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TheStreet Open House

Salix Prospects as Takeover Target Debated After Inversion Deal

Stocks in this article: SLXP

NEW YORK (TheStreet) -- Shares of drug maker Salix (SLXP) are falling after the company announced that it had agreed to carry out a merger which is expected to reduce its profits in 2015. However, research firm Piper Jaffray wrote that Salix is still an acquisition target and called the merger "compelling."

WHAT'S NEW: Salix agreed to merge with Ireland-based Cosmo Technologies, a subsidiary of Cosmo Pharmaceuticals, the companies announced last night. The deal will enable Salix to significantly reduce its tax rate by becoming an Irish company. Salix, which sees the deal lowering its effective long-term tax rate from high 30% to low 20%, said it expects the transaction to be "modestly accretive" in 2016 and increasingly accretive thereafter.

ANALYST REACTION: In a note to investors earlier today, Piper Jaffray analyst David Amsellem wrote that Salix is still a takeover target following the merger. Moreover, the merger is compelling, since it would significantly lower the taxes that the company would have to pay on its IBS-D treatment, Xifaxan, assuming that the drug is approved by the FDA, the analyst wrote. The deal could reduce the taxes that Salix would have to pay on its Xifaxan profits by 18 percentage points or more, Amsellem estimated. Furthermore, as a result of the merger, Salix will no longer have to pay Cosmo a royalty on sales of Uceris, an Ulcerative Colitis treatment, Amsellem stated. He kept an Overweight rating on the stock. Taking a somewhat different view was Leerink Swann analyst Jason Gerberry. In the wake of the deal, Salix is unlikely to be acquired in the near-term, the analyst stated. However, Salix could be acquired next year if Congress does not pass legislation that would prevent companies from lowering their tax burden by carrying out M&A with firms located in other countries, the analyst stated. Gerberry kept an Outperform rating on Salix.

PRICE ACTION: In morning trading, Salix sank $5.66, or 4.1%, to $131.61.

Reporting by Larry Ramer.

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