Auxilium eyes a Canadian biotech for a tax-cutting merger

Auxilium Pharmaceuticals ($AUXL) is merging with Canadian biotech QLT ($QLTI) in an all-stock deal designed to both expand its pipeline and slash its corporate tax rate.

Under the agreement, Auxilium will meld into QLT, which will retain its British Columbia incorporation, and become "New Auxilium." The company's current investors will get about 3.1 QLT shares for each of Auxilium share they hold and control about 76% of the combined company once the deal closes later this year, the companies said. For QLT's shareholders, the all-stock trade represents a 25% premium based on the companies' Wednesday closing prices.

The new company will keep Auxilium's management intact and hang on to its Pennsylvania headquarters. But, thanks to that 24% Canadian stake, the merged entity would pay corporate taxes in Canada, where the rate is 15%, instead of in the U.S., where it's 35%. In its announcement, Auxilium said the deal's closure depends in part on its lawyers signing off that the new company "should not be treated as a U.S. domestic corporation for U.S. federal income tax purposes."

The potential arrangement, called tax inversion, has become an en-vogue move for corporate giants looking to cut costs. Pfizer's ($PFE) $118 billion pursuit of AstraZeneca ($AZN) was partially motivated by the U.K.'s favorable tax environment, and AbbVie's ($ABBV) current designs on Shire ($SHPG) bear the same ambition. In the medical devices space, Medtronic ($MDT) is in the midst of an inversion coup after signing a deal to acquire Irish rival Covidien ($COV) for $42.9 billion, a move that would save the company an estimated $4 billion in taxes.

For Auxilium, the merger's "cost and tax synergies" will allow the combined company to better invest in R&D and bankroll further acquisitions, CEO Adrian Adams said.

"We believe this transaction will facilitate the continued build out of our current portfolio and provide us with the corporate platform and strong financial position to build on our strength in men's healthcare and enable expansion into new specialty therapeutic focus areas," Adams said in a statement. "The transaction aligns with Auxilium's well-defined growth strategy and our intention to build a more diversified global organization through the aggressive pursuit of product licensing and M&A."

Beyond the tax savings, Auxilium said the merger gives it a pipeline asset in QLT's ophthalmology program, now nearing Phase III. The Canadian company's treatment is an oral synthetic retinoid designed to treat orphan eye diseases caused by genetic mutations. The drug picked up the FDA's orphan designation, and Auxilium said it plans to seek out a partnership to take the treatment through late-stage development.

Auxilium's move follows a similar effort from Valeant Pharmaceuticals ($VRX), which in 2010 merged with Canada's Biovail to drive down its tax rate.

- read the statement