Endo International PLC launched a surprise bid to break apart Salix Pharmaceuticals Ltd.’s $10 billion agreed sale to another rival, intensifying an already frenzied round of consolidation in the drug industry.
Ireland’s Endo said it sent a letter to Salix’s board on Wednesday offering $175 a share in cash and stock—or $11.2 billion based on current shares outstanding—for the drug maker. Endo is hoping to snatch the seller of treatments for stomach illnesses from Valeant Pharmaceuticals International Inc., which signed a deal last month to acquire Salix for $158 a share, or about $10 billion.
“We are firmly committed to our all-cash agreed transaction, which delivers immediate and certain value to Salix shareholders,” Valeant said in a statement.
The move by Endo is the latest sign of the torrid pace of deal-making in the drug industry. Last year, $268 billion in pharmaceutical mergers and acquisitions were announced globally, more than double the volume in 2013 and the biggest total since Dealogic began keeping records in 1995. This year is off to an even faster start, with $65 billion of transactions announced, versus $39 billion over the same period in 2014.
Pharmaceuticals stand out even in a hot overall M&A market. Drug makers accounted for 7.8% of global M&A by dollar volume last year, up from 4.9% in 2013. So far this year, one in 10 dollars committed to global deals has come from the sector.
A mix of ingredients is propelling the activity. Beset by slowing growth, the companies are seeking mergers that will enable them to slash overlapping costs and pick up replacements for aging drugs that in some cases are losing patent protection. They are being encouraged by an ability to borrow funds at rock-bottom interest rates. But perhaps the biggest driver of all, analysts say, is taxes.
A number of U.S. drug companies in recent years bought foreign rivals largely to be able to move their tax locales to foreign countries with lower corporate taxes, in deals known as inversions. One such deal begot another, as companies fearful of falling behind inverted rivals sought their own acquisitions. As the U.S. moved last year to clamp down on such transactions, those companies that had already managed to invert intensified their hunt for deals in the U.S., which offer them the opportunity to spread their favorable tax rates over a wider base of income.
“You basically have a built-in profit margin that the guys you buy don’t have, because you’re able to strip the taxes out,” said Sanford C. Bernstein & Co. pharmaceuticals analyst Ronny Gal.
No company better illustrates the welter of activity than Salix.
Last fall, the company called off a planned inversion deal of its own after the U.S. Treasury implemented rules aimed at deterring such deals. Around the same time, Allergan Inc. held takeover talks with Salix as the Botox maker attempted to fend off a hostile takeover bid from Valeant. Valeant itself had inverted years earlier and boasts a tax rate of less than 5%.
After Allergan walked away from Salix—and agreed to be bought by another inverted company, Actavis PLC—Salix sought another buyer. The bidding process, which culminated in February, ultimately drew five suitors, all based abroad or soon to be. Endo, which inverted in 2014, was one of them, but its bid of $150 a share fell short of Valeant’s.
When Allergan and Salix were in talks late last year, Allergan had offered to pay $175 a share for Salix—even after discovering an inventory glitch, according to a regulatory filing and a person familiar with the matter. That makes Valeant’s deal look like a bargain, and may help explain why its shares surged on the agreement.
Valeant dropped 3.9% to $193.71 on Wednesday. Endo fell 1.4% to $87.76, while Salix rose 7% to $168.61.
There is no guarantee Endo’s bid will be accepted, and either way, buying Salix would be a big bite for the company, which has a market value of roughly $15 billion. Endo also would have to swallow a breakup fee of $356 million, or roughly $5.50 per share, should Salix walk away from the Valeant deal.
This isn’t the first time Endo has taken on a spoiler role. Last year, it broke up Auxilium Pharmaceuticals Inc.’s inversion deal to merge with QLT Inc., swooping in with a $2.6 billion bid to buy Auxilium.
Endo’s latest move pits its chief executive, Rajiv de Silva, against his former mentor, Valeant CEO Michael Pearson. Both men were consultants at McKinsey & Co., and Mr. de Silva was one of Mr. Pearson’s top lieutenants at Valeant before leaving to take the helm at Endo in 2013.
Under Mr. de Silva, Endo has borrowed from some of Valeant’s playbook as it remakes itself, unloading unwanted businesses, hunting for acquisitions and buying proven drugs in lucrative markets like skin treatments, instead of relying on risky investments in early-stage research. But Endo also sees itself as different from Valeant by, for instance, investing heavily in late-stage drug development, too.
Raleigh, N.C.-based Salix sells a drug called Xifaxan that some analysts say could exceed $1 billion in yearly sales if the Food and Drug Administration approves it to treat diarrhea caused by irritable bowel syndrome. The company reported $1.1 billion in total revenue last year.
Stomach disorders like traveler’s diarrhea and irritable bowel syndrome represent a fast-growing market because scientific advances have paved the way to discover new drugs, and health plans have been willing to pay for them.
At an investor meeting devoted to its stomach-disorder business on Monday, Takeda Pharmaceutical Co., another earlier Salix suitor, estimated the market will generate nearly $28 billion in sales by 2020.
By Liz Hoffman
