Teva to buy Cephalon for $6.8 billion, tops Valeant
NEW YORK (Reuters) - Teva Pharmaceutical Industries Ltd (TEVA.TA) TEVA.O struck a deal to acquire U.S. specialty drugmaker Cephalon Inc CEPH.O for nearly $7 billion, topping an unsolicited bid by Canada's Valeant Pharmaceuticals International Inc.
The deal would boost the brand-name business of Israel-based Teva, best known as the world's largest maker of generic drugs. Cephalon's pain, sleep and cancer drugs will help Teva reduce its reliance on the big-selling Copaxone multiple sclerosis medicine, which faces increasing competitive threats.
Teva's $81.50-a-share deal represented a nearly 12 percent premium over Valeant's (VRX.TO) $73-a-share offer, which Valeant made public on March 29. Valeant said after the joint Teva-Cephalon announcement on Monday that it was withdrawing its offer.
The combined company would have about $7 billion in branded drug sales, representing 36 percent of Teva's sales last year.
The acquisition "down the road will reduce the impact of Copaxone on Teva," said Natali Gotlieb, an analyst at the IBI Investment House. "Cephalon has a very interesting pipeline."
Cephalon marks the third major deal for Teva Chief Executive Officer Shlomo Yanai, a former general in Israel's army who took charge of the company little more than four years ago and continued its strategy of building through acquisitions.
While previous purchases of Barr Pharmaceuticals and Ratiopharm focused on Teva's generics business, Yanai touted the Cephalon deal as transforming Teva's branded business.
He told Reuters in an interview that Teva began three or four years ago to look for potential targets for its business selling brand medicines, which tend to carry far higher profit margins for drugmakers than generic drugs.
"We said we should definitely get to a strategy that would create a multifaceted business that is depending not on one product or handful of products, but has a broad portfolio and a broad pipeline," Yanai said. "Together with Cephalon, we reached this critical mass."
Discussions between the companies began about a year ago, Yanai said, with Teva Americas CEO Bill Marth talking to Cephalon founder and former CEO Frank Baldino.
Baldino died in December from complications associated with leukemia. The conversations intensified after Valeant's offer.
"When we heard about the hostile proposal, we thought that this is the time to move in fast," Yanai said.
Cephalon CEO Kevin Buchi said the deal with Teva followed a review of a range of strategic options.
Cephalon had urged shareholders to rebuff Valeant's overtures, and Cephalon shares had been trading above the Canadian company's offer.
The stock rose 4.2 percent to $80.24 on Nasdaq at mid-afternoon, after rising slightly above Teva's bid in pre-market trading. Teva shares rose 3.5 percent to $47.34. Valeant (VRX.N) fell 6.5 percent on the New York Stock Exchange.
Cephalon's top-selling Provigil sleep disorder drug is set to lose patent protection next year, while adoption of a newer version, Nuvigil, has been disappointing. Other Cephalon products include fast-growing cancer drug Treanda and pain medicine Fentora.
But Teva also pointed to Cephalon's experimental drug pipeline for driving the deal. The combined company will have more than 30 medicines in at least mid-stage, Phase II testing. Valeant had indicated it would either sell off or seek partners for Cephalon's experimental drugs, and seemed poised to cut research costs drastically given its track record.
"The big difference is Teva values the pipeline," analyst Thomas Russo of Robert W. Baird said in a research note.
Cephalon also has a smaller generics business that Teva said would complement its own presence in countries such as Switzerland.
The deal is not conditioned on financing and is expected to close in the third quarter, the companies said. Teva expects the deal to immediately add to its non-GAAP earnings per share.
Teva projected at least $500 million in annual cost savings and synergies within three years.
"If Teva succeeds in achieving synergies of this amount then the purchase price is certainly reasonable," Gotlieb said, who added that, at 16 times net profit, the deal was fair for specialty drug companies.
The deal is worth $6.8 billion, including the conversion of Cephalon's convertible debentures and stock options.
Credit Suisse Securities LLC is serving as Teva's financial adviser, while Deutsche Bank Securities and BofA Merrill Lynch are advising Cephalon.
(Reporting by Lewis Krauskopf and Bill Berkrot; Additional reporting by Tova Cohen in Tel Aviv, Toni Clarke in Boston and S. John Tilak in Toronto; Editing by Lisa Von Ahn, John Wallace, Dave Zimmerman and Richard Chang)
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