10/03/2011 08:59 EDT | Updated 12/03/2011 05:12 EST

Paladin pulls out of bidding for Cold-FX maker Afexa, clears way for Valeant

MONTREAL - Paladin Labs Inc. has dropped its attempt to acquire the maker of the Cold-FX flu remedy but the Montreal company is cashing in on its failed deal and could look for other takeover targets.

Paladin's decision Monday to end its bid for Afexa Life Sciences Inc. (TSX:FXA) clears the way for a friendly $88 million deal by Valeant Pharmaceuticals International (TSX:VRX) for Afexa to be completed.

As a minority shareholder of Afexa, Paladin will get at least $5 million from its stake in the company when it sells its shares to Valeant, the former Biovail Corp.

An analyst said Paladin (TSX:PLB) could use the money to make other deals as the maker of children's aspirin continues to boost its over-the-counter drug portfolio.

Pooya Hemami of Dejardins Securities said Paladin will generate a gross trading profit of about $5 million on the 15.4 million shares of Afexa it had previously acquired at 52 cents each before it launched a hostile bid for the Edmonton company.

"We expect that with its strengthening cash position, Paladin will continue to seek accretive assets to strengthen its growth profile," Hemami wrote in a research note Monday.

In a release before stock markets opened, Paladin said it's withdrawing its offer after Afexa agreed to increase what it would pay Valeant if that deal fell through.

The Paladin bid bid was set to expire this Friday.

That means that if Paladin had won the hostile bid, Afexa would have had to pay Valeant up to $4.5 million in a break fee.

For Paladin, such a penalty fee would have saddled the acquired company with higher liabilities and made such a deal less attractive.

The higher break fee for Valeant violated a condition of Paladin's bid, which stated that any increase of the termination fee would invalidate the company's offer.

"As a result of this agreement, a basic condition of Paladin's offer cannot be met and, therefore, no Afexa shares will be taken up when the offer expires on Oct. 7, 2011," Paladin said in a statement.

Paladin has said that Afexa's Cold-FX would have added to its sales of non-prescription products.

It has nine non-prescription medications including children's fever reducer Tempra, teething product Anbesol, anti-diarrhoea relief Kaopectate, the sleep aid Unisom and the emergency contraceptive Plan B, but it doesn't currently have any anti-cold remedies.

On Friday, Afexa said it would boost the break fee to $4.5 million under some circumstances. Such fees are negotiated in deals to help a bidder recoup some of their costs for making a takeover bid should it fall through.

Last week, Afexa had urged its shareholders to support the Valeant bid, which at 85 cents a share in cash topped Paladin's 81 cent a share offer.

Valeant has already signed lock-up deals with directors and executives of Afexa to tender their shares, amounting to 9.2 per cent of the company.

Valeant has said it wants to use the transaction to sell Cold-FX in Australia, Latin America and Central Europe, either under its current name or under a local brand name.

Olympic figure skating champion Joannie Rochette, and Olympic speed skating and cycling medallist Clara Hughes are among the high-profile athletes who promote Cold-FX, which contains North American ginseng. NHL hockey commentator Don Cherry also promotes it.

Afexa has just launched Coldsore-FX and is looking at developing Cold-FX for children.

Valeant already has a number of over-the-counter products such as moisturizer and skin care and acne treatments in countries such as the U.S., Mexico and Australia.

"In our case, what we believe we can do is take this product which is already well established in Canada and establish it in other markets, which will expand that growth," Valeant CEO Michael Pearson said in a recent interview.

"We have an ability to grow this brand because of our international footprint," Pearson has said.

Valeant is a multinational specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products primarily in the areas of neurology, dermatology and branded generics.

Shares in Valeant closed down $3.27, or 8.4 per cent, to $35.79 in trading Monday on the Toronto Stock Exchange. Shares in Paladin closed at $36.60, down 48 cents or 1.3 per cent, while shares in Afexa closed at 84 cents, down two cents.