Valeant Pharmaceuticals International Inc. (VRX) recently announced that it has made an unsolicited bid to acquire Cephalon Inc. (CEPH) for $5.7 billion in cash.
Valeant Pharma has proposed to pay $73 for each share of Cephalon which represents a premium of approximately 29% over Cephalon’s 30-day trading average. Valeant Pharma intends to begin a solicitation process during the week beginning April 4 in an effort to replace Cephalon’s board of directors with its nominees. Valeant Pharma plans to finance the transaction entirely with debt.
Ontario-based Valeant Pharma had privately approached Cephalon’s management before making the offer public. Cephalon’s management confirmed the receipt of the offer and mentioned that Valeant Pharma had put forward two options. The options include Valeant buying Cephalon in its entirety for $73 per share or just its non-oncology related assets for $2.8 billion. Cephalon is analyzing the alternatives and plans to respond to Valeant Pharma in a week.
However, Valeant Pharma decided to go public with its offer believing that Cephalon was delaying active negotiations. Moreover, the management at Valeant does not condone Cephalon’s current business strategy of investing in its pipeline. Valeant also believes that recent transactions announced by Cephalon (like the offer to acquire Australian biopharma company ChemGenex Pharmaceuticals Limited for $231 million and the definitive merger agreement with Gemin X Pharmaceuticals Inc. for $225 million) are tactics to delay the takeover, which destroy shareholder value. Valeant Pharma could consider offering a higher price if allowed to conduct due diligence.
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.
Cephalon management asserts that its current business strategy is in the best interest of its shareholders and too much importance is being attached to the upcoming genericization of its lead sleep disorder drug Provigil. Cephalon intends to spend about $520 million to $540 million on R&D in 2011.
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 Cephalon’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 Cephalon 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 sufficient 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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