Cephalon Surges on Hostile Takeover Offer From Valeant, Trumping Bid Price

Cephalon Inc. (CEPH) surged 28 percent to $75.44 in Nasdaq trading, its biggest gain in almost 16 years and higher than a hostile takeover bid from Valeant Pharmaceuticals International Inc. (VRX), Canada’s largest drugmaker.

Valeant made its cash offer of about $5.7 billion, or $73 a share, public last night after its private approaches were rejected, the company said. The bid for Cephalon, the Frazer, Pennsylvania-based maker of sleep and pain drugs, presents a 24 percent premium to yesterday’s closing price of $58.75.

If successful, the acquisition would be the largest hostile takeover in the industry since Sanofi-Aventis SA bid for Genzyme Corp. last year. Valeant is open to raising its bid depending on what due diligence reveals about the value of Cephalon, and also is willing to walk away, Chief Executive Officer J. Michael Pearson said on a conference call with investors today.

“Three weeks from now we should either be done with this or we should be moving on,” Pearson said.

The deal likely will get done at a higher price than the $73-a-share bid now on the table, Cowen & Co. analyst Eric Schmidt wrote in a research note today. He suggested $75 to $80 a share.

“We would not expect Valeant to encounter a lot of resistance” from Cephalon shareholders, New York-based Schmidt wrote.

Shares Surge

Cephalon increased $16.69 at 4 p.m. New York time in Nasdaq Stock Market trading, the biggest single-day gain since June 1995. The stock had lost 19 percent in the 12 months before today. Valeant increased $5.69, or 13 percent, to $50.08 in New York Stock Exchange composite trading. Its shares more than doubled in the last year.

Valeant, which merged in 2010 with Biovail Corp., said on Feb. 1 that it would buy Zug, Switzerland-based PharmaSwiss SA for $480 million to expand in Europe. In January, Pearson said Valeant would seek acquisitions to expand its markets globally.

“Valeant is an unusual company,” said Corey Davis, an analyst with Jefferies & Co. in New York, in a telephone interview yesterday. “They don’t believe in R&D, which is kind of anti-pharma. They are ultra-aggressive in acquisitions.”

After several private approaches were turned back, Valeant, based in Mississauga, Ontario, will push to replace Cephalon’s board with its own nominees, the drugmaker said in a statement.

“We put in an offer, tried to engage, but they wouldn’t,” Pearson said yesterday in a phone interview. “So we will go to shareholders. If they don’t like it, we will walk in a month.”

Provigil, Treanda

Cephalon reported 2010 revenue of $2.81 billion. The company sells the narcolepsy treatment Provigil, which last year generated sales of $1.12 billion, and the blood-cancer medicine Treanda, which had $393 million in revenue. The company is also developing medicines in other cancers including lung, melanoma and solid tumors, according to its website.

Valeant focuses on treatments for the central nervous system and skin diseases. It has made four acquisitions in the past year, according to Bloomberg data.

The offer is 5.5 times Cephalon’s earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. The median Ebitda multiple for deals in the industry has been 10.5, according to Bloomberg data.

Valeant said it plans to fund the transaction entirely with debt, and that Goldman Sachs Group Inc. provided a “highly confident letter for the full amount of the financing.” The company had $400.4 million in cash and marketable securities at the end of 2010, according to a February statement.

219 Acquisitions

There have been 219 acquisitions of U.S. pharmaceutical companies in the past 12 months, with an average disclosed price of $153.7 million and an average premium of 44 percent, according to Bloomberg data.

Cephalon in December appointed J. Kevin Buchi chief executive officer after the death of company founder Frank Baldino earlier that month. Baldino, 57, was chairman and CEO.

Cephalon has announced seven acquisitions in the past year, including a proposal on March 28 to buy ChemGenex Pharmaceuticals Limited, an Australian company developing a treatment for chronic myeloid leukemia called Omapro, in a deal valuing ChemGenex at about $231 million.

Gemin X

On March 21, Cephalon said it agreed to acquire Gemin X, a closely held developer of cancer therapies, for $225 million, with the potential for $300 million in additional cash payments based on certain milestones.

Valeant has expressed disappointment with the Gemin X deal.

“You are quite aware that investments in early-stage development programs are inconsistent with our strategy and quite frankly, from our perspective, this move has reduced the value creation potential of the proposed merger,” Valeant’s Pearson wrote to Cephalon’s Buchi in a March 25 letter. “We would hope that you delay any further such deals until our two companies have concluded this process, one way or the other.”

Pearson said he met with Cephalon’s Buchi twice. “Largely, he said this price is not in the range of what would interest him,” Pearson said during yesterday’s interview.

Valeant offered to buy Cephalon in a March 18 letter, re- printed in yesterday’s statement. The company said at the time it expected to complete due diligence in less than a month.

In the March 25 letter, Valeant indicated Buchi and Pearson had met a week earlier and that the Cephalon CEO said the board considered the offer too low to start discussions. Valeant also said it would consider raising its price based on findings during due diligence, according to the letter.

Alternative Transaction

Valeant proposed an alternative transaction in the March 25 letter, in which the company would buy Cephalon’s non-cancer- related businesses for $2.8 billion, or $37 a share in cash.

“We made the offer to buy just some of the assets in response to them,” Pearson said in the interview. “Their CEO said his shareholders under-appreciate his pipeline, so we felt we’d let him keep his pipeline and we’ll take off his hands the parts he thinks are depressing his stock.”

The second option “would allow Cephalon to continue to operate as a stand-alone oncology-focused company with sufficient cash, near-term revenue and infrastructure to develop and commercialize most of your pipeline as well as to provide additional funds to fuel your early-development stage acquisition strategy,” Pearson wrote.

Cephalon is working with its financial adviser, Deutsche Bank AG, to review the alternatives posed by Valeant and plans to respond during the week of April 4, the company said in a statement. Buchi told Pearson that Cephalon would consider the proposals, according to letters attached to Cephalon’s statement.

“To be clear: if Cephalon’s Board of Directors determines that either or both of your proposals should be pursued, we would expect to discuss with you a path forward at that time,” Buchi wrote Pearson in a letter dated yesterday.

Sanofi’s hostile bid for Genzyme, made public in August, was for $18.5 billion. After negotiations, Paris-based Sanofi said Feb. 16 it would buy Genzyme, the world’s largest maker of drugs for rare genetic diseases, for $20.1 billion.

To contact the reporters on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.

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