Endo moves to crash the Auxilium-QLT party

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Auxilium’s move on QLT last month was not your traditional inversion. Tax savings were moderate compared with other deals, and the move was not particularly well received by investors. So it is not surprising that Endo spied an opportunity to jump in.

Its $2.2bn spoiler bid for the predator-turned-prey looks to have a good chance of succeeding. The price appears to have been pitched to allow some negotiation, and Endo can afford to pay a bit more. Auxilium’s executives will have a hard time justifying a vigorous defence of the approach.

Shares in the Pennsylvania company surged 42% in early trade today to $30.51, above Endo’s $28.10-per-share cash and stock offer. In the wake of announcing the QLT deal, the stock had dipped to a nine-month low.

Because Auxilium does not expect to pay tax until 2017, the benefits of moving to a lower-tax region were always going to take time to come through (Auxilium joins inversion rush with bid for Canada’s QLT, June 26, 2014). Thus the company’s investors have greeted this offer of much nearer-term rewards with enthusiasm, particularly as the QLT transaction was seen to carry the risk of making Auxilium less attractive to suitors.

Of course this might have been Auxilium’s intention all along. If so, the poison was not drunk quickly enough. Auxilium swiftly adopted a second “poison pill” in the shape of a shareholder rights plan this morning, but, with Endo executives making it clear that they want to achieve a recommended bid, this should amount to little more than standard bid defence.

Adding to earnings

At the current price, and taking into account the cost savings that Endo targeted, analysts at UBS calculate that the deal could add 7% to its earnings next year, and 19% in 2016. Leerink analysts calculate that the move could give earnings a 20-25% boost in 2017-19.

Assuming that Endo has come to similar conclusions, it should be able to find a bit more meat to throw on the table.

The offer as it stands values Auxilium at $2.2bn. The company was last worth this much in April, before it became clear just how hard the testosterone replacement market – its main source of revenue – was being hit by safety concerns ("Low-T" panel likely to lean towards risk aversion, September 4, 2014).

Endo is well aware of the risks of this market: it has a contender in Aveed, an injectable product that won FDA approval earlier this year. So it is notable that the only product highlighted in its bid approach was Xiaflex, an injectable collagenase for the treatment of Dupuytren’s contracture and Peyronie’s disease.

Xiaflex was launched in 2010, and its sales are seen reaching $118m this year and climbing to $389m by 2020, EvaluatePharma’s consensus shows. Much of this growth depends on the product performing in Peyronie’s, a condition that manifests in curvature of the penis and in which it was approved last year.

Endo is probably capable of making Xiaflex a success, but as this is the only significant sales growth driver that the Auxilium deal will bring, this needs to happen to justify this move.

Playing catch-up

Endo is in need of new products to grow its top line, but the rapidly consolidating speciality pharma sector has left few high-quality targets remaining. With a focus on men’s health and urology products Auxilium is a fairly good fit for Endo, but this deal is not a sure-fire growth driver.

Last week’s restructuring announcement from Auxilium – which outlined plans to fire 30% of its staff – shows that the risks to its business are real.

None of which means Endo is not highly motivated to do this deal. With the big beasts of the sector like Actavis and Valeant getting ever bigger, the desire to play catch-up is strong.

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow @AmyEPVantage on Twitter

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