Salix and Cosmo Pharmaceuticals call off merger deal

Raleigh-based specialist drugmaker Salix Pharmaceuticals Inc. and Italian Cosmo Pharmaceuticals SpA have called off their $2.7 billion merger deal, in what is seen as the first casualty of the US government’s tightening of tax inversion rules.

In the merger agreement, Salix would have become a whole-owned subsidiary of the Italian drugmaker, thus shifting its tax domicile to Europe.

Salix announced on Friday that it would make a $25 million payment to Cosmo.

It is evident that Salix’ decision to pull out of merger talks was due to the dwindling tax inversion benefits since the US Treasury Department adopted new rules in September.

CEO and President of Salix, Carolyn Logan, said that when the company first announced its merger agreement with Cosmo, the board truly believed the fusion would generate significant value for shareholders through the addition of new products to its portfolio, as well as a promising development pipeline. She added that a more efficient corporate structure would have enhanced the company’s profitability.

The Salix-Cosmo merger is the first casualty of the Treasury Department’s new tax inversion rules.

Ms. Logan added:

“Since then, however, the changed political environment has created more uncertainty regarding the potential benefits we expected to achieve. As a result, Salix and Cosmo have mutually agreed to terminate the proposed transaction. We look forward to a continuation of our long-standing relationship with Cosmo.”

In other words, now that the lower corporate tax advantages of moving abroad seem to have vanished, Salix is no longer interested.

CEO of Cosmo, Alessandro Della Cha, said:

“The deal with Salix showed the potential of three products of ours for US. The development path of the pipeline continued in the meantime, so this termination has no effect on value creation. Our focus is now on obtaining approval of SIC-8000 and filing Rifamycin SV and Methylene Blue NDA in the next months. While all strategic options are in our hands, we look forward to a continuation of our long-standing relationship with Salix.”

Salix had recently been the target of Allergan Inc. for a takeover, which itself is being approached by Valeant Pharmaceuticals Inc. Allergan’s strategy was halted because its shareholders disagreed with the defensive acquisition, i.e. Allergan wanted to buy Salix to stop Valeant’s hostile bid.

Cosmo’s shares increased by 7.7% to 154 Swiss francs in early trading in Zurich this morning. Salix’ shares rose 5% to $158.50 in pre-market trading.