In a bid to expand its product portfolio/pipeline, Endo International (ENDP - Analyst Report) submitted a proposal to take over Auxilium Pharmaceuticals (AUXL - Analyst Report) for $2.2 billion in cash as well as stock. Endo intends to utilize its existing cash balance to fund the deal. The company said that it will also resort to debt financing for the purpose. Endo expects the transaction to be accretive to its adjusted earnings per share immediately after closure.

Offer Price Represents Substantial Premium

The offer price of $28.10 per share is 31% above Auxilium Pharma’s closing price of $21.52 on Sep 16. Furthermore, the offer price represents a premium of 40% to Auxilium Pharma’s average closing price over the past 30 trading days. Endo’s offer thus appears to be lucrative for Auxilium Pharma’s stockholders.

Auxilium Pharma has reported disappointing results over the past few quarters, hurt by declining sales of some of its key products. The company announced earlier in the month that it will reduce its workforce by 30% to drive the bottom line. Auxilium Pharma expects to reduce annual operating expenses by at least $75 million as a result of the move (read more: Auxilium Pharmaceuticals to Restructure, Cut Jobs by 30%).

Endo noted that the acceptance of its offer would result in far greater savings for the combined entity.

We expect the shares of both Auxilium Pharma as well as Endo to be positively impacted by the news. With Auxilium Pharma struggling as a stand alone entity, the takeover offer by Endo offers significant value. We expect Auxilium Pharma to respond favorably to the takeover bid.

Auxilium Pharma had inked a deal earlier in the year to merge with Canadian entity, QLT (QLTI - Analyst Report). The deal was mainly aimed at tax savings (read more: Auxilium and QLT to Merge on Tax Saving Attractions). In the event of Auxilium Pharma accepting Endo’s offer, it will be interesting to see what happens to the QLT deal.

Men’s Health in Focus

At Endo’s end, the company’s men’s health division has struggled over the past few quarters. Endo is looking to revive the segment through this impending buy. In the event of the deal materializing, Endo would get access to drugs like Xiaflex (Peyronie's disease and dupuytren’s contracture), Stendra (erectile dysfunction), Striant (a buccal system for testosterone delivery) and Testim (hypogonadism).

Will the Move Counter Generic Competition?

We believe that the offer to acquire Auxilium Pharma is a prudent move by Endo since it has also been struggling to record meaningful top-line growth due to generic competition confronting its key painkillers Lidoderm and Opana ER. In the event of the deal materializing, Endo’s top line would be boosted by the addition of Auxilium Pharma’s 12 FDA-approved products.

Endo carries a Zacks Rank #2 (Buy) while Auxilium Pharma is a Zacks Rank #3 (Hold) stock. A better-ranked stock in the health care space is Allergan (AGN -Analyst Report) which sports a Zacks Rank #1 (Strong Buy).

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