The Salix-Valeant Acquisition: "It’s Just a Game"

Sarah Chaney gives an in-depth look at the Salix-Valeant acquisition - a behind-the-scenes story of how analysts and investors can affect decision-making and potentially drive poor behavior.

In mergers and acquisitions, there’s always a winner and a loser. The question of which company’s culture will prevail, the acquirer or the acquired, looms large as soon as a deal is struck.

When Salix Pharmaceuticals was acquired by Valeant Pharmaceuticals on April 1 in an $11 billion deal, the first step in determining which company would ‘win’ occurred one day later: Valeant let go of 258 of Salix’s Raleigh-based employees on April 2.

The Canadian serial acquirer completed the takeover with little hassle, given Salix’s readiness to be sold. The acquisition was the culmination of a year’s worth of bids from other companies and several years’ worth of strategizing.

“We were very focused on creating value for shareholders,” said one of the layoff’s victims, who worked in Salix’s IT department until April 2015 and wished to remain anonymous due to privacy reasons. “We all felt at some point it would turn into an acquisition because that’s when it would turn into a cash value for that effort.”

Things weren’t so smooth for the Raleigh-based company in November.

Allergan had shown interest in a buy but saw some irregularities with Salix, and when that came out, the CEO and the CFO had to leave, explained Scott Lyman, who worked at Salix from 2006 to 2008 as a project manager and at Valeant earlier in his career.

The news reported in November stated that Salix had misreported inventory levels. The day the company announced it would review its inventory practices, Salix CFO Adam Derbyshire resigned. In January, CEO Carolyn Logan retired.

In addition to senior management, investors and analysts might be partially at fault when biopharm firms misbehave. Given insider-trading accusation lobbed by the likes of Bill Ackman in the Allergan/Valeant takeover drama, as well as a recent trend in which pharmaceuticals companies buy competitor drugs to jack up prices, management and pharma employee behavior in the environment of heavy investor interest must be highly scrutinized.

“I think you’re beginning to see a common theme here: Analysts and investors drive decision-making and potentially drive poor behavior,” Lyman said.

Valeant's latest takeover target is reportedly animal-health company Zoetis. Shares of Zoetis surged 11 percent to $55.38 on June 25, the day it was reported Valeant was pursuing this new buy.

Investor sentiment flies high – management influenced

On February 20, the day it was announced that Valeant was close to making its first bid to buy Salix, the stock closed at $173.3 per share, up from the previous day’s close of $169.1. And on March 16, the day Valeant raised its cash bid for Salix, the stock closed at $202.3 per share.

The final agreement ended up valuing Salix at $173 per share. Though one financial service firm, Sterne Agee, downgraded its fair value for Salix to about $150 per share in February, Shibani Malhotra, a former analyst for Sterne Agee, said the deal was priced just right.

The question of whether acquisitions in the pharmaceuticals industry create or destroy value is one of contention, often leading to philosophical speculation. Unlike deals in many industries, mergers in pharmaceuticals can mean great value for the market, a February 2014 McKinsey & Company article pointed out.

These acquisitions in pharmaceuticals are helpful because they merge synergies from two different companies and can provide commercial resources to products that may have been lacking.

Median excess returns for pharmaceuticals megamergers showed returns 5% above the industry index two years after a deal’s announcement. Other industries often had negative returns.

But Malhotra noted that deals like these can destroy value, because sometimes, the best people are lost when companies cut R&D to extremes. Valeant can’t afford to chop R&D too much because Salix has some good products in its pipeline, and they should be invested in it, she said.

"Stressful times"

The Salix IT employee said Valeant did what it set out to do. “There is an aspect that is sad to many of us who had been there awhile,” he said. “I fully expected to not be there (after the acquisition). When you look at the budget numbers, it has to come from somewhere. They (Valeant) are very regimented about meeting targets.”

The total number of layoffs represented nearly a third of the Salix workforce, about 1,000 before the acquisition, including at least 10 senior executives across many departments, according to the Worker Adjustment and Retraining Notification (WARN) Act.

For about a year, headlines about Salix - ranging from takeover strategies aimed at lowering corporate taxes to misreported inventory levels - flooded the news media. It was a rollercoaster year for Salix, during which the company was often criticized for its corporate strategy.

Given the shakeup in management, the acquisition might have been in the company’s best interest. The degree to which the management team mishandled things is almost incomparable, noted Lyman.

“Is it going to be easier for us to bring in brand new management and go through the period of adjusting, and hopefully they can get the ship turned around? Or is it in the best interest of our stockholders to just go ahead and sell?” said Brian Ellison, a strategy and marketing professional for managed care.

“You can imagine there’s some stressful times there,” Lyman said, referencing how the effects of the negative publicity likely trickled down the company pipeline.

“When you’re not at an established company, and you know an acquisition is a possibility, you sometimes take risks you wouldn’t normally see in big pharma," he said.

And sometimes these risks are driven by greed. In March, Bloomberg reported Derbyshire would get $10.2 million in stock and $3.1 million in options that he was awarded before the accounting problems were announced and Logan would get $32.7 million in stock that she was awarded before the sale to Valeant.

When Salix was approached last year, the prices were high and at a premium. It’s impossible to say what was in the minds of companies that were targeting Salix, but the IT employee believes the inventory issue was a possible factor delaying the sale.

The IT employee, however, touts Salix for its performance-driven culture. But some former employees were driven from the company because of its intense corporate climate, shedding light on how the stressful environment was not a recent development in some departments.

“I would say from limited experience it was the worst experience in pharma I’ve ever had,” said Tabitha Wilson, who worked at Salix in Oregon in field sales from 2006 to 2007. “A lot of people had to go on blood pressure medication and all kinds of medications because of the stress. The expectations were unrealistic.”

"No safe place"

Cost-cutting has been a heavy focus in these new deals. Thousands of employees have lost their jobs, as chief executives like Mike Pearson who believe very little in R&D strike deals. Some industry experts question the strategy, arguing it undermines research that could help propel sales down the road.

“You cut operating costs, that’s just wonderful you did that, but you let intellectual capital go,” Ellison said. “Whenever companies do layoffs, companies realize all of a sudden, we need some of those people back, and we let them go too quickly.”

Salix employees who were let go are looking for a new place to work, which might very well mean a company in the Research Triangle Park (RTP). It might mean a company in another city.

Though for several weeks the Salix headquarters building looked as it did before the acquisition, with the green-leaf willow symbol plastered against the wall of its front lobby, there will soon be a new purple-and-gray ‘V’ in its place.

As investors reward deals by driving up shares of acquisitive companies like Valeant, it seems there’s no where to run from job cuts in pharmaceuticals.

“You’ve seen the 1,000 or more people who are gone (in the RTP),” Lyman said. “There’s no safe place. There’s not many places to hide in pharma these days and feel like you have any longevity.”

Sarah Chaney is a business reporting student at the University of North Carolina, Chapel Hill, NC.