THE END OF A TRILOGY – VALEANT ON SALIX CASE.

The increased M&A activity within the Healthcare sector has not slowed down in 2015, after we saw a record volume of transactions in the previous year. After securing financing, Canada-based Valeant has won a tender offer for Salix Pharmaceuticals, in a $14.5bn transaction. The market trend of increased deal activity for tax-inverted players still continues.

Overview

Valeant Pharmaceuticals Industrial, headquartered in Quebec, Canada, is committed to offering a wide pipeline strategy, including new compounds, as well as product life-cycle management. Its products’ pipeline is mainly focused on drugs treating disorders related to dermatology and neurology.

Screenshot 2015-03-10 13.02.43

Financial ratios Valeant Pharmaceuticals

Salix Pharmaceuticals, headquartered in Raleigh, North Carolina, is a leading company in licensing, developing, and marketing products to treat gastroenterology diseases. With its diversified portfolio of 22 products, Salix targets mostly the US market through its own specialty sales force.

By carrying out the acquisition of Salix, Valeant will be able to take advantage of its Canadian domicile and low tax-rate of just 5%, which is fundamental when it comes to exploiting synergies from the acquisition. Moreover, the Canada-based company is expecting its earnings to increase by more than 20%, by relying mainly on the sales of Xifaxan, a new product to treat diarrhea developed by Salix.

The deal ends several tumultuous months for Salix. Allergan tried to acquire the company last year but it had to pull out of the deal after discovering some accounting irregularities that led the CFO to resign and the CEO to retire early.

Finally, the Valeant – Salix deal was announced after other relevant transactions took place, such as Pfizer acquiring Hospira for $17bn. This is a clear sign that the profitable M&A activity started in 2014 in the pharmaceutical sector is far from being over.

Deal Drivers

The acquisition of Salix Pharmaceuticals Ltd. by Valeant Pharmaceuticals International (a deal amounting to approx. $14.5bn) is another striking example of the ongoing industry consolidation in the Healthcare sector.

Financial ratios Salix Pharmaceuticals

Financial ratios Salix Pharmaceuticals

Salix is a potential competitor for Valeant since entering the highly competitive market for treatment against gastrointestinal disorders. It has developed a new product against diarrhea called Xifaxan, which is expected to add $ 1bn in sales yearly. As a result of this development, the North Carolina-based company has become one of the leaders in the gastrointestinal sector.

In the past, an attempt of Valeant to acquire the Botox-maker Allergan failed. Hence, the Canada-based company is looking for new potential acquisition targets. In order to keep up with its competitors, this deal would be an important turning point for Valeant.

Salix in the meanwhile, has cancelled its own planned acquisition of the Italian drug company Cosmo Pharmaceuticals Spa. Furthermore, Salix announced that the demand for its drugs is not as high as expected giving its rising inventory levels, leading to a significant decline in its stock price and the resigning of the CEO and CFO. Salix was sending signs to the market for being a potential acquisition target.

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Comparison of the stocks’ prices – vertical line indicates date of the announcement.

Valeant’s expectations from the transaction include growth in the key product segments. The transaction is expected to be over 20% accretive to cash EPS in 2016.

Salix’s leading position in the gastrointestinal market provides a perfect strategic fit for Valeant. Its products in this segment are outpacing the market in terms of volume and growth and constitute well-recognised brands. 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 solutions to the healthcare providers and their patients.

Unlike prior acquisitions of Valeant, this deal concerns more a single product exposure focusing on the gastrointestinal products. In general, Valeant is more focused on small or medium-sized acquisitions, but the acquisition of Salix can be seen as a turning point in Valeant’s transaction history.

Time-line

The Valeant-Salix transaction is a tender offer involving a cash payout. These forms of deals are characterized by a shorter time-frame than cash-merger deals, which usually take about four months or longer. Indeed, cash tender deals do not require the issuance of a proxy statement through the SEC, hence a shareholder vote is unnecessary. Typically a 15-day antitrust notification period is included, making the whole deal concluded in about 45 days.

The Valeant-Salix agreement provides for a further marketing period, which makes the deal expected closure to be in the second quarter of 2015. The following customary closing conditions are yet to be met, namely:

  • Minimum tender condition (50%)
  • Hart–Scott–Rodino antitrust filing verification

Deal Terms

The company from North Carolina has been valued at $14.5bn including the debt of $4.5bn Valeant is going to assume, which equals to a price of $158 per share. This all-cash acquisition comes few months later after the failed attempt by Valeant to acquire Allergan due to the white knight role played by Actavis. The main driver of this acquisition is the ability by the Quebec-based company to take the maximum advantage of the existing synergies thanks to its Canadian fiscal domicile. It is in fact going to pay a 5% tax rate compared to Salix’s 35.2%.

Moreover, Valeant, notoriously a cost-cutting company, is expected to further save $500m by cutting 90% of the current $560m R&D budget of Salix. This aggressive spending reduction on such a core sector for the company has been the reason that drove Allergan’s decision to avoid their hostile takeover in November 2014.

According to stock price movements, Salix’s investors have positively reacted to the news with shares being currently traded at around $158. This represents a great jump from a value of about $91 in early November 2014. Before that date, the excitement about a possible acquisition of the company by Allergan raised the price up to $169 before the price collapse due to serious irregularities with North Carolina-based company’s accounting procedures. The stock value of Salix has been steadily increasing after that moment. Since there was a widespread consensus among investors that Salix would have been targeted again from potential buyers, the stock price already reflected this possibility and therefore it did not sensibly react on the announcement date.

On the other hand, Valeant stock price heavily positively reacted to the acquisition announcement, rallying by around 15% over one single trading date, from $173.26 to $198.71.

The acquisition is going to be mainly funded through debt, principally provided by Deutsche Bank and HSBC. Aside the $15bn in order to complete the deal, an additional bridge loan of $7.5bn, necessary while the company secures a new agreement with the creditors, will be provided as well. Valeant will also exploit the additional cash flow of $5.5bn consisting of incremental loan facility and $9.6bn of an unsecured loan consisting of corporate junk level bonds. These will be sold in the high yield market at an expected interest rate of around 5.5 – 6%. This is going to be the second largest bond sale of such quality in the recent high-yield market history, underlying the investor’s appetite for high-return debt products.

Critics of Valeant’s approach have pointed at Valeant’s risky M&A policy in the long-term perspective. Management will try to debunk these theories by keeping the performance valuations for the two companies separated during 2015.


Sources: ©2015 Valeant, ©2015 Salix Pharmaceuticals, ©2015 Dow Jones & Company Inc., © The Financial Times LTD 2015, © 2015 National Post, a division of Postmedia Network Inc., © 2015 Bloomberg L.P.

To contact the authors of this story:

Peter Valach                                    peter.valach.mail@gmail.com

Alexandra Heidemann                      alexandra.heidemann@myebs.de

Riccardo Zanasi                              riccardozanasi@libero.it

Federico Cattani                              federicocattani@outlook.it

Luca Papa                                      luca.papa@studbocconi.it

To contact the editor responsible for this story:

Luca Papa                                      luca.papa@studbocconi.it