| TORONTO/NEW YORK
TORONTO/NEW YORK Valeant Pharmaceuticals (VRX.TO) (VRX.N) may walk from its $5.7 billion offer for U.S. drugmaker Cephalon CEPH.O within a month if it can't persuade shareholders to back the deal.
But Chief Executive Michael Pearson also said Valeant might be willing to pay more for its cash-rich target, which would expand Valeant's drug line-up into cancer and pain therapy, if Cephalon can persuade him it's worth it.
Valeant offered $73 a share for Cephalon late on Tuesday.
Analysts debated whether the price was too rich, but Cephalon shares surged more than 28 percent to as high as $75.50 on Wednesday, signaling investors' belief that a higher bid could be in the offing.
"While we are willing to consider a higher price if due diligence supports this, we will remain very disciplined on price," Pearson said on a conference call with analysts. "The question is, what is Cephalon worth? This is not an exercise of 'how much can you afford to pay?'"
Insisting that the bid process would not drag on, he added: "We would think that a month from now we should know."
HARD TO VALUE
Analysts are divided over the value of Cephalon, which faces the loss of U.S. exclusivity for its top-selling Provigil sleep-disorder drug next year.
The company had hoped to switch users to a newer form, Nuvigil, but analysts are disappointed in the sales so far.
Cephalon said it would respond to Valeant's proposal next week. The company has rebuffed private approaches from Valeant on previous occasions.
"There's a lot of things that on the surface make sense," CRT Capital Group analyst Tim Chiang said. "It's a fair bid that Valeant has offered."
Valeant stock was up 11 percent on Wednesday, its highest level since Canada's Biovail bought Valeant last September for $3.3 billion and took its name.
Analysts said the Cephalon deal would boost Valeant's earnings, helping it move away from its specialization in branded generics and dermatology and neurology treatments.
"If they walk away from the deal, the downside is the stock goes back to where it was," said Stifel Nicolaus analyst Annabel Samimy.
Pearson, who is known for seeking out cheap buys that he can clean up to increase value, promised more than $300 million in cost savings.
Cephalon's gross margins are around 80 percent, which are higher than Valeant's, said Chiang, who also said Valeant could sell off some Cephalon businesses.
Cephalon has strong cash flow, an increasingly popular cancer drug in Treanda and several other products that would fit with Valeant's, including a branded generics business. It also has a promising pipeline of drugs in development.
Valeant made its move less than four months after Cephalon's founder and longtime CEO, Frank Baldino, died from complications associated with leukemia and chief operating officer Kevin Buchi took over as CEO.
Pearson's tight time frame is in stark contrast to the nine-month hostile takeover bid for U.S. biotech Genzyme Corp GENZ.O by France's Sanofi-Aventis (SASY.PA).
Pearson said Valeant would take its offer directly to shareholders to try to get a deal done quickly, and will propose replacing the Cephalon board.
Fidelity and T. Rowe Price, top shareholders in both Cephalon and Valeant, "on average" seem pretty pleased with the strategy, he said.
Valeant would need to raise about $6.7 billion in debt to fund the deal, and it says Goldman Sachs & Co has provided a highly confident letter for the full amount of the financing.
Pearson, who took over the old Valeant and turned it around before the takeover by Biovail, said he was willing to look for other ways to invest Valeant capital if he fails to win over Cephalon's stockholders.
(Writing by Pav Jordan; editing by Janet Guttsman and Peter Galloway)