Auxilium Rejects Endo, But Is It Making A Play For More Cash?

Negotiations are likely to kick into high gear now that Auxilium officially has rejected Endo’s first offer of $2.2 billion. Auxilium is sticking to its QLT commitment, but the transaction holds little more than a tax-inversion play for the biotech.

Auxilium Pharmaceuticals Inc. appears to be playing hard to get with Endo International PLC – rejecting the Irish company’s first unsolicited bid and telling shareholders to continue their support of the previous plan to acquire Canadian company QLT Inc.

In what is likely a play for a higher offer, Auxilium released a statement Sept. 22 officially turning down Endo’s bid of $28.10 per share, or $2.2 billion. The mixed cash/stock offer came on Sept. 12 and was made public on Sept. 17 (Also see "Endo Makes A Play For Auxilium, But QLT Deal Gets In The Way" - Pink Sheet, 17 Sep, 2014.).

Auxilium said the Endo offer “significantly undervalues” the company, but that it is maintaining the option to “engage in discussions with Endo and other third parties.” [See Deal]

The announcement went on to say that the Auxilium board of directors “unanimously determined it is not a superior proposal under the terms of its existing merger agreement with QLT and has unanimously reaffirmed its recommendation that Auxilium's stockholders vote in favor of the adoption of such merger agreement.”

It’s no surprise that Auxilium would push for a higher offer. While the initial bid from Endo was unsolicited, it did represent a 31% premium to Auxilium’s closing stock price on Sept. 16, the day before the offer became public. The Chesterbrook, Pa.-based company’s shares have continued on a steady climb since the deal was announced and have surpassed $31 per share, showing that investors think the company is worth more.

Endo has made clear that the QLT transaction is not included in its current offer.

“We continue to believe that our transaction for Auxilium is compelling,” said Endo in response to the Auxilium rejection. “We are providing a substantial premium and immediate cash value for Auxilium shareholders as well as the opportunity to participate in the upside potential of a leading global specialty health care company. We note Auxilium’s statement that it maintains the right to engage in discussions with Endo and it is our strong preference to work collaboratively with Auxilium to realize the benefits of this transaction.”

Motivating Factors

Endo’s motivation for the offer is Auxilium’s portfolio of men’s health and urology products, including Xiaflex (collagenase clostridium histolyticum) and the testosterone gel Testim. Xiaflex, which brought in $49 million during the first half of the year, is approved for the treatment Peyronie’s disease, or a curvature of the penis, and Dupuytren’s contracture, a clawing of the hand caused by a buildup of fibers. The drug has been slow to gain traction, but further indications – including frozen shoulder syndrome and cellulite – could improve its performance.

Auxilium could have a better outlook now for the erectile dysfunction drug Stendra (avanafil), partnered with Vivus Inc., which recently added a claim for a 15-minute onset of action. The drug launched in January and generated $13 million through the second quarter, but a full promotional push has been awaiting the differentiating claim (Also see "Stendra Gets Its 15 Minutes, With New FDA-Approved ED Claim" - Pink Sheet, 18 Sep, 2014.).

For Endo, the acquisition makes strong strategic sense – Auxilium’s portfolio fits squarely into the company’s existing urology business that it has been looking to expand and the Irish drug maker has the resources in place to drive sales of the Auxilium products in ways that the current company lacks.

The deal is just the most recent in a string of deals that the company has conducted since current CEO Rajiv De Silva took over almost two years ago (Also see "Endo’s Next Chapter Will Be Led By CEO De Silva" - Pink Sheet, 26 Feb, 2013.). De Silva came from Valeant Pharmaceuticals International Inc. and has followed in his former employer’s footsteps, growing the business through the acquisition of late-stage or already-marketed products rather than through internal R&D.

Yet, the Valeant/Endo business model has come under attack of late as Valeant’s pursuit of Allergan Inc. has put the business model of de-emphasizing R&D under the microscope (Also see "Allergan Attacks Valeant’s Reporting, Uses Pearson’s Words Against Him" - Pink Sheet, 5 Aug, 2014.).

The offer from Endo puts a wrench in Auxilium’s previous plans to conduct a tax-inversion deal with Vancouver-based QLT. The company announced at the end of June that it was planning an all-stock buyout of QLT in a deal worth $345 million [See Deal]. The deal is expected to close in the fourth quarter and has a $28 million breakup fee should Auxilium pull out.

The QLT transaction brings little to Auxilium since the company is largely a shell corporation at this point – other than the highly coveted lower tax rate. It sold its only marketed product, Visudyne (verteporfin), a light-activated therapy for wet age-related macular degeneration, to Valeant in September 2012 for $112.5 million. In 2009, the company sold off its U.S. business and prostate cancer assets to Tolmar Holding.

QLT now has one product in development – a Phase I asset for the treatment of inherited retinal diseases such as Leber congenital amaurosis (LCA) and retinitis pigmentosa (RP) due to mutations in the LRAT and RPE65 genes, both ultra-orphan indications that only affect a few thousand patients in the U.S., EU and Japan.

The Canadian company put itself up for sale in mid-2013, touting the appeal of its strong balance sheet and low tax rate (Also see "QLT Shows Off Its Assets In Hopes Of Attracting A Suitor" - Pink Sheet, 21 Nov, 2013.).