In case you missed it, Salix Pharmaceuticals (NASDAQ:SLXP) last week plunked down $2.6 billion to buy another specialty pharmaceutical company, San Diego-based Santarus (NASDAQ:SNTS).
While the figure may be eye popping the fact that Salix made a deal should not be. Raleigh-based Salix has not been shy about licensing drugs or even acquiring companies as part of its growth strategy. The Santarus acquisition came nearly nearly two years to the day of Salix’ 2011 announcement it would buy Oceana Therapeutics for $300 million.
Santarus is a much larger acquisition and to some, the $2.6 billion price is a bit much to swallow. Those familiar with Salix might remember that over the summer the company was rumored to be among the suitors for Montreal-based specialty drug company Aptalis Pharma. Reuters later reported that Salix was one of two companies who balked at the $3 billion asking price. That prompted an analyst to ask CEO Carolyn Logan during a conference call if price is a limiting factor when Salix evaluates potential deals. Her response was basically, no, not really.
“If it treats or prevents gastrointestinal disease, we are interested in taking a look at it,” Logan said at the time. “We like to look at every opportunity in gastrointestinal disease because even though we have a very large portfolio right now there’s still a lot of holes in our portfolio.”
Well, Santarus will fill some holes.
Salix characterized the Santarus acquisition as complementary to Salix’ drug portfolio. Like Salix, Santarus also plays in the gastrointestinal space; its Uceris tablets treating ulcerative colitis generated $19.6 million in third quarter revenue. Santarus’s top seller Glumetza is a drug that improves glycemic control in adults with type 2 diabetes. Glumetza produced $45.6 million in third quarter sales, a 6 percent year over year increase.
The combined company will have 22 marketed products, none of which overlap. The deal will also diversify Salix’s revenue. Logan said that according to preliminary estimates, no single product from either company is expected to account for more than 50 percent of the combined company’s revenue. Using figures through the third quarter, revenue from the combined drug lineups on an annualized basis would top $1.3 billion, yielding earnings of $537 million.
Santarus does bring something more to the table than its drugs. One quirk about being a specialty pharmaceutical company is that you might find your drugs reaching patients through specialists. Logan said Santarus will help Salix reach the primary care market. While specialists do prescribe Santarus’s drugs those drugs are also prescribed by primary care physicians. That relationship with primary care doctors is attractive to Salix.
Salix needs to build sales connections in primary care at some point; it’s a particularly important market for growing sales of Salix’s top-selling drug, Xifaxan. First approved to treat traveler’s diarrhea, Xifaxan later received additional approval as a treatment for hepatic encephalopathy (HE), a brain disorder associated with severe liver disease.
“Our market research has shown us that somewhere in the neighborhood of 25 percent to 30 percent (of HE patients) – could be even a little bit more than that – is treated by the primary care physician audience,” Logan said last Thursday during the conference call with analysts. “And up until now, we have not really had much of an access to that market.”
Reaching primary care physicians will be even more important if Salix receives regulatory approval on Xifaxan to treat irritable bowel syndrome with diarrhea. The Food and Drug Administration declined to approve Xifaxan for that indication in 2011, asking for more information. Salix is now in the midst of another phase III clinical trial and expects to have an FDA approval decision in the second half of 2014. If Xifaxan is approved, Santarus would give Salix primary care relationships already in place to sell the drug and reach a market of IBS patients who have been clamoring for the drug.
Salix can’t talk in detail about combining sales forces or other synergies until the deal closes, which Logan said should happen in the first quarter. The all-cash transaction represents a 39 percent premium over Santarus’ average closing stock price over the 30 days before the deal was announced last Thursday. As for the size of the deal, it’s not nearly the biggest pharma acquisition in recent years but it’s in the neighborhood. According to data compiled by Bloomberg, there have been 44 acquisitions of specialty drug companies for more than $500 million in the last three years. The average disclosed size was $1.2 billion and the average premium was 20 percent, the data show. Of all those deals the largest deal was Perrigo Co.’s purchase of Elan Corp. for $6.2 billion earlier this year.
Salix isn’t likely to make another big acquisition any time soon; CFO Adam Derbyshire told analysts as much during the call. But, he added, don’t rule Salix out of smaller deals. That deal could be for a late-stage product that doesn’t require much money up front but is driven by milestones as Salix takes the compound through development. Salix has done those kinds of deals before.
“You know our philosophy about business development – we never stop looking,” Derbyshire said. “We can’t afford to stop looking. So we will continue looking.”
So if you’re a clinical-stage pharma company with a late-stage gastrointestinal drug candidate, it might interest you to know that even though Salix hasn’t yet digested its $2.6 billion acquisition of Santarus, the company’s appetite is not yet sated. Salix is still hungry for more deals.
