On Monday Teva (TEVA) announced its intention to buy Cephalon, Inc. (CEPH) for $6.8 billion in cash. If successful, this deal will expand Teva's branded pharmaceutical business. It will increase Teva's revenues by $2.8 billion per year and should be immediately accretive to earnings. Additionally, Teva estimates that the merger will produce cost synergies of at least $500 million per year beginning in the third year after the deal closes. With increased product offerings in branded pharmaceuticals and an expanded pipeline, this acquisition should allow Teva to smoothly navigate the loss of sales from Copaxone, its blockbuster multiple sclerosis drug. This deal makes Teva an even more appealing investment.
In an earlier article I described how Teva was an attractive investment, despite the prospect of generic Copaxone as well as Biogen Idec's (BIIB) potential competitor to Teva's Laquinimod, its next-generation MS drug. Teva's acquisition of Cephalon gives it several branded drugs with immediate sales and potential for growth. Cephalon's largest sources of revenue are Provigil and Nuvigil, both products used to treat excessive sleepiness caused by narcolepsy or shift work sleep disorder. Provigil's patent expires in 2012, but Cephalon has been trying to convert Provigil users to Nuvigil before then. The difference between the two is subtle, but critically important for patent expirations. Provigil contains two closely related molecules that are actually mirror images of each other. While both molecules are clinically active, one is more active and the more active one is marketed as Nuvigil. Nuvigil's patent doesn't expire until 2023, and captured 38% of the “wakefulness” market by the end of 2010. Cephalon is currently seeking other uses for Nuvigil, including conducting a clinical trial investigating Nuvigil as a bipolar treatment. Nuvigil should contribute to sales and earnings for years to come.
Treanda is the second major drug marketed by Cephalon. Treanda is used as a secondary treatment of a particular type of non-Hodgkin's lymphoma as well as to treat chronic lymphocytic leukemia. Cephalon launched Treanda in 2008 and had 2010 sales of $393 million. This is an additional source of revenue and earnings growth, particularly if Cephalon's Phase 3 trial to approve Treanda for front-line non-Hodgkin's lymphoma is successful.
Cephalon also has an attractive drug pipeline. It currently has 13 chemical compounds in 65 clinical studies. Some highlights include the 5 Phase 3 trials planned for 2011, including the two listed above for new indications for Nuvigil and Treanda. The other three Phase 3 clinical trials are Cinquil for the treatment of asthma, tamper deterrent hydrocodone as a long-acting hydrocodone, and Lupuzor for the treatment of the autoimmune disease lupus.
Valeant Pharmaceuticals (VRX) made an unsolicited offer to acquire Cephalon in March of this year but was rejected. Teva's purchase price of $81.50 per share of Cephalon represents an increase from Valeant's offer of $73 per share, and is a 39% premium over Cephalon's stock price before Valeant's offer was announced. Even at $81.50 per share, Teva is only paying 10 times trailing 12 months earnings. Teva has announced that it will use cash on hand, lines of credit, and public debt markets to fund the acquisition, so it will not be dilutive to current owners.
Teva's acquisition of Cephalon will provide increased revenues from a variety of products. The revenue stream from Nuvigil and Treanda should help Teva past the Copaxone patent expiration. Cephalon's pipeline adds a number of potential products for future growth. Overall, I view this acquisition as a good use of Teva's prodigious cash flow, and it reinforces my recommendation to buy Teva.