Salix plays the long game with $2.6bn Santarus swoop
Salix Pharmaceuticals made no secret yesterday that its surprise swoop on Santarus was driven as much by a desire for an established primary care sales force as by an attraction to the California company’s products.
None of Santarus’s five marketed drugs has patent protection beyond 2020 – and four expire before the end of 2016 – making the $2.6bn price tag, a 36% premium over the pre-deal share price, look rich. But with Salix readying for broader approval of its lead product Xifaxan, it is betting on the benefits of a bigger and established sales force in place, primed to make the most of the new indications. If everything falls into place this deal should prove an effective use of Salix’s cash (see tables).
Wringing out sales
Salix is certainly not afraid of a challenge. In 2011 it bagged rights to Relistor, a constipation drug spurned by Pfizer that has yet to prove its worth (Progenics and Salix suffer as FDA blocks constipation drug, July 31, 2012).
And Xifaxan has been a long struggle. It reached the market in traveller's diarrhoea in 2004, lost a co-promote partner in the shape of Altana the next year, and was knocked back in the crucial non-constipation irritable bowel syndrome (non-C IBS) indication in 2011.
But sales are now growing strongly thanks to approval in a second illness, hepatic encephalopathy; in the third quarter revenues advanced 20% to $166m. Consensus forecasts see sales of $1.43bn in 2018, according to EvaluatePharma, a figure that does not fully reflect the potential impact of any IBS approval.
Carolyn Logan, chief executive of Salix, said on a conference call that around 30% of patients with hepatic encephalopathy were treated by primary care doctors – an audience to which the company currently has little access. Approval in IBS was always going to need a bigger presence in this area.
The acquisition of Santarus provides a profitable sales force “right out the gate”, she said, without the risk of having to grow one organically before any FDA decisions.
|Top 10 products of the combined companies|
|Annual sales ($m)|
|Rank||Product||Therapeutic subcategory||Company||Patent expiry||2012||2014||2016||2018||CAGR||Status|
|3||Relistor||Constipation agent||Salix Pharmaceuticals||03/11/2017||33||55||115||176||32%||Marketed|
|4||Apriso||Gastro-intestinal anti-inflammatories||Salix Pharmaceuticals||16/07/2021||70||146||175||167||15%||Marketed|
|7||Solesta||Incontinence treatment||Salix Pharmaceuticals||12/12/2017||3||17||54||83||75%||Marketed|
|10||Budo-San||Gastro-intestinal anti-inflammatories||Salix Pharmaceuticals||30/06/2018||-||9||27||42||n/a||Phase III|
Santarus’s GI-focused portfolio does reflect Salix’s own focus, without any real overlap. And despite the short patent life on most of its marketed drugs, the most valuable, Uceris in ulcerative colitis, is protected until 2020. Salix forecasts peak sales of $500m for the product, and believes it would benefit from a bigger sales force.
Ruconest, a treatment for hereditary angioedema that Santarus licensed in from Pharming, appears an outlier. With a regulatory decision pending in the US – a PDUFA date of April 16, 2014, has been set – Salix might as well wait to hear this verdict before deciding a course of action. But it is hard to see Ruconest finding a place in the portfolio.
The therapeutic fit and readymade sales force aside, analysts project a much more rapid pace of growth for Salix than Santarus over the next five years; the latter will be hit by its various patent losses. So to make this acquisition work, Salix needs to light a fire under newly launched Uceris – $20m in sales reported by Santarus for the third quarter is encouraging.
But even more importantly it needs to deliver expansions to its own products. An FDA panel will consider the company’s appeal about Relistor’s approval in opioid-induced constipation in patients with chronic pain next March, while data from a third phase III trial testing Xifaxan in IBS will read out in the second quarter next year, and allow a re-filing with the FDA.
The $2.6bn deal is being funded with $800m in cash and the remainder in debt; the company estimates it can reduce debt to 3x Ebitda within three years. Without the use of overseas tax breaks that have flattered other takeovers recently, Salix needs good old fashioned cash flow to fund this plan, and to help justify buying a readymade sales force over building one itself.
|Financial projections ($m)|
|Net income - normalised||196||703||29%|
|Net income - normalised||114||129||3%|
All data sourced to EvaluatePharma.