Salix Pharmaceuticals and Cosmo Pharmaceuticals have called off their $2.7 billion merger, citing recent moves by the U.S. Treasury Department to make it more difficult for companies to complete so-called corporate inversions.
The move heightened speculation that Raleigh-based Salix may be on the verge of being acquired. Bloomberg News reporting late Thursday that Salix is now in talks to be acquired by Actavis, an Irish specialty pharmaceutical company, after its earlier discussions with Botox-maker Allergan failed to produce a deal.
Analysts with Sterne Agee wrote in a note Friday that the canceling of the Cosmo deal is a signal that Salix is up for sale.
“The Cosmo inversion was seen by investors as a potential roadblock to a sale of the company,” analysts Shibani Malhotra and Austin Nelson wrote in a note to clients.
Salix announced in July plans to merge with Cosmo Technologies, an Ireland-based subsidiary of Cosmo Pharmaceuticals. Salix would have continued to be headquartered in Raleigh but would have re-incorporated in Ireland, allowing it to eventually reduce its long-term tax rate from the high 30 percent range to the low 20 percent range.
“When we announced our agreement to merge with Cosmo Technologies in July we believed the combination would generate significant value for our stockholders through the addition of key products to our development pipeline and a more efficient corporate structure that would enhance our profitability,” Salix CEO Carolyn Logan said in a statement. “Since then, however, the changed political environment has created more uncertainty regarding the potential benefits we expected to achieve. As a result, Salix and Cosmo have mutually agreed to terminate the proposed transaction.”
Last week, the Treasury Department announced new regulations intended to reduce the benefits of such maneuvers. The regulations would prohibit some techniques that companies use to lower their tax bill and tighten ownership requirements that must be met for such deals to occur. Under the rules, Salix would have had to own no less than 80 percent of combined company.
The Obama administration proposed the rules after a wave of inversion deals were announced in recent months, many of them by drugmakers. The Salix-Cosmo merger was one of eight that were pending when the new rules were announced.
Salix will pay Cosmo a $25 million termination fee under the terms of the merger agreement.
Several media outlets reported in recent days that talks between Salix and Allergan, which is fending off a hostile takeover bid from Valeant Pharmaceuticals, have cooled over the past week. Bloomberg reported that the talks stalled over concerns about what valuation Salix would fetch. Salix, which expects revenue to exceed $1 billion for the first time this year, has a market value of $9.9 billion.
Salix sells drugs to treat gastrointestinal ailments. Actavis is a more logical suitor for Salix, the Sterne Agee analysts wrote, as it has gastrointestinal products in various stages of development. In July, an Actavis subsidiary paid $1.1 billion to acquire Morrisville-based Furiex Pharmaceuticals. Furiex’s most promising drug, eluxadoline, is an experimental treatment for patients suffering from irritable bowel syndrome with diarrhea.
Investors initially hailed the end of the Salix-Cosmo deal, sending Salix’s shares up more than 6 percent early Friday. The stock closed at $152.87, up $1.78.