NEW YORK (TheStreet) -- Investors in Valeant Pharmaceutical (VRX) cheered after it announced Sunday that it would acquire Salix Pharmaceuticals (SLXP) for $14.5 billion, while Salix investors were hoping for more.
Valeant plans to pay $158 a share in cash for Salix, which will expand the Quebec-based drugmaker into the growing gastrointestinal drug therapy market. Raleigh, N.C.-based Salix develops drugs that treat stomach disorders, and has a portfolio of 22 products, including Xifaxan, Uceris, Relistor and Apriso. Valeant specializes in dermatology products, eye health, neurology and branded generics. The deal is expected to close in the second quarter.
Shares of Valeant surged 13.2% to $196.09 on Monday on strong trading volume of more than 9 million shares. Shares of Salix traded down 1.1% to $156.08 as investors looked to exit their positions. More than 20 million shares of Salix changed hands vs. the three-month average trading volume for the stock of 1.85 million.
However, it's worth noting that John Paulson bought shares of Salix during the fourth quarter, a new position for the hedge fund investor, and his biggest buy position for the quarter.
Here's what analysts said about the deal.
Ronak Shah, Credit Suisse (Neutral on Salix; $137 PT)
Acquisition of SLXP by VRX (announced today) not a surprise, although, announced deal value likely slightly lower than many expected. Take-out speculation over the past few weeks remove surprise from today's announcement. The $158/share announced deal value is in-line with recent speculated deal value (Reuters, 02/20), but still slightly lower than some investor's expectations (in the $170+ range; stock closed on 02/20 at $157.85), particularly considering that multiple bidders were reported to be interested. It remains to be seen if other reported interested parties (e.g., SHP, ENDP) could still become involved in the process.
Irina Rivkind Koffler, Cantor Fitzgerald (Buy on Valeant; $214 PT)
Valeant reported revenues of $2.28B (+10% Y/Y) and adjusted non-GAAP EPS of $2.58 in 4Q:14 vs. guidance of $2.2B and >$2.55 and FactSet consensus of $2.23B and $2.55. Management introduced 1Q:15 EPS guidance of at least $2.30 per share, above consensus estimates of $2.24. Additionally, the company reduced its debt to $15.5B, which bring its overall leverage ratio to approximately 3.5x adjusted EBITDA. The big news is that Valeant plans to acquire Salix Pharmaceuticals for $158 cash/share (or $14.5B enterprise value). We maintain our BUY rating and raise our PT from $184 to $214 to incorporate our Salix accretion assumptions along with our interest expense estimates and expect to refine our estimates further after tomorrow's 8:00 am conference call. We would not expect Valeant to enter a bidding war for Salix if other more interested parties emerge through the process.
Is there a strategic fit for Salix's assets within Valeant? We believe that Xifaxan is a durable asset with no generic competition for the foreseeable future. The drug is attractively priced at $23.57 per pill and is pending approval for a large indication in diarrhea-predominant irritable bowel syndrome (IBS-D) on May 27. Furthermore, management has previously stated that it is interested in sectors reliant upon close physician relationships so could utilize the Salix deal as a beachhead into gastroenterology, followed by future acquisitions. The Salix pipeline is late-stage and therefore relatively low-risk, in our view; and contains valuable assets in opioid-induced constipation and prevention of liver decompensation.
Alex Arfaei, BMO Capital Markets (Outperform on Valeant; $187 PT)
Salix is a leading gastroenterology company and we see several sources of value: By 2017, we estimate that Salix should improve Valeant's revenue growth rate from 9% to 10%, add at least $3.18 to Valeant's 2017EEPS (i.e., > 20% accretive), and improve Valeant's gross margin by ~1% and operating margin by at least 2.5%. Valuation clearly reflects Salix's double digit growth potential. The deal values Salix at an EV of $14.5Bn, or 6.6x our expected 2016 revenues and 5.7x our expected 2017 revenues. This is higher than the typical < 3x revenues Valeant prefers to pay; however, we expect Salix's revenues to grow by a CAGR of ~19% during 2015-2017, excluding inventory draw down impact in 2015. Valeant states that it conducted extensive due diligence on Salix's inventory levels, and plans to target two months or less of inventory by the end of 2015. Therefore, Salix's 2015 revenues could be lower than the $1.3Bn expected. To account for the inventory drawdown and the growth opportunity in Xifaxan IBS-D, we focus our synergy and accretion analysis on 2016 and 2017. We can see how the deal is 20-22% accretive in 2016 and 2017 (Exhibit 1). Valeant expects operating cost synergies of >$500MM by 2016, driven by reductions in corporate overhead and R&D. This is higher than our $300MM expectation; however, given Valeant's track record with Bausch + Lomb, management will likely be given the benefit of the doubt. By the end of 2016, leverage (Net debt/2016 EBITDA) is expected to go down to 3.7x, which is manageable.
