(Bloomberg) An accounting scandal, a failed merger and the departure of top executives would normally make a company toxic to acquirers. Not for Salix Pharmaceuticals Ltd., the subject of a $11 billion bidding war that drove the drugmaker’s stock close to its highest-ever price.
In filings this month, Salix restated seven quarters worth of results, explaining how it put sales in the wrong period, counted rebates as business expenses and failed to account for millions of dollars in potential product returns. The Securities and Exchange Commission is investigating possible violations of the law.
In the frenzied market for drug companies, that’s not enough to scare away buyers. After being passed over by Allergan Inc. and Actavis Plc last year, Salix made an $11.1 billion deal Monday with Valeant Pharmaceuticals International Inc., which beat out Endo International Plc. The offer is a 29 percent premium over Salix’s share price on Feb. 2, a day before Bloomberg News reported Valeant was considering a bid.
Drugmakers are clamoring for deals to grow their pipelines. There were $273 billion in proposed or completed drug and biotechnology acquisitions last year, according to data compiled by Bloomberg. Pfizer Inc. and AbbVie Inc. have announced $15 billion-plus deals this year, with premiums greater than 40 percent.
For Valeant, the opportunity to get Salix’s fast-growing antibiotic Xifaxan outweighed the company’s blemishes, said Umer Raffat, an analyst with Evercore-ISI.
“It’s not like it’s a mature company and it really matters if the current sales are real or not,” Raffat said, adding that third-party data sources have shown prescriptions are growing. Valeant has experience dealing with troubled companies, Raffat said.
Due Diligence
Valeant said last month that it “has conducted extensive due diligence” and will be able to quickly work down excess drug inventory that Salix built up. Endo’s outside spokesman Aaron Palash declined to comment on the matter.
Salix agreed Monday to Valeant’s raised offer of $173 per share in cash, or $11.1 billion, beating out Endo’s offer of $175 a share in cash and stock. Salix shares rose 2 percent to $172.80 at 1:27 p.m. in New York, close to an all-time high.
Salix’s stock fell 34 percent on Nov. 7 after the accounting problems were revealed. While that now looks like a forgotten bad dream, the drugmaker’s restated filings this month show the veritable buffet of accounting errors that led to that decline.
Product Rebates
Salix said that in July 2014, it paid one of its distributors $7.5 million for “marketing services,” and counted the cost toward expenses. In fact, those were product rebates, which means they should have been subtracted from sales, Salix said in the filing. The distributor isn’t named, and Stephen Cohen, an outside spokesman for Salix, declined to comment.
Salix also repeatedly recorded sales for the wrong period. Products that were shipped near the end of a quarter, yet arrived at a wholesaler in the next, were sometimes recorded in the earlier period, boosting sales. In 2014, $15.2 million in sales were put in the third quarter when they should have been in the fourth, Salix said.
The company also inflated sales by underestimating how much of its product would get returned.
In one case, the company estimated that customers would return $8.7 million worth of Giazo, an ulcerative colitis drug. In fact, the company had agreed to accept about double that amount of returns, yet never counted it against sales.
In total, the restatements cut sales by $20.7 million, and net income by $11.9 million, Salix said in a statement. Chief Executive Officer Carolyn Logan and Chief Financial Officer Adam Derbyshire left the company.
Failed Deals
The accounting issues stymied the company’s earlier attempts to forge a deal. Salix planned last year to buy part of Italy’s Cosmo Pharmaceuticals SpA in a about $2.7 billion transaction that would have moved Salix’s legal address abroad to a lower tax jurisdiction.
That deal fell apart after Salix was approached by Allergan about a takeover—a deal that also never happened. Actavis, the generic drugs conglomerate, looked at Salix as well before eventually deciding to buy Allergan instead. Both companies backed away from Salix partly because they found the accounting problems during due diligence, before they had been publicly disclosed, a person familiar with the matter said at the time.
