Endo Buys Struggling Auxilium for $2.6 Billion to Augment Urology Franchise

Endo International’s $2.6 billion purchase of Auxilium Pharmaceuticals complements Endo’s urology and male health portfolio, and the company intends to leverage its resources to optimise and drive increased adoption of three key Auxilium drugs, according to an analyst with research and consulting firm GlobalData.

Adam Dion, GlobalData’s Analyst covering Healthcare Industry Dynamics, identifies these treatments as Xiaflex, approved for the treatment of Dupuytren’s contracture and Peyronie’s disease, and Auxilium’s Testopel and Testim, both hormone replacement agents.

Dion says: “Testopel and Testim generated combined sales of $271 million in 2013, and will supplement Endo’s hypogonadism therapy Fortesta.

“GlobalData’s Net Present Value (NPV) analysis values Auxilium pharmaceutical assets at approximately $2.5 billion, which is in-line with Endo’s outlay. Largely driving the company’s valuation is Xiaflex with an NPV of $920 million, followed by Testopel at $570 million, and Stendra at $558 million.”

With a market cap of $1.5 billion, and an enterprise value of $2.1 billion, GlobalData believes Endo’s purchase price could be considered a little high, given that Auxilium was negotiating from a position of weakness.

Dion continues: “Auxilium’s top-line revenue was flat in 2013, and the company has been faced with slowing sales of Testim, and witnessed a 50% year-on-year drop in sales from Xiaflex.

“The company responded by announcing that it would cut about 190 jobs, or 30% of its workforce, as part of a plan to save $75 million per year. Auxilium was also considering purchasing the Canadian eye drugmaker QLT in an effort to shave costs to a lower tax domicile, but recent changes to tax laws most likely thwarted those efforts.”

The analyst states that Endo’s motivation behind the deal centers on cash generation and cost-cutting, with the company expected to achieve annual cost synergies of about $175 million. This synergy run-rate is expected to be immediately accretive in the first year after closing, and includes Auxilium’s reduction in annual operating expenses previously announced in September.

“After the transaction, Endo will have a stronger balance sheet, increased cash flow with improved financial flexibility to continue with its diversification strategy, transforming itself into a larger specialty pharma and medical device maker,” Dion concludes.