Bill Gunderson

About the Author Bill Gunderson

Bill Gunderson is the CEO and Chief Market Strategist of Gunderson Capital Managment in San Diego, CA. He is also a professional money manager, former research analyst, author of Best Stocks Now, and developer of the Best Stocks Now smartphone app. He offers four free weeks to his weekly Best Stocks Now to Seeking Alpha readers. http://www.pwstreet.com He also hosts a daily stock market radio show on AM1000 KCEO from 7am-8am. http://www.kceoradio.com Bill has appeared on the Fox Business Channel and on Bloomberg radio numerous times. He has been published in Barron's, Forbes, TheStreet.com and numerous other publications i.e. Los Angeles Business Journal, San Diego Union Tribune, Phoenix Business Journal, Salem News, Rochester Business Journal, and many others.

A Bizarre Pharma Love Triangle


Back on July 3rd of this year, I wrote about a good find in pharma called Salix Pharmaceuticals (NASDAQ:SLXP). Salix Pharmaceuticals is a specialty pharma company that specializes in gastroenterology treatments.

In the article, I mentioned Salix Pharmaceuticals was being discussed as a prime candidate to do a tax-inversion deal. Just a few days later on July 9th, Salix Pharmaceuticals announced a deal to buy three gastrointestinal drugs from a unit of Italy-based Cosmo Pharmaceuticals SpA (COPN), allowing Salix to move to Ireland and lower its tax bill. The analysts get it right sometimes, after all!

I also mentioned in the article that Salix was being touted as an excellent takeover target. At the time, several companies had expressed interest in acquiring Salix Pharmaceuticals and its impressive portfolio of GI drugs.

One of the companies rumored to be interested at that time was Allergan (NYSE:AGN), a multi-specialty global pharmaceutical company focused on ophthalmic pharma, dermatology, neuroscience, urology and cosmetics. Cosmetics – yes, Allergan is the maker of onabotulinumtoxinA, known by its product name BOTOX┬«.

Allergan has also been “in play” this year, receiving a $53 billion hostile takeover bid from Valeant Pharmaceuticals (NYSE:VRX) and Bill Ackman-led Pershing Square Capital Management back in April. And last month, it received an all-cash bid from Ireland-based generic and branded pharmaceutical company, Actavis plc (NYSE:ACT).

Now it is being reported that Allergan has rejected the latest offer from Actavis in favor of closing in on its own takeover candidate, Salix Pharmaceuticals. Another advantage of this deal, besides Salix’s drug portfolio, is that the deal may make Allergan too big and complicated for Valeant and activist investor Ackman to buy.

So to recap, Allergan loves Salix, but Valeant loves Allergan. Allergan doesn’t love Valeant and the Bill Ackman/Pershing offer, as it would result in big R&D cuts. The matter is further complicated by the fact that Ackman is Allergan’s largest shareholder at 10%, and he is trying to force Allergan to love him.

Actavis also loves Allergan, and wants to pay cash for it. It also promised to be a better mate and vowed not to cut R&D. But Allergan is rejecting Actavis too. Even after everything that has happened, Allergan is still in love with Salix Pharmaceuticals.

What a bizarre love triangle!

In comes scorned suitor Bill Ackman on Tuesday, who threatens to sue Allergan if it pursues its desire for Salix. Even if Allergan and Salix never come to an agreement, their talks still threaten to derail Ackman’s Pershing Square Capital Management and its partner, Valeant Pharmaceuticals from pressuring a deal. Largest shareholder Ackman is pressuring for a shareholder vote.

For purposes of disclosure, I own all four companies involved in this love triangle: Salix Pharmaceuticals, Allergan, Valeant Pharmaceuticals, and Actavis.

Let’s take another look at Salix Pharmaceuticals and see what Allergan is hoping to acquire.

Screen Shot 2014-10-07 at 11.52.31

Since I last wrote about Salix Pharmaceuticals back in July, the stock has gone from around $135 per share to almost $170 per share. And the stock is certainly trading higher than when Allergan was considering the company earlier in the year.

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Data from Best Stocks Now app

Salix Pharmaceuticals is a Mid-Cap stock with a market capitalization of $10.8 billion. Its risk profile is Aggressive, and it has a trailing P/E of 136 times earnings. Its market cap has risen in size from $7.8 billion since last July, when it had a trailing P/E of 105.

Screen Shot 2014-10-07 at 11.52.45

Data from Best Stocks Now app

Salix stock has certainly increased in value given positive pipeline developments, tax-inversion deals, and merger speculation. It had a Value Grade of B+ back in July. Now its Value Grade rates a C-.

Screen Shot 2014-10-07 at 11.52.52

Data from Best Stocks Now app

Salix stock is up a whopping 88% for the year, up 36% over the last 3 months. Its Momentum Grade and Performance Grade rates an A. This company has definitely been a great performer this year.

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Data from Best Stocks Now app

When I look at companies in my Best Stocks Now app, I weigh both valuation and performance and price strength. In the case of Salix Pharmaceuticals, even given its now premium valuation, the stock ranks #23 out of 3800+ stocks in the Best Stocks Now universe. It still receives a stock of A. Back in July, it was ranked #2 and received a grade of A+.

The Best Stocks Now app has been “right on” when it comes to Salix Pharmaceuticals stock. The company is still an attractive investment. That is one of the reasons that Allergan would rather buy Salix Pharmaceuticals and enhance its product portfolio, than be acquired by another company.

Salix Pharmaceuticals’ and Allergan’s “relationship status” remains in limbo for now. It will be interesting to see who ends up with whom in this interesting Pharma Bizarre Love Triangle.

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According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Bill Gunderson has a total average return of 5.8% and a 59.6% success rate. Gunderson has a 4.6% average return when recommending SLXP, and is┬áranked #676 out of 3866 Bloggers.

 

 

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