Visudyne developer QLT Inc. brings more than a Canadian address and its synthetic retinoid program to men's health care firm Auxilium Pharmaceuticals Inc. It brings the potential for a more favorable tax rate.

An all-share merger, expected to close in the fourth quarter, gives the shareholders of Chesterbrook, Pa.-based Auxilium 76 percent of the combined entity, with Vancouver, British Columbia-based QLT shareholders holding 24 percent. With intentions to license out the retinoid program, the true motivation for the merger is to create a Canadian-domiciled structure.

"It provides meaningful financial and tax synergies," said Auxilium CEO and president Adrian Adams on a conference call. "We project that the long-term estimated effective tax rate could eventually be reduced to the mid-20 percent range."

That's down from a high-30 percent range if the company remains as is in the U.S., and Auxilium expects the tax rate to fall further with continued partnering and mergers and acquisitions.

Terms call for a wholly owned subsidiary of QLT to be merged into Auxilium, whose shareholders will get 3.1359 QLT shares for each Auxilium share. The deal, valued at about $350 million, represents a 25 percent premium to QLT shareholders based on the June 25 closing price. The combined entity will be temporarily called New Auxilium.

QLT's stock (NASDAQ:QLTI) rose Thursday 14.6 percent, or 79 cents, to close at $6.19, while Auxilium's stock (NASDAQ:AUXL) dropped 54 cents to close at $20.69.

RBC Capital Markets LLC analyst Michael Yee noted that the transaction results in a high dilution of 215 million shares, up from 50 million, for Auxilium, as well as the potential for a "25 percent tax (rate) that will take time," as opposed to the more immediate 15 percent rate achieved with Irish inversions.

Jonathan Aschoff, of Brean Capital LLC, echoed the concerns. "We understand that the tax benefits from this deal facilitate further acquisition only if the stock responds at some point better to this announcement than it has already done [Thursday], and that it would benefit [earnings per share] in the event of any profitability that should ever come, but we are not impressed with today's news because we view the 'transformation,' as management likes to say, as even less appealing than the 'old' Auxilium."

The combined entity will continue to pursue a partnership for QLT's only product, the orphan drug QLT091001 for retinal diseases caused by gene mutations that interfere with the availability of 11-cis-retinal. An 8-K filing indicates Auxilium expects to receive no more than $25 million for the program. Having already completed safety and proof-of-concept studies in patients with leber congenital amaurosis or retinitis pigmentosa, the oral synthetic retinoid program is ready for phase III.

"We do believe that this new platform that we now have will allow us to more aggressively compete in the partnering and M&A fronts," Adams said.

Aschoff is doubtful, however, saying Auxilium's "heavy debt may hinder the company from doing any M&A involving cash settlement and thus increase dilution further." As of March 31, Auxilium had cash of $217 million and debt of about $549 million.

QLT's flagship product, Visudyne photodynamic therapy, gained FDA approval in 2000 for wet age-related macular degeneration and was sold to Montreal-based Valeant Pharmaceuticals International Inc. for $112.5 million in September 2012, after losing market share to Roche AG's Lucentis (ranibizumab) and the former Eyetech Inc.'s Macugen (pegaptanib). (See BioWorld Today, Sept. 25, 2012.)

QLT also sold its U.S. subsidiary in 2009 for $230 million to Tolmar Holding Inc., which included the prostate cancer drug Eligard (leuprolide acetate). The company currently has 37 employees and about $140 million in cash and cash equivalents.

Auxilium's 12 approved products include Stendra (avanafil) for erectile dysfunction and Xiaflex (collagenase clostridium histolyticum) for Peyronie's disease and Dupuytren's contracture. In the pipeline, the company has phase II candidates with top-line data expected in the fourth quarter for its cellulite program, and in the first quarter of 2015 for its frozen shoulder program.

Auxilium's current management will lead New Auxilium, maintaining headquarters in Chesterbrook. All Auxilium directors and two QLT directors are expected to join the board. Both company's boards have unanimously approved the merger.