Salix Had a $13 Billion Offer on the Table From Allergan Before Accounting Problems Smashed Share Price

 Salix (SLXP) Had a $13 Billion Offer on the Table From Allergan (AGN) Before Accounting Problems Smashed Share Price
March 25, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor

An accounting error made by a third party widely assumed to be Botox maker Allergan Inc. would have had Salix Pharmaceuticals, Ltd. acquired last year for $205 per share, instead of the $173 per share price for which Valeant Pharmaceuticals International, Inc. acquired it, a new account of the deal from Salix revealed Wednesday.

“In a full history of the ups and downs Salix faced over the past 18 months, the company disclosed that Allergan Inc. offered as much as $205 per share in cash, something that would have valued the deal at more than $13 billion, or 18 percent higher than the $11.1 billion in cash that Valeant agreed to pay,” the Triangle Business Journal reported this week.

Salix does not identify the third company outright–in a filing, Salix refers to the company repeatedly as “Party A” – but makes at least two other references that make it clear the company is Allergan, the maker of Botox based in Irvine, California,” said the article.

In the Salix filing quoted in the story, on Aug. 20, Allergan began upping its offer price to $200 per share in cash.

“The Party A (Allergan) Chief Executive Officer advised that Party A’s intention was to be in a position to complete due diligence and announce a transaction within three weeks,” according to a Salix filing made public this month. The companies then haggled over a sale price of $205 or $210 a share, before deciding on $205 per share in cash. The deal was set to go ahead when Allergan began its due diligence—which eventually turned up inventory problems at Salix and had the company recalculate its offer.

In the meantime, multiple bidders had appeared, and they all were pitching lower numbers after the inventory issues had come to light.

In the end, the tug of war for the acquisition of Salix ended March 16, after Valeant Pharmaceuticals International, Inc. (VRX) said it would sweeten its bid for Salix and increase it from $158 per share to $173 in cash, more than rival HREF="http://investor.biospace.com/biospace/quote?Symbol=ENDP">ENDP) offer, which had dropped in value to $172.56 per share.

Thomson Reuters reported that the new Valeant offer is based on Salix's 63.33 million shares outstanding as of Feb. 23 and gives the company an enterprise value of about $15.8 billion.

"While we are disappointed with this outcome, we have been and will continue to be disciplined in our approach to potential acquisitions. We would like to wish Salix and Valeant continued success as they move forward with their transaction,” said Endo in its statement. “As a next step, Endo is focusing our attention on other opportunities in our robust deal pipeline and on maximizing our organic growth initiatives including progressing our R&D pipeline. We will continue to drive Endo's growth as a global leader in specialty pharmaceuticals and look forward to creating value for our shareholders while improving patients' lives."

Salix confirmed in early March that it has received an unsolicited bid for the company from Endo International Plc for a whopping $170 to $175 a share in cash and stock, a significant premium to its previous suitor Valeant’s price. The news meant that the $14.5 billion marriage between Valeant Pharmaceuticals and Salix Pharmaceuticals has hit a major speed bump on the way to the altar, causing a fraught week of frenzied negotiations as the two firms tried to outjockey one another.

"We believe that we could successfully close this transaction within a period as short as 5-6 weeks of a negotiated agreement," Endo Chief Executive Officer Rajiv De Silva said in an email to employees the day prior to the deal announcement.

For the winning bid, Valeant teamed up with activist hedge fund investor Bill Ackman, who owns 5 percent of the company. He and Valeant made an unsuccessful hostile takeover bid for Botox maker Allergan Inc. (AGN) last fall, but appear to have been more successful this time around.

“In order for them to take the Endo transaction, they have to walk away from an all-cash deal,” said Ackman told Bidness days before the deal closed. “If you think Valeant is getting it on the cheap, then you should buy Valeant stock, which is what we did. We think Valeant stock is very cheap.”

The fate of employees at all three firms remained up in the air, as Wall Street and staff rosters alike tried to parse out what the various pairings could mean if consummated. For its part, Valeant said it was standing behind its existing bid.

If Salix Pharmaceuticals, Ltd. (SLXP) sells to one of its two suitors, Irish Pharma Endo International (ENDP) or Canadian-based Valeant Pharmaceuticals International, Inc. (VRX), jobs in the Research Triangle Park area are likely to be eliminated, but there could be silver lining,

North Carolina-based Salix Pharmaceuticals, which manufactures medications to treat various stomach ailments, is being heavily courted by the two pharmaceutical entities, the latest move in a heavy round of industry acquisitions over the past few months. Last year, $268 billion in pharmaceutical mergers and acquisitions were announced globally, more than double the volume in 2013, the Wall Street Journal reported.

“We are firmly committed to our all-cash agreed transaction, which delivers immediate and certain value to Salix shareholders,” the company said in a statement.

"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," said Pearson.

"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."

The news comes amid reports that Valeant is once again going shopping, despite pressure from shareholders and Wall Street analysts to rein in its free-spending buying spree. Since 2008, Valeant has acquired more than 100 smaller companies, a pace Chief Financial Officer Howard Schiller told stakeholders earlier this year that will slow, but will still be active.

Valeant was rumored earlier this month to be mulling over a bid for Raleigh, N.C.-based Salix Pharmaceuticals, though many market watchers worried that Valeant will pay too much for Salix, which has a market value of around $9 billion. Shibani Malhotra, an analyst with Sterne Agee Group, has estimated that the shares could shoot up as high as $170 each after a takeover, a significant bump from where it now sits at $157.85.

“We believe the resolution of the accounting-related overhang should ease investor concerns,” said Malhotra in his note, “as reliable financials will be available near-term for investors as well as potential acquirers.”

Schiller said shareholders should expect "small and medium sized transactions" in 2015, he told the audience of J.P. Morgan Healthcare Conference which began Monday in San Francisco and is the oldest and largest conference of its type. It includes 300 of the largest biotech, healthcare and biopharma companies presenting their top-line data and estimates to 4,000 of eager bankers, analysts, institutional investors, hedge funds and journalists.

Valeant has made 60 acquisitions in six years, including its most recent deal to buy eye care company Bausch & Lomb for $8.7 billion.

Valeant has previously said it aims to be one top five pharma companies by the end of 2016, which means it would need to have a market cap of $150 billion, a difficult task as its debt continues to balloon . Right now, Valeant has $17 billion in debt on its books from $4.9 billion in 2012, a huge leap from $2.6 billion in 2008, when CEO Michael Pearson joined the company.

The company told analysts during a fourth quarter call last year that they hope to keep the deal making up.

"We can't predict the path that will get us to the $150 billion, per se. But we find it's very helpful to set a structure of aspiration,” an executive said at the time. “It's something that we've done every year, and it gives our investors a sense of where we're trying to go. And unless you aim high, you don't achieve high."



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