Battle brews to take over Cold-FX maker Afexa

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Canada's pharmaceutical industry has developed a case of the hots for the maker of the popular cold remedy Cold-FX.

The takeover battle for Afexa Life Sciences Inc , which produces the ginseng-based health product, is heating up after Valeant Pharmaceuticals International Inc. announced a white-knight deal on Tuesday to acquire the smaller Edmonton-based company for $76-million.

Mississauga, Ont.-based Valeant said its takeover offer, which is worth 71 cents a share, already has the approval of Afexa's board and tops a hostile $56.7-million hostile cash-and-stock bid made by Montreal-based Paladin Labs Inc. earlier this month.

Afexa's appeal also proved catchy with investors who bid up its stock by more than 20 per cent, or 12 cents, to close at 71 cents a share in Toronto. That sizable gain matched the value of the Valeant offer, while fuelling speculation that a higher bid could still be in the works.

That's because Valeant offered Afexa a 30-day "go shop" clause in exchange for the right to match any future offers or opt for a break fee of $3.75-million if Afexa chooses a higher offer from a rival suitor.

William White, chairman of Afexa's board of directors, confirmed the company will seek out any higher value alternatives that may exist.

"Yes, we are speaking other people," Mr. White said in a telephone interview. He declined to specify how many other parties are being consulted. When asked if there were any other firm offers, he replied: "Look, what's firm on the table is the Valeant offer that we think is quite attractive."

Paladin, which already owns a roughly 15-per-cent stake in Afexa, did not provide immediate comment on its next steps. Its cash-and-stock offer is worth 55 cents a share, or 0.013 of a Paladin share, for each Afexa share it does not already own.

Executives from both Afexa and Valeant confirmed, however, there is nothing preventing Paladin from sweetening its takeover offer.

J. Michael Pearson, chairman and chief executive officer of Valeant, said he's not worried about a rival deal emerging. He said Valeant offered Afexa a go shop clause to pre-empt an auction.

"Whoever does put an offer on the table has to realize that if we choose to we can come in and match them – so they are not sure of getting it in any case," said Mr. Pearson.

"And if we decide not to match them, then our shareholders are compensated for the efforts that we've made through this breakup free which will more than cover any of the costs that we've expended on this effort."

The deal remains subject to various closing conditions and requires the support of at least 66-2/3 of Afexa's outstanding shares. Already, however, Valeant has lock-up agreements with directors and officers who hold 8.8 per cent of its stock.

In the mean time, Valeant is hoping the acquisition, if it comes to fruition, will give it a growing foothold in Canada's lucrative over-the-counter medication market to complement its specialty pharmaceutical business which focuses mostly on neurology and dermatology. In that regard, the company is hoping to leverage its distribution system to bring new over-the-counter medications into Canada, while introducing Cold-FX to other global markets including the United States and Australia. Currently, the natural cold remedy is only sold in Canada and Hong Kong.

"This gives us a platform ... Cold-FX is a leading brand and they have a lot of infrastructure and capability in the OTC area. So, it is an area, as a company we are very interested in," said Mr. Pearson.

While some experts argue the science is far from conclusive, clinical studies have suggested that Cold-FX is effective in preventing or reducing cold symptoms in healthy adults.

The product, whose backers include hockey commentator Don Cherry, captured media hype in the wake of the H1N1 flu outbreak and a marketing campaign linked to the Vancouver 2010 Olympic Games. The company says the typical buyer is aged 35 to 65 and it is slightly more popular with women.

Valeant's offer to purchase Afexa is its third acquisition deal in recent weeks. In July, two of its subsidiaries signed a $345-million deal to acquire the assets of the Ortho Dermatologics division of Janssen Pharmaceuticals, Inc. Just days earlier, it announced a separate $425-million agreement to acquire Dermik, a dermatology division of Sanofi.