Tougher US Tax Rules Cited as Salix Ends $2.7 Billion Cosmo Pharma Deal

Salix Pharmaceuticals Ltd. and Italy’s Cosmo Pharmaceuticals SpA ended a $2.7 billion merger agreement, the first time a U.S. company has blamed tougher rules for scrapping a plan to move overseas for lower taxes.

Salix will make a $25 million payment to Lainate-based Cosmo, the companies said in a statement. Raleigh, North Carolina-based Salix is in talks to sell itself to Actavis Plc, people with knowledge of the matter said.

The scrapped deal is the first evidence that rules adopted last month by the U.S. Treasury Department are succeeding in curbing cross-border, tax-reducing deals known as tax inversions that have helped drive a record period of industry mergers.

“The changed political environment has created more uncertainty regarding the potential benefits we expected to achieve,” Salix Chief Executive Officer Carolyn Logan said in the statement on the Cosmo deal.

Cosmo rose 7.7 percent to 154 Swiss francs at 9:39 a.m. in Zurich, giving the company a market value of 2.3 billion francs ($2.4 billion). The stock lost 8.3 percent Thursday after CNBC reported that Salix would end the agreement. Salix fell 2.3 percent to close at $151.09 Thursday.

‘Not Disappointed’

Mauro Ajani, Cosmo’s founder, chairman and controlling shareholder, said he’s not disappointed the deal fell through and said there are no plans to sell the company.

“The political environment changed, the shareholders maybe pushed them to sell the company, it’s easy to understand,” Ajani said by phone.

The congressional Joint Committee on Taxation has estimated that a bill to curb inversions would raise about $20 billion over the next decade.

Though an agreement between Salix and Actavis isn’t imminent, it has become more likely in the past week, the people said, asking not to be identified discussing private information.

Botox maker Allergan Inc. has been trying to acquire Salix, but that effort to stalled in recent days over valuation concerns, two of the people said. Salix’s top selling drug is Xifaxan, a treatment for travelers’ diarrhea.

The Cosmo deal, announced in July, called for Salix to combine with Cosmo Technologies Ltd., an Irish unit of Cosmo Pharmaceuticals, to create a company based in that country.

Gut Drugs

Salix would have bought patents to three gastrointestinal drugs from Cosmo Pharmaceuticals for about $2.7 billion in stock. Salix shareholders were to own just less than 80 percent of the combined company.

U.S. drugmakers have sought foreign headquarters in order to bypass the U.S.’s 35 percent corporate tax rate, the highest in the developed world.

Cosmo said it’s focused on gaining FDA regulatory approval for Methylene Blue, a dye to make pre-cancerous colon lesions easier to see, and SIC-8000, a chemical that makes them easier to remove. The company is also developing an antibiotic called Rifamycin SV.

“While all strategic options are in our hands, we look forward to a continuation of our long-standing relationship with Salix,” Cosmo Chief Executive Officer Alessandro Della Cha said in the statement.