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Unexpected Offer Sends This Drug Stock Soaring

There’s something brewing in the pharmaceutical industry…

Hot on the heels of a sudden 85% rise for Avanir Pharmaceuticals (AVNR) last Monday, another pharma company just saw a huge price move.

The surge happened on massive volume…

A total of 15.6 million shares changed hands – well above the stock’s average daily volume of 1.2 million.

As a result, the price blasted to a 52-week high before closing 45% higher at $31.18.

The reason?

One that was music to shareholders’ ears…

A $2.2-Billion Shot in the Arm

On March 4, shares of Auxilium Pharmaceuticals (AUXL) hit a 52-week high of $32.89.

The stock then embarked on a steady downward spiral that saw the price slump to the $17 range a month ago.

Then came a sudden – and massive – shot in the arm last Wednesday, causing shares to soar by 45%. Take a look…

Auxilium's Six-Month Rollercoaster

Why the big move for Auxilium?

The catalyst was an unsolicited buyout offer from Endo International plc (ENDP) – one that would acquire all outstanding shares of Auxilium for $28.10 each. That’s a 40% premium to the average closing price for the previous 30 days.

Under the terms, Endo would pay a mix of cash and stock valued at $1.41 billion, while also assuming Auxilium’s debt.

In all, the deal is worth $2.2 billion.

But does Auxilium want it?

No Hostilities, Please

Endo announced that it had privately approached Auxilium’s board with a “shareholder friendly” bid on September 12. But after receiving no response, Endo went public with the offer.

The Auxilium board then indicated that they were reviewing Endo’s proposal, while also adopting a one-year shareholder rights plan in the interim.

The shareholder rights plan, commonly known as a “poison pill,” will allow existing shareholders to buy additional Auxilium shares at a discount if Endo attempts to buy more than 15% of Auxilium’s outstanding shares – thus reducing the likelihood of a hostile takeover.

But the real question is this: Will Auxilium shares benefit from a merger with Endo?

Wanted: New Growth

Before Endo’s buyout was announced, Auxilium’s share price reflected a company that was struggling.

Specifically, sales of its testosterone gel, Testim, are declining, and the firm recently announced that it would cut 190 jobs – 30% of its workforce – as part of a plan to save $75 million per year.

Until the Endo offer, Auxilium had pinned its future hopes on sales of Xiaflex. Xiaflex is a drug used to treat Dupuytren’s Contracture – a nasty condition that causes the tendons in the hand to thicken and shorten, curving the fingers inward.

Auxilium has even increased its R&D budget for Xiaflex in order to find additional uses for the drug – a move that’s showing some success. Unfortunately, this is only a stopgap measure for the company, which desperately needs to find new markets with new products.

Of course, Endo could be the impetus for future growth… but the deal has some complications.

Deal Status? It’s Complicated…

You see, Auxilium is in the process of purchasing Canadian biotech firm, QLT (QLTI). Auxilium agreed to pay $346 million for the company.

The QLT deal is a “reversion” deal that would allow Auxilium to move its headquarters to Canada, thus reducing its higher corporate income taxes in the United States.

However, the Endo offer excludes QLT, which Endo deems unnecessary because it’s already headquartered in Dublin, Ireland.

Right now, the deal is still on… But Auxilium’s board has some thinking to do.

Ultimately, an Auxilium-Endo merger would make more sense. Both companies have complementary products in the men’s health field, and Endo’s stronger financial resources and regulatory expertise could result in stronger, faster growth for Xiaflex.

And shareholders would benefit, too…

Our Verdict: Let’s Make a Deal

Endo gives Auxilium shareholders a far better deal than the QLT acquisition could ever hope to achieve – one the Auxilium board won’t be able to ignore.

In fact, based solely on the numbers, you could make a strong case for valuing the Endo deal even higher than the current $28.10 offer on the table – possibly as high as $35 to $45 per share.

This means shareholders will likely push the board hard for a price that’s significantly higher than the initial bid – a prospect that makes a deal with Endo a virtual lock.

Expect a merger to be consummated by the first quarter of 2015.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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