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Salix Pharmaceuticals (UNKNOWN: SLXP.DL ) announced this month that it has signed a definitive agreement to acquire Santarus (UNKNOWN: SNTS.DL ) for $32 per share.
Both Salix and Santarus are relatively small specialty pharmaceutical companies with focus on acquiring and promoting gastrointestinal therapeutics to hepatologists and GI specialists.
The all-cash transaction values Santarus at $2.6 billion and allows Salix access to Uceris, Santarus's lead ulcerative colitis medication and star performer. Santarus shares soared on the news, so did Salix's, which gained 20% since the news broke out.
The addition of Santarus' Uceris to Salix's Xifaxan hepatic encephalopathy medication and Apriso ulcerative colitis drug would create a meaningfully broad GI portfolio, and the combined marketing power of both companies' experienced specialty sales forces would allow Salix to maintain a strong position in the US gastrointestinal therapeutics market.
Launched in February, Uceris -- budesonide extended release tablets for the induction of remission in patients with active mild to moderate ulcerative colitis -- achieved $43 million during the first nine months of 2013. Santarus, which added 85 new sales reps for the product launch, increasing total reps number to 235, expected peak sales of $300 million for the product.
According to Salix's management, combining the two companies' specialists sales forces under one roof could now propel Uceris, which competes in the same space as Salix's Apriso, to $500 million in peak sales.
According to Salix, annualized combined company revenues for 2013 could easily exceed $1.3 billion with an adjusted EBITDA estimate of $537 million and strong growth. The realization of additional synergies are expected to deliver EPS of approximately $3.85 per share in 2014.
Salix had cash and cash equivalents of approximately $852 million as of October 31st and the company intends to finance the transaction with a combination of $800 million from available cash and $1.95 billion in debt at 5% interest per year.
At current valuation, Salix would be trading at 22 times 2014 expected earnings per share and at 4 times 2013 sales. However, given the fact that Salix is paying in cash, rather than shares, and financing the transaction with a debt load exceeding 2013 revenue expectations, the company might need to raise additional capital in the near future, which could dilute its equity base.
I like the synergies between Uceris and Apriso, the new critical mass achieved in the gastrointestinal space and the added growth that Santarus will provide to both Salix's top and bottom lines.
However, giving the anticipated debt load, I would think cashing out now for a 20% profit for the week and entering the stock sometime in the future at a more favorable valuation might be the prudent thing to do.
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