salix’s board.
The transaction also calls for Salix obtaining Cosmo’s US patents for the ulcerative colitis treatment Uceris (budesonide) and an experimental formulation of the antibiotic rifamycin using multimatrix structure (MMX) technology, which allows the delivery of the active ingredient directly to the colon. Salix will also acquire Cosmo’s patents for rifamycin MMX in Canada, certain Latin American countries, India, China, Japan and the rest of the Far East, excluding Australia and New Zealand, and its patents for Uceris in Japan. Further, the company will have a right of first refusal for any GI drugs that Cosmo markets in the US.
Shares in Cosmo rose as much as 17 percent on news of the transaction. Friedrich von Bohlen, managing director of Dievini Hopp Biotech, which holds a 9.9-percent stake in Cosmo, commented that “it’s a very good deal because…you get these shares which are valuable and are real currency, and on the other hand the company retains the rights outside of the US.” Salix, whose shares declined as much as 5.9 percent, noted that the merger is expected to be “modestly” accretive to earnings per share in 2016 and increasingly accretive thereafter. However, Leerink analyst Jason Gerberry said “the deal looks modestly dilutive in 2015-2017 and modestly accretive in 2018 (and beyond),” adding that the agreement “was not about generating near-term accretion, but more about setting up a more favourable long-term tax structure.”
Meanwhile, analysts at UBS and JMP Securities expressed disappointment in the lack of near-term accretion with the transaction, with Oren Livnat of JMP Securities suggesting Salix’s long-term strategy makes a sale of the company unlikely anytime soon. However, Piper Jaffray analyst David Amsellem called the deal “compelling,” saying Salix could benefit from lower taxes for the experimental irritable bowel syndrome drug Xifaxan (rifaximin), which is expected to generate $1.5 billion in annual revenue, if approved. Gerberry further suggested that Salix could emerge as a takeover target by 2015 “if the deal closes and no anti-inversion US tax legislation is passed.”
Earlier this year, Salix completed an acquisition of Santarus for about $2.6 billion.