A white knight rides in
May 2011
by Jeffrey Bouley  |  Email the author


FRAZER, Pa.—What seemed in late April like it might be a whirlwind takeover of Cephalon Inc. by Canadian company Valeant Pharmaceuticals International Inc. turned out, in a real-life plot twist, to instead become a white knight-style rescue by Israeli company Teva Pharmaceutical Industries Ltd.—which outbid Valeant by more than a billion dollars in a friendly acquisition offer at the beginning of May.
It's been a busy and globally diverse several weeks for Cephalon. No sooner had it announced a friendly merger deal with Melbourne, Australia-based biopharmaceutical company ChemGenex on March 29, than suddenly Valeant announced it wanted to acquire Cephalon for $73 per share, or about $5.7 billion total.
Cephalon's board of directors rebuffed Mississauga, Ontario-based Valeant repeatedly, complaining that the unsolicited offer was inadequate. Among the many complaints coming from the Cephalon board was that "By Valeant's own admission, its analysis of Cephalon's value is based on a worst-case scenario, which is an inappropriate methodology."
Valeant maintained that it was offering a 29 percent premium over Cephalon's 30-day average and argued that a series of research and development setbacks had left Cephalon with no new major products for more than a decade. Cephalon's board and management countered that Valeant's timing was opportunistic, as the 30-day average Cephalon share price of $56.74 on which Valeant based its proposal was near the stock's 52-week low, and the proposal represented "virtually no premium to Cephalon's 52-week high."
Cephalon also disagreed with the sentiments regarding its pipeline, which it argued is one of the broadest in the industry, with 10 late-stage product candidates targeted at novel and best-in-class therapeutic goals. Cephalon says that includes six indications with blockbuster potential that are expected to begin launching in the next three years.
Cephalon already sells Provigil for treatment of narcolepsy, which last year generated sales of $1.12 billion, and the company reported total revenues of $2.81 billion in 2010.
Unmoved, in mid-April Valeant set a May 12 deadline for Cephalon to accept the offer and also began the process not only of appealing directly to shareholders but working to replace the entire board of directors at Cephalon. Eric Schmidt, an analyst with Cowen & Co. in New York, was among the many market-watchers who predicted Valeant would win out in the end but would likely have to boost its offer and perhaps give a little on its deadline, noting that "There will be a dance and courtship and there will be a deal at the end of that process," and writing in an investment note that if it offered somewhere between $75 and $80 per share, "We would not expect Valeant to encounter a lot of resistance" from Cephalon.
Ten days before Valeant's deadline, though, Teva and Cephalon announced that their boards of directors had unanimously approved a definitive agreement under which Teva will acquire all of the outstanding shares of Cephalon for $81.50 per share in cash, or a total enterprise value of approximately $6.8 billion—a transaction that is not conditioned on financing and is expected to be completed in the third quarter of 2011.
What made Teva's arrival stand out so much, though, was the prevailing opinion that no white knights were likely to arrive. Cowen & Co. 's Schmidt, for example, was one of the many analysts who thought that most potential acquirers had probably already evaluated Cephalon and were shying away because of perceived weaknesses at the company in the wake of its founder and CEO Frank Baldino—a driving force for the company—dying some four months prior to the Valeant proposal.
Still, while Teva is paying a billion dollars more than Valeant said it would pay, the Israeli company is still probably getting a good deal. According to figures gathered by Bloomberg, Valeant's proposal valued Cephalon at 5.3 times earnings before interest, taxes, depreciation and amortization, which would reportedly have made it a huge bargain compared to other recent deals in the $1 billion-plus category. In fact, Bloomberg data indicated that even if Valeant had bumped the offer up to $84 per share, it would be one of the cheapest deals in history—and clearly Teva's offer falls below that.
When his company was still in the running, Pearson said that if neither Cephalon nor its shareholders could be moved, "we will be happy to move on to other opportunities," and he appears to be doing just that, telling Bloomberg shortly after the Teva-Cephalon announcement that "We have many irons in the fire around the world." He added that $300 million to $500 million is his company's "sweet spot" but also noted they "could go a little higher" than the $5.7 billion they offered to Cephalon if the right company came around.
Pearson will likely pursue one or more other acquisitions aggressively soon, having said many times that that early-stage drug research is too risky and doesn't make solid economic sense—preferring to grow Valeant and expand its pipeline through acquisitions rather than organic growth.
For Teva, which is known largely for being a top dog in the generic drug market, the acquisition of Cephalon reinforces a long-term strategy of building out its branded and specialty pharmaceuticals business through diversification and expansion. Indeed, the combined company's branded portfolio represents approximately $7 billion in sales, with a pipeline that includes more than 30 late-stage compounds and which creates "immediate and sustainable value in niche therapeutic areas including CNS, oncology, respiratory and pain management," Teva notes.
Zacks Investment Research indicates that the acquisition "makes sense for Teva, which is currently facing patent challenges for Copaxone. With Copaxone accounting for 20.5 percent of total revenues in 2010, the earlier-than-expected entry of generic versions of Copaxone would be a major setback for Teva."
Zacks also notes that Teva's pipeline will be boosted significantly following the closing of the acquisition, citing such pipeline candidates as Lupuzor for systemic lupus erythematosus and Cinquil for eosinophilic asthma.
"We currently have a Neutral recommendation on Teva," Zacks notes, adding that the acquisition of Cephalon "will not only strengthen Teva's pipeline; it should also help the company achieve its goal of increasing its branded revenues from $4.6 billion in 2010 to more than $9 billion in 2015."

Cephalon and ChemGenex agree to acquisition terms
With its board of directors in agreement with a proposal to acquire the Australian company for about $163 million, ChemGenex announced March 29 along with Cephalon CXS Holdings Pty Ltd., a wholly-owned subsidiary of Frazer, Pa.-based Cephalon Inc., that shareholders of ChemGenex will be advised to accept the offer in the absence of a better one. 
"The ChemGenex board welcomes Cephalon's bid, which represents an attractive premium to the current and recent trading prices of ChemGenex shares," says Brett Heading, ChemGenex's chairman.
"The proposed transaction allows ChemGenex shareholders to realize cash proceeds at a significant premium to recent trading levels," says Kevin Buchi, CEO of Cephalon.
ChemGenex focuses mostly on hematology, and is currently developing its lead product candidate, OMAPRO, which is intended for the treatment of patients with chronic myeloid leukemia and which recently completed Phase III clinical trials. ChemGenex plans to file a new drug application for the product with the U.S. Food and Drug Administration in the second half of the year. 
In other recent activity, Cephalon signed a definitive merger agreement with Gemin X Pharmaceuticals Inc., to acquire all of their outstanding capital stock for $225 million, as well as entering into a technology collaboration with Champions Biotechnology Inc.
Both deals show how Cephalon has been focusing on oncology lately, as does the ChemGenex acquisition plan, which Buchi says "adds an interesting late-stage opportunity to our portfolio." 
In a letter to his company, Buchi notes that "by strategically investing in a comprehensive pipeline now, Cephalon will ensure that it has the opportunities to continue to grow far into the future."

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