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Salix buys into Ireland: Merger with Cosmo will lower taxes and expand GI pipeline

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By Michael Fitzhugh
Staff Writer

Salix Pharmaceuticals Ltd. is joining the tax inversion parade, with plans to beef up its gastrointestinal drug portfolio and trim its costs ahead of a planned supplemental new drug application for rifaximin and intentions to advance three new pipeline programs the merger delivers. (See BioWorld Today, July 2, 2014.)

By combining with an Irish subsidiary of longtime collaborator Cosmo Pharmaceuticals SpA in an all-stock transaction valued at about $2.6 billion, the Raleigh, N.C.-based company plans to create Salix Pharmaceuticals plc, reincorporating in Dublin to form a company that will add three marketed gastrointestinal products and six in clinical development to its current portfolio.

Salix projects that the merger will increase its competitive positioning for future M&A and product licensing efforts while accelerating its sales and earnings-per-share growth, providing modest accretion to its 2016 earnings. Part of that gain would come through a lowering of Salix's effective long-term tax rate from the high 30 percent range to the low 20 percent range. Salix would also benefit from gaining U.S. patents for rifamycin MMX and methylene blue MMX, drugs incorporating Cosmo's technology for delivery of active pharmaceutical ingredients, mainly into the lumen of the colon.

The transaction could open doors to substantial new opportunities, the company said, as it gains three new development programs from Cosmo: two rifamycin MMX programs – a phase II program exploring the drug's application in treating diverticulitis and a phase III targeting traveler's diarrhea – plus a phase III program testing methylene blue MMX for colorectal cancer detection.

Cosmo, which now sells the ulcerative colitis medications Lialda (mesalamine) and Uceris (budesonide) in the U.S. through license agreements with Shire plc and Salix, respectively, will continue to manufacture methylene blue MMX and rifamycin MMX for Salix.

Despite the potential the new pipeline additions hold, Leerink analyst Jason Gerberry discounted their near-term value, pointing out that none are likely to launch until 2018.

Should Salix's merger with Cosmo succeed, as it is likely to do, it also will eliminate royalties Salix would have owed Cosmos on ulcerative colitis flare-up drug Uceris, a drug discovered by Cosmo and sold by Salix-owned Santarus Inc. That change could boost Salix's gross margins on Uceris to 95 percent from 78 percent, according to Jeffries analyst David Steinberg. By throwing added marketing muscle behind the drug, Steinberg's colleague, Jeffries analyst Peter Welford estimated peak worldwide sales of the drug could hit $450 million or more, as European regulators clear Ferring Pharmaceuticals SA to sell the drug under the name Cortiment, an action expected in the second half of 2015.

Salix said its U.S. leadership will remain in place and its headquarters will remain in Raleigh, and, while it will be an Irish firm, it will be established as UK tax-paying company, so the majority of its board meetings will be moved to the UK.

Since the boards of both Salix and Cosmo already approved the deal, the approval of Salix shareholders will be required next. At the transaction's close, which Salix suggested will come before the year's end, current Salix shareholders will own slightly less than 80 percent of the new company, while Cosmo owns the remainder.

Cosmo CEO Alessandro Della Chá will join Salix's board as part of the transaction.

The deal is part of a string of recent deals structured to slash the U.S. tax obligations of companies, including Abbvie Inc.'s pursuit of Shire plc, and Pfizer Inc.'s failed bid for Astrazeneca plc. (See BioWorld Today, May 12, 2014, June 26, 2014, and July 9, 2014.)

"You can easily see how complementary and strategic this is for Salix," wrote Salix CEO and president Carolyn Logan in an email to employees that the company filed with the SEC. "We immediately gain two pipeline products and have first right of negotiation on others that Cosmo may want to bring into the U.S. market."

Current Salix shareholders will pay taxes on the transaction, when the company exchanges their shares of Salix Pharmaceuticals Ltd. for shares of Salix Pharmaceuticals plc. Such exchanges generated considerable tax bills for some longtime Medtronic Inc. shareholders earlier this year following that company's merger with Dublin-based Covidien plc. Since then, the tax consequences of inversions for retail shareholders have become a subject of controversy, as some investors questioned whether the potential long-term payoffs for any inversion are merited by the near-term tax hit the transactions create.

Salix is "confident that our shareholders will see the tremendous value in this transaction and will approve it," Logan wrote in her message to employees. Shareholder of the Lainate, Italy-headquartered Cosmo (SIX: COPN) are likely quite pleased: The company's share price rose more than 7 percent on news of the transaction, closing at CHF179.10 (US$201.02) per share on Wednesday. Salix shares (NASDAQ:SLXP) lost $3.98 following the announcement, to close at $133.29.

But, even with shareholder support, transactions built around foreign tax advantages could soon become more difficult. The Stop Corporate Inversions Act of 2014 would raise the percentage of stock ownership required to reincorporate offshore from its current 20 percent to 50 percent and still treat the surviving company as a U.S. company for tax purposes if management and control of the merged company remain in the U.S.

Cautions about the potential consequences of the bill, sponsored by Sen. Carl Levin (D-Mich.), have already made their way into regulatory filings of merger partners Horizon Pharma Inc. and Vidara International Therapeutics Ltd., according to Thomson Reuters WestLawNext.