Salix and Auxilium reveal an anti-chain in overdrive

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With Salix Pharmaceuticals trading up as high as 11% before the markets opened this morning on speculation that it was being targeted by Allergan, the M&A anti-chain has gone into overdrive.

In this case there could be an unexpected result, thwarting moves on the Botox maker but also derailing Salix’s own attempt to remain independent. Allergan is of course being bid for by Valeant – and perhaps Actavis – and could gain support from Salix investors who want their company to scupper its own bid for Cosmo Pharmaceuticals.

There is some similarity here with Auxilium Pharmaceuticals’ move on Canada’s QLT, which is arguably driven by an M&A anti-chain of its own. This theory says that companies that see themselves as ripe for opportunistic takeovers, like Auxilium and Salix, do acquisitions of their own to try and break the chain (With an eye on Allergan and Valeant, Shire bulks up, May 13, 2014).

The irony with both QLT and Cosmo is that, rather than acting as poison pills, they have served to bring buyers higher up the chain out of the woodwork.

Race to the bottom?

Perhaps the problem is that the anti-chain has actually resulted in less-than-stellar businesses being targeted at excessive valuations in a kind of race to the bottom, prompting some shareholders to say enough is enough.

This seems to be what is happening with Salix’s bid for Cosmo, for instance, which apparently has mobilised a group of Salix investors to threaten voting down the move and push for Salix to sell itself instead. Allergan’s interest in Salix, reported by the Wall Street Journal yesterday, could play into this quite handily.

Of course, whether Allergan’s move on Salix is itself a mirror image of Salix buying Cosmo, and one that could perversely earn the ire of some of Allergan’s investors, is a separate question. Salix stock is up 137% over 12 months, and its market cap stands 60% above EvaluatePharma’s estimate of the NPV of its marketed drugs and R&D pipeline.

This is a crude measure, certainly, but it illustrates the point. Salix’s investment case centres on the promise of Xifaxan in irritable bowel syndrome, but even before yesterday’s rumour broke, and even with consensus 2020 sales at a bullish $2.3bn, the company’s market valuation bakes in a pretty big takeover premium.

In afternoon trading on the Swiss stock exchange Cosmo was off 8% owing to the risk of it not being acquired as well as the renewed threat of US Treasury curbs on tax inversions. QLT had fallen 14% after Endo launched a bid for Auxilium on September 17; Auxilium turned down this bid yesterday.

The apparent entry of Actavis into the fray is a separate issue. The acquisitive speciality pharma player reportedly made its own offer to buy Allergan, presumably pitching itself as a white knight to stave off Valeant, but Allergan rejected the approach.

No doubt Allergan has numerous ideas, but it needs to do something to get rid of Valeant’s unwanted attentions. The group’s immediate concern is a December shareholder vote on ousting its board, over which it is pursuing litigation to prevent Pershing Square Capital from voting its allegedly “unlawfully acquired” 9.7% stake.

A fast all-cash purchase of Salix could be just the ticket, especially after Allergan's initially rumoured anti-chain transaction – for Shire – did not materialise. The question for Allergan investors is whether they would rather overpay for Salix than see Valeant underpay for their own stock.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobEPVantage on Twitter

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