Endo may hunt smaller prey after losing out on Salix

Endo International P.L.C.'s foiled pursuit of a $10 billion-plus target showed that the drugmaker has a big appetite for deals. It may have to settle for something smaller.

The $16 billion company withdrew its cash-and-stock offer for Salix Pharmaceuticals Ltd. after Valeant Pharmaceuticals International Inc. countered with a sweetened all-cash bid. The acquisition would have been Endo's largest by far, at more than $11 billion, including debt.

Because of a previous acquisition, Endo is officially headquartered in Ireland so it can pay less in U.S. corporate taxes, but its executive offices are in Malvern.

"While we are disappointed with this outcome, we have been and will continue to be disciplined in our approach to potential acquisitions," Endo said in a statement. "We would like to wish Salix and Valeant continued success as they move forward with their transaction. As a next step, Endo is focusing our attention on other opportunities in our robust deal pipeline and on maximizing our organic growth initiatives, including progressing our R&D pipeline."

Endo made the right choice by walking away and not overstretching, said Michael Waterhouse of Morningstar Inc. Still, there aren't many targets like Salix left that are large enough to have a meaningful impact on earnings. That could lead the Dublin-based company, which has used its tax-advantaged Irish domicile to grow through acquisitions, to continue hunting for smaller or private targets.

Salix was "kind of that last low-hanging fruit sitting out there," Waterhouse, a Chicago-based analyst at Morningstar, said. "There are still a lot of small companies out there that they'll continue to look for, but it's definitely becoming a much more crowded buyers' market."

Endo could seek to build out its pain-management business or try to find another gastrointestinal drugmaker, according to Gabelli & Co. Possible targets could include BioDelivery Sciences International Inc., a $750 million company that already partners with Endo on a pain medicine, or Impax Laboratories Inc., at $3 billion.

Endo's bid for Salix shows it's willing to strike a large deal if the right opportunity comes along, said David Amsellem, a New York-based analyst at Piper Jaffray Cos. If the company wants to be bold and yet not stray too far from its core businesses, it could merge with one of its Irish neighbors, such as $15 billion pain-treatment company Mallinckrodt P.L.C.

Salix "made a lot of sense for Endo, but, that being said, they have ample flexibility to execute on other types of transactions," Amsellem said. "The company is casting a pretty wide net and there are a lot of options out there."