Salix Pharmaceuticals, Ltd.
) and Cosmo Pharmaceuticals S.p.A. have entered into a definitive
agreement under which Salix will merge with Cosmo Technologies
Ltd., a subsidiary of Cosmo Pharmaceuticals. The deal is slated to
close in the fourth quarter of 2014.
Terms of the Deal
Following the merger, the combined entity will be renamed Salix
Pharmaceuticals, plc. with Salix becoming a wholly-owned subsidiary
of Irish domiciled Cosmo Technologies. Shareholders of Salix will
own a little less than 80% of the ordinary shares of the combined
entity and the rest will be held by Cosmo's shareholders.
Once the merger goes through, the combined entity will own patents
for Uceris in the U.S. and will be able to capture full value of
Uceris' sales due to the modification of the supply agreement and
elimination of royalties and milestone payments. This will boost
Salix's profitability from Uceris' sales. Moreover, Salix
Pharmaceuticals, plc will receive the U.S. patents for two other
candidates − rifamycin MMX and methylene blue MMX.
The company will also acquire Cosmo's patents for rifamycin MMX
in certain territories outside the U.S. Additionally, Salix
Pharmaceuticals, plc will hold specified rights of negotiation for
all products that Cosmo or its affiliates seek to develop or
commercialize in the U.S.
Primary Motive to Save Taxes
Under the merger agreement, Salix will become a wholly-owned
subsidiary of Cosmo Technologies and will be domiciled in Ireland.
The long-term tax rate for the company will be reduced from the
high 30% range to a low 20% range. Salix expects this transaction
to be modestly accretive to 2016 earnings and boost the bottom line
further thereafter. Higher margins on Uceris and lower tax rates
will boost the bottom line.
We are positive on the upcoming merger. The practice of reducing
tax liability by making an international acquisition and shifting
the base to a lower tax zone has become a new trend among U.S.
companies. Last month,
) entered into a definitive agreement to merge with
Canadian Entity QLT
) in a bid to diversify its portfolio and save taxes.
The merger with Cosmo is an important step for Salix strategically
as well as financially. Firstly, the change of base will allow the
company to enjoy a tax efficient corporate structure, thereby
allowing it to obtain lower tax rates on licensing agreements to be
signed in future.
Secondly, Cosmo, which has expertise in the field of
gastrointestinal diseases such as inflammatory bowel disease, colon
infections and diagnostics, will help to strengthen Salix's
position in the market for gastrointestinal disease and disorders.
Salix carries a Zacks Rank #2 (Buy). A better-ranked stock in the
health care sector is
Synergy Pharmaceuticals, Inc.
), carrying a Zacks Rank #1 (Strong Buy).
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