Valeant Bids $5.7 Billion for Cephalon
By ANUPREETA DAS And JONATHAN D. ROCKOFF
Canada's Valeant Pharmaceuticals International Inc. made a hostile offer for smaller rival Cephalon Inc. late Tuesday, valuing the U.S. drug maker at $5.7 billion, and signaling a renewed willingness among companies to pursue deals as the markets bounce back.
Valeant's all-cash offer of $73 a share, disclosed Tuesday, represents a 24.5% premium to Cephalon's stock price of $58.75 as of Tuesday's market close. Valeant also said it would seek to replace Cephalon's board.
The offer suggests just how much the anticipated loss of revenue from patent expirations on key products is re-shaping the pharmaceutical industry. As drugs lose patent protection in coming years, drug makers stand to lose hundreds of millions of dollars of revenue and are searching for growth through acquisitions that plug those expected holes and allow companies to cut costs.
Valeant said it plans to pay for the deal entirely with debt, and has a commitment letter from its adviser Goldman Sachs Group Inc.
In an interview, Valeant Chief Executive J. Michael Pearson called the offer reasonable, since the offer price is higher than Cephalon has been trading the last two years. Mr. Pearson said he'd be willing to increase the offer "somewhat" if Valeant gets the chance to perform due diligence and sees further value, such as opportunities to reduce Cephalon's tax rate.
Mr. Pearson said Cephalon was a good fit with Valeant because the companies share branded generic businesses in Europe and consolidation offers the opportunity to cut Cephalon's unnecessary spending, especially as it loses revenue from products losing patent protection. "Strategically it makes sense," he said of a deal. But he added: "If we don't get a sense within the next month that this can go forward, we will move on to other things."
Cephalon said in a statement it would consider Valeant's hostile offer, and advised shareholders to wait for a response from Cephalon's board. Cephalon said it had received offers from Valeant on March 18 and March 25, and told Valeant that it has been reviewing the offers and would respond by next week.
"We must proceed in a manner that provides the basis for thorough and complete analysis by our board," Cephalon CEO J. Kevin Buchi wrote to Mr. Pearson in a letter dated March 29. Deutsche Bank is advising Cephalon.
Founded as a biotechnology start-up in 1987, Cephalon makes drugs for central nervous system disorders, pain and cancer. Its founder, Frank Baldino Jr., died Dec. 16 after running the company for more than two decades. And a leading product, narcolepsy treatment Provigil, loses patent protection in April 2012.
The company has tried to get patients to switch to a newer version, but Mr. Buchi acknowledged during a recent interview that the company will see "reduced sales and reduced earnings" in 2012. Yet Mr. Buchi expressed confidence that the company's acquisition of promising compounds and investment in their development will pay off later.
"If we can get a couple of them to work, that should be enough for us to get through," he said.
Valeant's Mr. Pearson, a former McKinsey & Co. consultant known for financial engineering, is offering Cephalon shareholders a different approach. He says he could wring value out of Cephalon by cutting its spending, particularly on marketing drugs like Provigil once they lose patent protection. He would also try to spend less on research and development by partnering with larger pharmaceutical companies to develop promising compounds. "Our strategy is better," he said.
Based in Mississauga, Ontario, Valeant is a specialty pharmaceutical company selling both branded and generic medicines. It is best known for its ex-chief executive, Milan Panic, a former prime minister of Yugoslavia, who landed in trouble with shareholders and regulators after selling $1.24 million in stock before disclosing that a drug hadn't received regulatory approval. Mr. Panic resigned in 2002 from the company, then known as ICN Pharmaceuticals Inc.
Last June, Valeant agreed to merge with Canadian drug maker Biovail, and the combined company retained the Valeant name.
Since 2008, it has been led by Mr. Pearson.
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Valeant approached Cephalon several times in private and sent three letters, but Cephalon was unwilling to engage in discussions, Valeant said. "We thought they might be open to a sale. We really didn't get a whole lot of feedback, so we decided to go directly to shareholders," Mr. Pearson said.
On Tuesday, the Frazer, Pa.-based Cephalon said it had made a $163 million bid to buy the shares of Australian cancer drug maker ChemGenex Pharmaceuticals that it didn't already own. Last week, it said it would buy Gemin X, a small privately-owned biotech, for $525 million, an amount that includes future payments.
In a letter Tuesday to Cephalon's Mr. Buchi, Mr. Pearson said Cephalon has become a less attractive target for Valeant.
"Since the time of our original offer you have announced two deals that will reduce your cash on hand by over $400 million dollars, which makes Cephalon a less attractive acquisition from our standpoint," he said in the letter.
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