Yet another acquisition deal was announced in the pharma sector with generic player, Teva Pharmaceutical Industries Ltd. (TEVA) entering into a definitive agreement with Cephalon, Inc. (CEPH). Teva intends to acquire Cephalon for $81.50 per share in cash or $6.8 billion.
Teva Tops Valeant Bid
Cephalon has been in the news over the past few weeks with Valeant Pharmaceuticals (VRX) expressing an interest in acquiring the company. Valeant had initially approached Cephalon in late March with a $73 bid. However, Cephalon rejected the offer. Teva’s offer price tops Valeant’s offer and represents a 39% premium to Cephalon’s stock price before Valeant’s unsolicited proposal was announced.
Deal in line with Long-Term Strategy
The Cephalon deal is in line with Teva’s long-term strategy of expanding and strengthening its branded and specialty pharma business. Once the acquisition goes through, the combined company’s branded product portfolio will consist of more than 20 products representing sales of about $7 billion. While Teva’s branded portfolio consists of Copaxone (multiple sclerosis), Azilect (Parkinson’s disease), respiratory and women’s health products, Cephalon will be bringing with it products like Provigil/Nuvigil (sleep disorder), Amrix, Actiq and Fentora (for pain management), and Treanda and Trisenox (oncology).
The acquisition makes sense for Teva which is currently facing patent challenges for Copaxone. With Copaxone accounting for 20.5% of total revenues in 2010, the earlier than expected entry of generic versions of Copaxone would be a major setback for Teva.
Cephalon also has a presence in the generics market following its April 2010 acquisition of Mepha AG, which specializes in the marketing of branded and non-branded generics and specialty products in more than 50 countries. Mepha has a presence mainly in Europe, the Middle East, Africa, South and Central America and Asia.
Teva’s pipeline will also be boosted significantly following the closing of the acquisition. Cephalon has several candidates in its pipeline including Lupuzor (systemic lupus erythematosus), and Cinquil (eosinophilic asthma).
Financial Impact
Teva expects to achieve cost synergies of at least $500 million per annum from the third year following the closing of the deal. The deal, meanwhile, is expected to be immediately accretive to earnings. Teva intends to use cash on hand, lines of credit and the public debt market to finance the deal.
Neutral on Teva
We currently have a Neutral recommendation on Teva, supported by a Zacks #3 Rank (short-term “Hold” rating). The Cephalon deal, which is scheduled to close in the third quarter of 2011, 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.
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