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Teva Bets on Stem Cells, Cancer in $6.2 Billion Cephalon Bid

Teva to Buy Cephalon for $6.8 Billion
Cephalon aquired the narcolepsy treatment Provigil in 1993, and in 2009 the drug became a blockbuster. Photographer: JB Reed/Bloomberg

Teva Pharmaceutical Industries Ltd., swooping in to outbid Valeant Pharmaceuticals International Inc. for Cephalon Inc., is counting on “high-risk, high-reward” stem-cell treatments and therapies for asthma and lung cancer to help it overcome growing competition to its biggest product.

The $6.2 billion deal gives Teva, which relies on the multiple sclerosis medicine Copaxone for 21 percent of its revenue, more than 30 compounds in late-stage trials. The pipeline will ensure future growth as Copaxone faces competition and Cephalon’s top-selling drug, the narcolepsy treatment Provigil, loses patent protection next April, Teva Chief Executive Officer Shlomo Yanai said.

Teva and Cephalon executives said they see potential in a therapy for congestive heart failure under development with Mesoblast Ltd., reslizumab for asthma and the lung-cancer treatment obatoclax. Teva needs two or three of Frazer, Pennsylvania-based Cephalon’s drugs to succeed to offset lost revenue once patent protection ends for the U.S. company’s top products, said Ori Hershkovitz, a partner at Sphera Global Healthcare Fund in Tel Aviv.

“Teva’s making four or five shots on goal with a very high-risk, high-reward kind of profile,” Hershkovitz said in an interview. Sphera owns Teva shares. “If they pull off the stem-cell product, they’re in the clear. But if they pull off two or three of the others, it would also be a very good deal.”

Branded Drugs

Teva will pay $81.50 a share in cash, 12 percent above Valeant’s March 29 offer, the Petah Tikva, Israel-based drugmaker said yesterday in a statement. Including assumed debt, the purchase values Cephalon at $6.8 billion. Valeant, based in Mississauga, Ontario dropped its plan to buy Cephalon after Teva announced its bid.

The deal will make Teva, the world’s biggest maker of generic drugs, less dependent on Copaxone for the branded portion of its business, Yanai said.

Cephalon said in some circumstances it may accept a better offer and, in certain instances, pay a fee of $275 million if it terminates the takeover, according to a company filing.

Cephalon rose $3.09, or 4 percent, to $80.11 at the 4 p.m. New York time close yesterday of Nasdaq Stock Market trading. Teva’s American depositary receipts climbed $1.54, or 3.4 percent, to $47.27. Valeant, based in Mississauga, Ontario, fell $3.05, or 5.8 percent, to $49.58 in New York Stock Exchange composite trading.

After the Valeant offer, Cephalon estimated that a dozen projects aiming to reach the market by 2016 may have peak sales of more than $9 billion combined. The company reported 2010 revenue of $2.81 billion, of which $1.12 billion came from Provigil.

Cephalon has a better new-drug pipeline than Wall Street has given it credit for, Bill Marth, president of U.S. operations for Teva, said in a telephone interview.


“Cephalon didn’t seem like they could get a break for the pipeline,” Marth said. “We are very excited about it and we think it will bear a lot of fruit.”

The deal gives Teva a 20 percent stake in Melbourne-based Mesoblast, a maker of stem-cell therapies, under a deal Cephalon signed in December. Revascor, an adult stem-cell therapy for congestive heart failure, a progressive weakening of the heart muscle, may revolutionize treatment if it’s effective, Hershkovitz said.

In a second-stage study in 60 heart failure patients, 45 patients who got the stem cells had fewer adverse cardiac events than 15 patients in a control group who didn’t, Cephalon announced in January. Therapies like Mesoblast’s aim to use adult human stem cells to replace and repair damaged tissue.

‘Consistent Results’

“We saw improvements in every cardiovascular measure we looked at,” said Kevin Buchi, chief executive officer of Cephalon, in a telephone interview yesterday. “It is a very small data set, but the consistent results across all the endpoints make us believe that these cells are doing something.”

Among the most advanced of Cephalon’s experimental drugs is a novel biotech medicine, reslizumab, which may help treat asthma patients whose symptoms aren’t controlled by existing medications. A trial on 106 patients with a certain kind of severe asthma found that the drug improved asthma control and lung function, Cephalon announced in February 2010. Final-stage human trials are ongoing and may yield results in late 2012, Buchi said.

‘Expensive’ Treatment

“It will be injectable, and it will be expensive, certainly tens of thousands of dollars a year,” Eric Schmidt, a New York-based analyst with Cowen & Co., said in a telephone interview. “It certainly has multi-hundred million if not billion-dollar sales potential.”

Another drug in Cephalon’s pipeline, obatoclax, targets small-cell lung cancer, a type of tumor that is difficult to treat. In a mid-stage clinical trial, patients who got the drug in addition to chemotherapy lived longer than those who received chemotherapy alone, Buchi said. Those results haven’t been published, he said.

There had been discussions between Teva and Cephalon over a possible deal “long before” Valeant came along, Marth said. “We’ve had contact between the companies for a long time, for many months,” he said.

The death of Cephalon founder and then-chief executive Frank Baldino in December slowed those discussions down, he said. Valeant’s offer “sped up things a little bit.”

“The previous talks were at a very, very early stage,” Buchi said. “There was obviously a lot more haste and focus” once Valeant became involved.

Previous Bets

Both companies have profited from gambles on risky drugs in the past. When Baldino acquired Provigil in 1993, analysts estimated it would generate no more than $50 million in annual revenue. In 2009, the drug became a blockbuster.

Former Teva Chairman Eli Hurvitz picked up Copaxone after it had been rejected by Johnson & Johnson and Upjohn, a U.S. drugmaker later bought by Pfizer. One of the first therapies for multiple sclerosis, the 14-year-old injected drug now has sales of about $3 billion a year.

Teva estimates the deal will result in $500 million in annual cost savings in the third year after closing. Alongside Cephalon’s branded pipeline, Teva gets control of the Mepha generic-drugs unit Cephalon acquired last year. The unit was one of two drugmakers sold by Germany’s Merckle family; Teva bought the other, Ratiopharm GmbH, last year.

Nuvigil’s Effect

After the Provigil patent expires, Teva will continue to benefit from sales of a next-generation version of the treatment called Nuvigil, said David Maris, an analyst with CLSA in New York. Investor concerns that patients will switch from Nuvigil to cheaper generic copies of Provigil are overblown, he said.

“The market thinks that when Provigil goes generic, Nuvigil will be hurt badly,” Maris said in a telephone interview. “But evidence has shown in previous drug examples that it doesn’t happen. Part of why they are buying Cephalon is that they must believe that Nuvigil won’t fall apart.”

Copaxone accounted for about 70 percent of Teva’s branded sales last year. The addition of Cephalon will drop that to about 47 percent in 2015, Yanai said.

“It’s about taking this business from relying on one product,” he said.

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