With Salix buy, Valeant bets $10B on GI market growth

It didn't take long for serial acquirer Valeant ($VRX) to jump back into the dealmaking saddle after failing to snag Allergan ($AGN) last year. Now, the Canadian pharma has inked its second agreement of the month--a $10.1 billion pickup of North Carolina's Salix Pharmaceuticals ($SLXP) that will ring in as its largest deal ever.

Valeant will shell out $158 per share in cash for GI specialist Salix, which had also drawn takeover interest from Shire ($SHPG) and Endo ($ENDP). The Quebec-based drugmaker expects the deal to close in the second quarter of 2015 and pad its 2016 EPS by 20%, it said in a Sunday statement.

Valeant CEO J. Michael Pearson

True to CEO J. Michael Pearson's ways, the company will be looking to cut more than $500 million in operating costs to help it reach that earnings target, and Valeant expects to achieve savings within 6 months of the deal's close. As ISI Group analyst Umer Raffat pointed out in a note to clients, that equates to about 75% of Salix's SG&A and R&D expenses. But the $500 million cost squeeze will come from the combined company rather than Salix alone.

In the meantime, some of Salix's sales folks need not worry. Specialty salespeople--along with hospital, key account and field reimbursement teams--will be sticking around, Valeant says. It will need them as it sets out to foray into the GI field, one of two new arenas it will be entering after locking up Dendreon's ($DNDN) cancer vaccine Provenge earlier this month. While Pearson has traditionally targeted skincare and eyecare, he has said he's interested in fast-growing markets, and GI fits the bill.

"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," Pearson said in a statement. "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 key drug will be lead Salix product Xifaxan, which currently boasts indications for hepatic encephalopathy and traveler's diarrhea. While its sales currently fall in the $750 million range, analysts expect it to top out at $2 billion, according to Raffat. But the med's success--and the deal's success, for that matter--will depend on Xifaxan's launch in IBS-D, a label expansion it expects to snag by May 27. "Unlike Valeant's prior acquisitions, there is a large single product exposure in this deal," Raffat wrote.

The agreement is also a win for the deal-minded Salix shareholders who had been ramping up pressure on the company to sell itself after an inventory snafu was revealed late last year. Valeant will now pick up where Salix left off in trying to correct those stock problems, which led to wholesalers piling up 9 months' worth of inventory for the company's top four products. Valeant figures it can pare those levels down to two months or less by this year's end, it said.

- read Valeant's release

Special Reports: Pharma's top 10 M&A deals of 2013 - Valeant/Bausch + Lomb - Salix/Santarus | The most influential people in biopharma today - J. Michael Pearson - Valeant

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