Could buying Salix get Valeant off of Allergan's scent?

Allergan CEO David Pyott

Allergan ($AGN), working to fend off a hostile approach from Valeant Pharmaceuticals ($VRX), is reportedly taking a look at the smaller Salix Pharmaceuticals ($SLXP), weighing a multibillion-dollar deal that could render it unattainable--or at least drive up its asking price.

Citing unnamed sources, The Wall Street Journal reports that Allergan has approached the North Carolina company about a deal, allured by its stable of gastrointestinal drugs and pipeline full of treatments for inflammatory bowel disease and pain. Salix commands a market cap north of $10 billion, and swallowing it whole could be just what Allergan needs to thwart Valeant in its attempt to stir a shareholder revolt and get management to accept a $48.7 billion bid.

Complicating matters is the fact that Salix is in the midst of an M&A operation of its own, awaiting the close of a $2.6 billion all-stock merger with a subsidiary of Cosmo Pharmaceuticals ($COPN). Under that deal, expected to wrap up in the fourth quarter, Salix would reverse-merge with Cosmo's Irish division, thereby granting the U.S. company a tax-friendly domicile and lowering its effective rate through an en vogue process called inversion.

Whether Salix's Irish plans have anything to do with Allergan's reported interest remains unknown, though the Journal's sources note that the two companies could strike a deal as soon as next month, which could imperil the Cosmo merger.

The news is a philosophical fit with past statements from Allergan CEO David Pyott, who has repeatedly talked up the potential benefits of a sizable acquisition without disclosing any targets. At January's J.P. Morgan Healthcare Conference, Pyott told FierceBiotech he had a $10 billion purse earmarked for takeovers and an eye on M&A.

But that was before Valeant came calling with a series of hostile offers, sparking a months-long back and forth that has led Allergan to reevaluate its approach to R&D. Amid its suitor's accusations of bloated budgeting, Allergan has announced plans to cut 13% of its workforce--about 1,500 employees--and curtail its commitment to early-stage research. The two sides remain at an impasse, with Valeant and co-agitator Bill Ackman striving to shake up Allergan's board and get negotiations moving.

- read the WSJ story

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