Bloomberg News

Endo Tax Edge for Deals Mimics Valeant Playbook: Real M&A

November 12, 2013

Endo Health Solutions Inc. (ENDP:US)’s recent acquisition designed to lower its tax rate may be following Valeant (VRX:US) Pharmaceuticals International Inc.’s blueprint for a lucrative takeover spree.

Endo shares are up 42 percent to a record after Chief Executive Officer Rajiv De Silva agreed last week to buy Canadian drugmaker Paladin Labs Inc. (PLB) The deal will allow Endo to reincorporate in Ireland with a lower tax rate, giving it an edge as it pursues more pharmaceutical takeovers. It’s a tactic that helped Valeant make more acquisitions than any of its peers in the last three years and increase its stock price sevenfold, according to data compiled by Bloomberg.

Endo, with a $7.1 billion market value, could consider buying BioDelivery Sciences International Inc. (BDSI:US), its partner on a pain medicine in development, and Impax Laboratories Inc. (IPXL:US), Janney Montgomery Scott LLC said. Such acquisitions could help counter generic competition that has started to eat away sales of Endo’s main painkillers. De Silva, the former president of Valeant, took the helm in March after his predecessor was criticized for acquisitions of medical-device businesses that never paid off.

“De Silva’s very well-informed by Valeant’s playbook,” David Amsellem, a New York-based analyst at Piper Jaffray Cos., said in a phone interview. Like Valeant, the lower tax rate “gives Endo a lot more flexibility in terms of pursuing deals, which is ultimately what it’s going to have to do. This is unquestionably a game-changing transaction.”

‘Ideal’ Fit

Blaine Davis, a spokesman for Endo, declined to comment on its takeover plans. Brian Korb, a spokesman for BioDelivery Sciences who works at Trout Group LLC, declined to comment on whether the company is for sale or has been approached by Endo. Mark Donohue, a spokesman at Impax, didn’t return a phone call or e-mail seeking comment.

Endo began bolting medical-device businesses onto its pain-treatment franchise three years ago with two acquisitions totaling about $3 billion. Instead of the “ideal strategic fit” that then-CEO David Holveck promised, Endo was left with the U.S. specialty pharmaceuticals industry’s lowest valuation just as he was preparing to retire, data compiled by Bloomberg show.

Endo said Nov. 5 that it agreed to buy specialty-drug maker Paladin for about $1.6 billion in cash and stock. Including gains from the deal announcement, Endo shares had advanced (ENDP:US) 103 percent through yesterday since De Silva took over as CEO on March 18.

Irish Taxes

“It’s a company in transformation right now,” Jason Gerberry, a Boston-based analyst at Leerink Swann LLC, said in a phone interview. “There’s an execution and management premium starting to factor into the stock because the new CEO has indicated what he’s trying to do with the company and he’s delivering on it.”

Today, Endo rose 2.7 percent to $63.55.

Because Paladin shareholders will own more than 20 percent of the combined company, the new entity is able to reincorporate in Ireland, where the corporate income tax rate is 12.5 percent versus 35 percent in the U.S. Endo anticipates the new structure will lower its rate to 20 percent over time and may be able to shrink even more depending on future acquisitions.

Valeant, a maker of generic medicines, was able to reduce taxes through its 2010 merger with Biovail Corp., which was based in Canada, where the rate is now 15 percent.

Valeant’s Climb

Since then, Valeant has been the most acquisitive drugmaker in North America with 33 transactions totaling almost $18 billion, including Biovail, data compiled by Bloomberg show. Its shares have jumped 620 percent (VRX:US) in that time, reaching a record last month.

“Valeant built its business on acquiring companies, and its stock just kept going higher,” Jim Molloy, a Boston-based analyst at Janney Montgomery Scott, said in a phone interview. “When you’re a large pharma, acquisitions are really the most cost-efficient way to build your revenue. If you move to Ireland, it gives you the ability to effectively bid and pick up the smaller companies when their products look like they might be able to make it to market.”

Actavis Plc was able to shift its domicile from the U.S. to Ireland this year and reduce taxes after purchasing Warner Chilcott Plc for about $9.1 billion, including net debt. Actavis shares have surged (ACT:US) 50 percent since Bloomberg News first reported the deal discussions in May, giving it the biggest gain among health-care stocks in the Standard & Poor’s 500 Index over that span, data compiled by Bloomberg show.

BioDelivery Sciences

De Silva told analysts on a conference call last week that he’s looking at acquisitions in the range of $250 million to $500 million. BioDelivery Sciences, which had a market value yesterday of $183 million and net cash of $37 million, may fit the bill for Endo, Molloy said.

BioDelivery Sciences, based in Raleigh, North Carolina, works with Endo on a pain medicine called buprenorphine that’s in phase 3 trials. Endo has agreed to pay BioDelivery Sciences an additional $95 million to $150 million, depending on the drug achieving certain milestones.

“It would seem to fit right in the target of what Endo says it’s looking to pick up because it’s in their pain space and branded pharmaceuticals, and it’s the right size,” Molloy said. Plus, “if the data looks good, Endo owes BioDelivery basically half their market cap (BDSI:US) in cash.”

Today, BioDelivery Sciences fell 3.3 percent to $4.64.

Endo also is open to deals of up to $1 billion, according to a person familiar with the situation who asked not to be named because the strategy hasn’t been made public.

Impax Opportunity

Impax Laboratories, a generic drugmaker facing manufacturing setbacks, is another potential candidate, which Endo may be able to run more efficiently, according to Molloy. The company had an enterprise value of $1.1 billion yesterday.

Today, Impax rose 1.4 percent to $22.70.

The U.S. Food and Drug Administration said earlier this year that it wouldn’t approve Impax’s Rytary treatment for Parkinson’s disease until the plant where it was made was re-inspected. During the re-inspection, regulators found that repeat problems weren’t corrected.

Still, analysts see Impax generating $848 million of annual revenue by 2018, a 46 percent increase from last year, estimates (IPXL:US) compiled by Bloomberg show. Endo’s revenue is forecast to slip 19 percent to $2.46 billion (ENDP:US) over that span, according to analysts’ estimates.

Endo is facing generic competition to its top three products: painkillers Lidoderm, Opana and Voltaren Gel, which together accounted (ENDP:US) for 45 percent of last year’s sales.

Valeant’s acquisitions (VRX:US) have helped boost revenue almost fourfold from 2010, data compiled by Bloomberg show.

“This value-creating M&A model has worked for Valeant,” Gerberry of Leerink said. “Endo hasn’t historically been an innovator, so it has to go out and buy innovation. Now it’s in a more competitive position to go out there and compete more effectively on deals.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net


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Companies Mentioned

  • ENDP
    (Endo International PLC)
    • $67.51 USD
    • 2.34
    • 3.47%
  • VRX
    (Valeant Pharmaceuticals International Inc)
    • $122.97 USD
    • 0.82
    • 0.67%
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