Oren Livnat, JMP Securities (Market Perform on Salix; N/A PT)
Salix Pharmaceuticals has agreed to be acquired by Valeant for ~$14.5B cash ($158/share), a valuation below some expectations but, in our view, likely close to the best offer Salix will receive given the thorough vetting process, the remaining FDA risk, and growth drivers in primary care; we reiterate our Market Perform rating.
With reports of multiple interested bidders, and potential acquirers likely kicking the tires for months, we suspect that this accepted offer is at or near where the deal will get done. Many had projected a potential tax-advantaged acquisition by Valeant (VRX, NC) at >$170/ share. This price looks thrifty in light of VRX's projected >$500M synergies in six months and >20% EPS accretion in 2016. We can only surmise that the remaining risk around the May 27 PDUFA date for Xifaxan in IBS-D, and the primary care investment necessary for potential growth drivers in IBS and oral Relistor in OIC, may have given bidders pause. Of the other companies rumored to be interested in SLXP, we believe only Shire SHPG - immediately on the heels of closing its NPS acquisition - could marshal a competitive all-cash offer.
Jason Gerberry, Leerink (downgraded Salix to Market Perform from Outperform; $158 valuation)
VRX-SLXP combination is expected to yield "greater than $500m" in cost synergies within 6-months of deal close, primarily from corporate overhead costs and R&D rationalization. VRX does not plan to reduce SLXP's specialty gastroenterology and hospital sales force, but indicated in the press release that it would determine the optimal size of the primary care sales force during the integration process. While VRX didn't break out synergies by line item, we estimate (1) general corporate is probably ~$100m; (2) R&D ~$150-200m; and (3) tax synergies of $230m, assuming VRX can shave 20% off SLXP's full US tax rate. SLXP currently employs ~160 primary care (PCP) reps who could be redundant or expendable with a near-term loss of exclusivity of some SLXP primary care brands but VRX may want to keep if Xifaxan requires a primary care launch; PCP reps could allow for an addt'l $50m in synergies.
With VRX having conducted "extensive due diligence" on SLXP's wholesaler inventory issues and a separate independent auditors coming back clean, we believe SLXP's inventory issues do not represent a material risk to the deal. Tomorrow, we expect VRX investors to inquire about SLXP's upcoming Xifaxan PDUFA relating to the IBS indication. We continue to expect Xifaxan will be approved for IBS & worse case VRX could get more aggressive with Xifaxan pricing. Lastly, we view Xifaxan as having high quality patent life into 2025-28 with limited risk of patent challenge.
TheStreet Ratings team rates SALIX PHARMACEUTICALS LTD as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate SALIX PHARMACEUTICALS LTD (SLXP) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 13.7%. Since the same quarter one year prior, revenues rose by 48.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Compared to its closing price of one year ago, SLXP's share price has jumped by 45.86%, exceeding the performance of the broader market during that same time frame. Although SLXP had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
- SALIX PHARMACEUTICALS LTD has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SALIX PHARMACEUTICALS LTD increased its bottom line by earning $2.14 versus $1.01 in the prior year. This year, the market expects an improvement in earnings ($3.94 versus $2.14).
- The debt-to-equity ratio is very high at 5.57 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, SLXP has a quick ratio of 0.59, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, SALIX PHARMACEUTICALS LTD's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: SLXP Ratings Report