Takeover Tables Turn On Cephalon

Canada's Valeant Pharmaceuticals has made a hostile takeover offer, worth about $5.7 billion, for the Pennsylvania-based biopharmaceutical company Cephalon.

The offer came while Cephalon was making its own $163 million bid to buy the Australian biotech firm ChemGenex and about a week after Cephalon agreed to acquire Canada's Gemin X Pharmaceuticals for $525 million. Although those two companies accepted the takeover overtures, Cephalon itself has resisted Valeant.

Valeant says it has approached Cephalon's management and board many times, only to be "disappointed by Cephalon's unwillingness to engage in discussions in a timely manner." Starting the week of April 4, Valeant intends to begin the process of replacing Cephalon's board of directors with its own candidates.

In a statement, Cephalon confirms that it had received three offers from Valeant over the past two weeks. Two proposals were to buy the entire company, while a third offered to buy Cephalon's non-oncology products for $2.8 billion, a deal that would let Cephalon keep its development pipeline. In all cases, Cephalon says, it told Valeant it was reviewing the proposals. Cephalon's board plans to meet to consider the proposals and respond during the week of April 4.

An aggressive acquirer of what it calls "undermanaged assets," Valeant has bought several specialty pharmaceutical firms in the past few years. It is known for selling off or licensing R&D projects because "we value marketed products, not pipeline assets," CEO J. Michael Pearson said in a March 30 conference call with analysts. "We do not bet on science but on management."

Valeant sells branded drugs, generics, and over-the-counter products. It had 2010 sales of $1.2 billion, largely in the areas of neurology and dermatology. Meanwhile, Cephalon, with 2010 sales of $2.8 billion, ranks among the top six biopharmaceutical companies. It develops and sells products for pain, cancer, and central nervous system disorders.

Valeant's offer, which is to be funded entirely with debt, represents a 29% premium over Cephalon's recent average share price. "We have taken a close look at Cephalon's business and believe we put forward a very compelling offer," Pearson said. He wants to move quickly because Cephalon's patent on Provigil, a narcolepsy drug with $1.1 billion in 2010 sales, will expire soon. He is highly critical of Cephalon's continued spending on "high-risk" R&D programs and on the ChemGenex and Gemin X deals.

Going public with the offer, Pearson said, lets Valeant engage directly in discussions with Cephalon shareholders about whether the offer is fair. If shareholders don't support the offer, Valeant will look elsewhere to invest its money. "In three to four weeks we should be either done with this or moving on," Pearson added.