Cephalon Inc. (CEPH) recently announced that its board of directors has rejected Canadian drug company Valeant Pharmaceuticals International Inc.’s (VRX) unsolicited bid to acquire it for $5.7 billion in cash. Last month Valeant Pharma had proposed to pay $73 for each share of Cephalon by initially approaching the latter’s board privately. The Cephalon board has found the offer too low and not in the best interest of its shareholders.
Cephalon believes Valeant Pharma’s offer significantly underestimates the value of the company by using a worst case scenario. The offer also does not ascribe any value to its broad pipeline and its prospects. Moreover, the $73 per share offered for each Cephalon share is closer to the 52-week lowest price instead of representing a premium to its 52-week high price.
Following the rejection of the offer by Cephalon, Valeant Pharma has decided to approach Cephalon’s shareholders directly. Valeant Pharma has begun a consent solicitation process to oust all the Cephalon directors and replace them with its seven nominees. Valeant Pharma believes its nominees should be able to try and find out a modest amount of additional value for Cephalon, thus hinting that it could increase the offer price.
Valeant Pharma has filed a preliminary consent solicitation statement with the Securities and Exchange Commission (SEC) to approve the step. Valeant Pharma announced that it has received a positive feedback from many of Cephalon shareholders. Cephalon has set a record date of April 8, 2011 for the consent solicitation. The shareholders will now have 60 days from this date to decide whether or not to accept the offer.
Valeant Pharma is moving rapidly with the deal. In case it cannot clinch the deal, the company said it would move on and invest its capital elsewhere.
It is indeed clear to us that if Valeant eventually acquires Cephalon, it will definitely terminate some of Cephalon’s R&D programs and cut down on its spending.
Neutral on Cephalon
We currently have a Neutral recommendation on Cephalon, which is supported by a Zacks #3 Rank (short-term “Hold” rating). With Provigil sales remaining strong, we remain concerned about the slower-than-expected conversion of patients to Nuvigil.
Both 2012 and 2013 should be challenging years for the company due to the genericization of Provigil. We are nevertheless pleased with the company’s efforts to reduce its dependence on its central nervous system franchise. Cephalon is looking to expand into new therapeutic areas to drive long-term growth and has been very active on the in-licensing/acquisition front over the past few quarters. However, considering the upcoming patent cliff, we believe the shareholders might find the Valeant Pharma offer attractive.
Neutral on Valeant
We currently have a Neutral recommendation on Valeant Pharma. We believe, with Cephalon, Valeant Pharma will gain a company with strong cash flow, solid pipeline and a great cancer drug in Treanda. However, we think that Valeant is a bit too aggressive with the Cephalon deal. Though attractive, the deal will make a big hole in Valeant’s pocket, increasing its outstanding debt. Valeant Pharma will require significant amounts of cash to pay down the debt. Moreover, the genericization of Provigil could reduce revenues of the combined entity which will subsequently lower cash flows.
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