Salix's Strange Deal

Most people associate pharmaceutical companies with massive research-and-development budgets and blockbuster medicines. But not all drug outfits follow this model. Some license commercialized or late-stage experimental medicines from others, creating value by marketing those drugs effectively.

Salix Pharmaceuticals (Nasdaq: SLXP) and InkinePharmaceutical (Nasdaq: INKP) belong to this latter group. Yesterday, Salix announced that it will buy Inkine in an all-stock acquisition valued at $190 million. At first glance, the two companies appear to be a good strategic fit, since both specialize in marketing gastrointestinal drugs. However, the agreement seems to have more weaknesses than strengths.

First, at $3.55 a share, the price seems steep. The deal values Inkine at 39 times the high end of projected 2005 earnings. Granted, the figure could be based on long-term potential -- except that Inkine recently lowered guidance because of increasing competition for its main drug Visicol, which is used for colon-cleansing before a colonoscopy. Inkine is also awaiting Food and Drug Administration approval for a next-generation drug with the same basic purpose. The earnings potential doesn't seem to justify the price.

Second, Salix noted that the deal will leverage its primary asset -- its specialty sales force. But adding Inkine's Visicol to the mix may prove more of a distraction than anything else. Like Inkine, Salix currently relies on one product: Colazel, its treatment for ulcerative colitis. The drug accounted for 83% of the company's $28.8 million first-quarter sales, but Salix has been trying to diversify by building up sales of Xifaxan, a treatment for traveler's diarrhea. Xifaxan sales remain very tiny but have been growing. Now Salix's reps will also have to support Visicol, another relatively small opportunity under competitive pressure.

Admittedly, Salix has shown progress over the past few years; the firm racked up its first annual profit in 2004. But this deal just doesn't seem to be the wisest move.

More pharmaceutical Phoolishness:

• Amgen's Drug-Approval Dilemma
• Biotech's Global Agenda
• Wyeth's Lower Dosage

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.