Teva to buy Cephalon for $6.8 billion, topping Valeant's unsolicited bid

Israeli generic king Teva Pharmaceutical Industries has agreed to buy the US biotech Cephalon for $6.8 billion in cash – topping an unsolicited bid by Valeant Pharmaceuticals.

While Teva is willing to give credit to Cephalon's 10 late-stage product candidates and welcomes the firm's Western European operations, Valeant management made no effort to hide its disdain for high-risk R&D and certain far-flung operations, suggesting a potential breakup of the company.

The boards of Teva and Cephalon have unanimously approved the deal, the companies said during a 2 May conference call with investors and analysts, although the acquisition still needs approval from Cephalon's shareholders.

Teva is bidding $81.50 per share in cash – well above Mississauga, Ontario-based Valeant's hostile bid of $73 per share, which Cephalon's board brushed aside, insisting it was too low and did not value the Frazer, Pennsylvania's company's pipeline.

Teva's offer represents about a 12% premium over Valeant's offer. It also is a 39% premium to Cephalon's stock price on 29 March – the last closing price before Valeant's unsolicited proposal.

Investors reacted on 2 May to Teva's offer by pushing shares of Cephalon as high as $4.09, or 5.3%, before closing at $80.11, a gain of $3.09, or 4%.

Teva's American depositary shares climbed as high as 4.4%, or $2, before closing at $47.27, a gain of $1.54, or 3.4%. Meanwhile, Valeant's stock closed down $3.5, or 5.8% on 2 May.

The deal appears definitive, Oppenheimer analyst Dr Brett Holley said in a research note, as "the premium gives ample value to Cephalon's pipeline, and Cephalon's shareholders will find these terms attractive".

RW Baird analyst Thomas Russo concurred, stating that "with nothing to suggest a higher bid by Valeant or a new party is forthcoming, we currently expect this transaction to complete".

Both analysts have in the past few weeks held the view that an appealing offer would most likely be acceptable to shareholders as an attractive exit, given the near-term obstacles Cephalon faces.

Although the deal will require approval by the US Federal Trade Commission, it is believed that the little overlap between the two companies should make for a smooth review.

On the 2 May call, Teva management revealed the generics firm had been in discussions with Cephalon as far back as last year – long before the untimely death in December of company founder Dr Frank Baldino – with those talks intensifying after Valeant went hostile.

Valeant had recently accelerated its timetable, and its hostile dealings had resulted in an extremely adamant response from Cephalon (scripintelligence.com, 25 April 2011). Oppenheimer's Dr Holley correctly predicted that, given the fact that Teva stepped in on friendly terms, and given Valeant's cost-conscious attitude, Valeant would be unlikely to counter with a higher bid.

Indeed, in a statement issued shortly after news of the Teva-Cephalon deal broke, Valeant said it had withdrawn its solicitation to shareholders to remove and replace board members in connection with its $73 per share bid.

"We believe that this announcement is positive news for Cephalon stockholders and we are pleased that Teva has paid what we believe is a very full value for the company, and as a result, have withdrawn our consent solicitation," said Valeant CEO Michael Pearson. "As Cephalon stockholders ourselves, with over a million shares owned, we will benefit from this transaction without participating further in the process. We will remain disciplined in our M&A strategy and will look to deploy our freed-up capital on other opportunities to create value for our shareholders."

If the deal goes through, Teva would gain a global specialty company with 2010 revenue of $2.8 billion – with one quarter of those sales outside the US. Of those sales, $1.12 billion came from Cephalon's wakefulness drug Provigil (modafanil).

One of Teva's goals with the acquisition is to reduce the proportion of branded-drug revenue it gets from its lead product Copaxone (glatiramer acetate), an FDA-approved medicine used to treat multiple sclerosis.

While Teva previously said its long-term strategy was to maintain a 70:30 ratio of generics to branded products, Mr Yanai said that figure "is not a rigid number".

Also attractive to Teva was Cephalon's recent purchase of Swiss generic maker Mepha – the number-one generics firm in Switzerland – and its presence in high-growth markets of Latin America, Africa and Eastern Europe.

"From our first day of operations, Cephalon will provide additional revenue, profitability and strong cash generation," Teva CEO Shlomo Yanai told investors and analysts.

During the conference call, the firms revealed the existence of a break-up fee of "a few hundred million dollars" if the deal is not completed.

If the deal is sealed, the combined company will have more than 20 branded products, with pro form branded sales of around $7 billion. It also will have a pipeline of 30 late-stage compounds.

Mr Yanai boasted that the deal would be a "game changer" for Teva.

"We will now not only be the world's largest generics company, but also one of the world's largest specialty pharma companies," he declared.

Teva executives earlier had indicated at investor meetings that the company was open to any sort of deal that would build on its core generics business or help it diversify in the branded area – as the company's stock has been under pressure amid concern about Copaxone being hurt by increasing competitive threats.

Some 20% of the company's sales come from the injectable multiple sclerosis drug – with Teva reporting record sales of $3.3 billion in 2010, up 17% from a year earlier.

Indeed, Copaxone is roughly about 70% of Teva's overall branded revenues.

Thus, the Cephalon deal fits squarely with Teva's goal of diversifying and doubling branded product revenue from $4.6 billion to $9 billion by 2015.

It has been no secret that Cephalon has been in a weakened position and is confronting some near-term obstacles. Most notably, its lead central nervous system franchise faces a loss of revenues when Provigil loses patent protection next year, and it has had a rough road of establishing its follow-on product Nuvigil (armodafanil).

There is a chance that Teva could launch a generic modafanil version as the authorised Provigil generic. Teva currently is challenging the Nuvigil patents – an issue the FTC will need to review.

Cephalon has a large pipeline, with some products acquired very recently as part of a series of smaller acquisitions. But some of Cephalon's assets are early stage, hard to value and are expected to require significant cash investment.

Nonetheless, Mr Yanai said the two companies late-stage pipelines in the areas of oncology, pain management, immunology and biologics are "equally complementary".

Teva management in particular noted the promise of Cephalon's targeted oncology drug obatoclax, which has just come out of Phase IIb testing in small-cell lung cancer. Cephalon obtained that drug through its recent acquisition of Gemin X (scripintelligence.com, 23 March 2011).

Another valuable asset Teva would gain in the Cephalon deal is a specialty sales force.

Teva said it plans to finance the deal from cash-on-hand, lines of credit and debt. The transaction is expected to close in the third quarter.