Auxilium Pharmaceuticals' Slow Response to Endo Troubles Investors

NEW YORK (The Deal) -- Endo International plc's $1.4 billion spoiler bid for Auxilium Pharmaceuticals (AUXL) , which would break up the Auxilium merger with QLT (QLT) , is likely to succeed, based on the market reaction. Nevertheless, Auxilium's slow response to the bid is troubling.

The spoiler bid is not a surprise, in that the Auxilium-QLT deal was launched with market expectation that a bid might surface for Auxilium, whose shareholders were required to approve the QLT deal.

The June 26 transaction offered some tax benefits as Auxilium was combining with Canadian-based QLT. The deal is conditioned on there being no change of law in the U.S. that would invalidate tax purpose advantages of the merger. Auxilium, is a specialty pharmaceutical company with a focus on erectile dysfunction and testosterone replacement therapies. QLT, a British Columbia corporation, has a focus on ocular product lines and both companies engage in orphan drug development. The tax motivation for the QLT deal is a driving factor and the merger was accepted with some reluctance.

Endo is based in Dublin and presumably offers potential tax benefits, as well.

The June 26 merger with QLT included Auxilium shares with possible adjustments to the share price based on licensing developments for QLT's synthetic retinoid product entering phase III development with fast track status under the Food and Drug Administration. QLT has been in some talks about licensing or sale agreements over the product called QLT091001. On the conference call for the merger, reference was made to late stage discussions with a partner for the retinoid project.

QLT shares traded down to $5.34 from $6.20 at the market close Tuesday. Shares off Auxilium gained about $9, or 42%, to $30.50 at a premium of $2.40, 0r 8%, to the proposed value of $28.10 in the Endo offer, which the bidder said would be roughly 50/50 cash and stock.

Endo does not intend to acquire QLT and said it can double the $75 million of synergies, or cost savings, recently announced by Auxilium, subject to due diligence, which Endo said it could complete swiftly. Endo would not elaborate on its willingness to pursue a hostile transaction, stating that the price and equity participation offered Auxilium should bring them to negotiations.

Auxilium adopted a poison pill.

The question is why did Auxilium ignore the advance of Endo, a long-term Auxilium shareholder said. The board had time to make some announcement regarding the proposal, so he asked why did they not recognize it? Auxilium will have a difficult time getting shareholder approval for the QLT transaction, he said.

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