Salix-Cosmo to Merge in Tax-Saving Deal - Analyst Blog

By
A A A

Salix Pharmaceuticals, Ltd. ( SLXP ) 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.

Our Take

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, Auxilium Pharmaceuticals ( AUXL ) entered into a definitive agreement to merge with Canadian Entity QLT ( QLTI ) 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. ( SGYP ), carrying a Zacks Rank #1 (Strong Buy).


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

SALIX PHARM-LTD (SLXP): Free Stock Analysis Report

AUXILIUM PHARMA (AUXL): Free Stock Analysis Report

SYNERGY PHARMAC (SGYP): Free Stock Analysis Report

QLT INC (QLTI): Free Stock Analysis Report

To read this article on Zacks.com click here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: SLXP , AUXL , SGYP , QLTI

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Stocks

Referenced

Most Active by Volume

65,989,724
  • $74.34 ▼ 2.00%
59,233,040
  • $9.47 ▼ 5.30%
43,424,593
  • $17.10 ▲ 0.65%
34,088,861
  • $42.13 ▲ 0.12%
32,974,715
  • $32.74 ▼ 3.48%
32,353,256
  • $11.57 ▲ 3.21%
28,324,792
  • $4.64 ▼ 13.75%
27,089,159
  • $107.08 ▼ 0.24%
As of 10/30/2014, 02:13 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com