The head offices of Valeant Pharmaceuticals International Inc. are seen in Laval, Quebec May 20, 2014.Christinne Muschi/Reuters
Recent deals in the pharmaceutical space have looked like a game of Hungry Hungry Hippos – the target marble drops, and large bidders lunge to snap up the asset. And all these competing bids have pushed up deal valuations on target companies.
Valeant Pharmaceuticals International Inc. emerged as the winning hippo Monday, with an $11.1-billion (U.S.) all-cash offer for Raleigh, North Carolina-based Salix Pharmaceuticals Ltd. Including debt, the deal for the maker of an irritable bowel syndrome treatment is valued at $15.8-billion. This represents a nearly 31 per cent premium over Salix's stock price on February 21, before the announcement was made.
Valeant's move to raise its more appealing all-cash offer to $173 per share from $158 was enough for competitor Dublin-based Endo International Plc to walk away from the deal entirely, saying it was disappointed in the outcome.
It has been a busy start to the year for international pharma deals so far in 2015, driven largely by arthritis treatment giant AbbVie Inc.'s $21-billion deal to buy cancer therapy producer Pharmacyclics Inc. The acquisition landed as Pharmacyclics was said to be nearing a deal with Johnson & Johnson, a company it had partnered with in the past; AbbVie paid a 39 per cent premium to Pharmacyclics' March 3 closing price.
Amid this competition, the value of announced global M&A deals targeting pharmaceutical companies was already up to $59.3-billion before Valeant increased its bid, according to data from Thomson Reuters. That is up nearly 94 per cent over the activity in the same period a year earlier – the highest level since 2009. And that follows a blockbuster year of pharma deal-making in 2014, too.
But Valeant and AbbVie have also been pushed out of deals in recent months. In November last year, Valeant abandoned its bid to buy Botox-maker Allergan Inc. when Valeant was outbid by a $66-billion offer from Actavis plc. And Abbvie was forced to walk away from a deal for Dublin-based Shire Plc in late 2014 amid the U.S. crackdown on so-called tax inversion deals.
Many are expecting the scramble for deals to continue through the rest of 2015 as low interest rates keep capital costs down for acquirers, according to an Ernst & Young report on the outlook for biopharma company M&A. Actavis, for example, took advantage of this after buying Allergan when it took to the bond market with a $21-billion bond issuance – the second-largest corporate bond sale ever to hit the market.
Large pharma companies are struggling to find new avenues for organic growth, making nimble biotech and specialty pharma companies more attractive as targets, EY says. Acquirers will be looking for complementary treatment providers in their core markets, or areas where they have competitive advantages. The report predicts that pharma giants will look to divest any business lines that aren't part of their core strategy.
And as Valeant's partnership with Bill Ackman on the Allergan bid indicates, shareholder activism in the sector has been on the rise, and EY says that is likely to continue.
Valeant's legal advisers on the deal are Osler Hoskin & Harcourt, Skadden Arps Slate Meagher & Flom and Sullivan & Cromwell, and its financial advisers are Deutsche Bank and HSBC Holdings PLC. Centreview Partners LLC and JPMorgan are the financial advisors to Salix, and Cadwalader, Wickersham & Taft, Covington & Burling, Debevoise & Plimpton and Wilkie Farr & Gallagher are Salix's legal advisers.