Valeant Pressures Cephalon for Faster Decision, Goes Hostile With $5.7B Bid

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Includes: CEPH, VRX
by: The Burrill Report

By Michael Fitzhugh

Valeant Pharmaceuticals (NYSE:VRX) is taking its $5.7 billion hostile bid for Cephalon (NASDAQ:CEPH) directly to shareholders of the U.S. sleep and pain medicine specialist after growing impatient with an evaluation of the offer undertaken by Cephalon's board.

Valeant, Canada's biggest drugmaker, sees opportunities to maximize the growth and cash flow from sales of Cephalon's best-selling specialty pharmaceutical products, such the narcolepsy drug Provigil and the cancer-related pain medicine Fentora, and to monetize the U.S. company's pipeline through new partnerships.

"Cephalon has a strong business in CNS and pain, which fits in well with our operations in North America and a complementary branded generic business in Europe, through their acquisition of Mepha, which will fit well with our business over there," says Valeant CEO J. Michael Pearson.

Valeant's all-cash bid values Cephalon at $73 per share, a 24 percent premium to the Pennsylvania company's $58.75 per share close before the offer was made public. Since the offer was made public, Cephalon shares have climbed as high as $75.50. Pearson allowed that his company may raise its offer, but only if it finds additional value in Cephalon if and when the company allows it to conduct due diligence on the offer.

Valeant has also made a second offer—to purchase just Cephalon's non-oncology related assets for $2.8 billion.

Valeant says it will begin a consent solicitation process during the week of April 4 in an effort to replace Cephalon's current board of directors with its own nominees. Meanwhile, Cephalon says it intends to consider Valeant’s unsolicited proposal and “will respond in due course.”

“We must proceed in a manner that provides the basis for a thorough and complete analysis by our board and, as a result, cannot allow your schedule to govern that process,” wrote Cephalon CEO J. Kevin Buchi in a letter to Pearson posted on Cephalon’s web site.

Part of the reason for Valeant's urgency is the clip at which Cephalon has been making acquisitions of its own. On March 21, the company said it would acquire the biotech startup Gemin X Pharmaceuticals for as much as $525 million to access its pipeline of first-in-class cancer therapeutics. Just a week later, it launched a $231 million takeover bid for ChemGenex Pharmaceuticals, a hematology-focused Australian biopharmaceutical company.

"We decided to take the step of appealing directly to Cephalon shareholders due to the lack of urgency on the part of the board of directors and their decision to continue to spend over $400 million in the last week or so in what we view as high risk investments," says Pearson.

Valeant also has its eye on Cephalon's large R&D pipeline, in which it sees interesting opportunities for new partnerships.

"While we may not be the natural owner for many of these assets, we believe that there are many other biotech and pharmaceutical companies that might be interested in partnering with us on these assets," says Pearson.

Valeant says it expects the deal to be accretive immediately and in the long term, even after patent protection expires for Cephalon's leading medicines.

Valeant has closed 20 M&A transactions since Pearson took over as the company's CEO in June 2010. That was when the Canadian company Biovail acquired Valeant in a $3.2 billion merger to create a new specialty pharmaceutical group with a global presence and portfolio.

Even amid the fight for Cephalon, Pearson says the company still has an appetite for new acquisitions.