12:00 AM
 | 
Apr 04, 2011
 |  BioCentury  |  Strategy

Half-A-Loaf Dilemma

Cephalon's decision: Total takeout by Valeant, or stand alone as cancer company

Cephalon Inc.'s board is evaluating the two options in last week's hostile takeover bid from Valeant Pharmaceuticals International Inc.: take the $5.7 billion in cash for the whole company, or take $2.8 billion for the non-oncology assets and retain a rump company that would contain the cancer products.

Choosing the latter would require convincing shareholders that the cancer assets, three of which have the potential to be first in class, will offer a competitive ROI over much more advanced programs in competitors' pipelines.

Cephalon, which has been widely credited for building the specialty pharma model via asset acquisitions, has announced six acquisitions since the beginning of 2009, including proposals to buy cancer plays Gemin X Pharmaceuticals Inc. and ChemGenex Pharmaceuticals Ltd. over the past two weeks (see BioCentury, March 28).

But Valeant has been buying companies and assets even more energetically, including 10 acquisitions over the same period. Cephalon would be number 11.

Vulnerable

Buysiders contacted by BioCentury noted that Valeant's offer was well timed.

In addition to a change in top management, as CFO J. Kevin Buchi took over as CEO late last year following the death of founder Frank Baldino, Cephalon is facing a patent cliff.

The company expects to face generic competition in the U.S. for sleep disorder drug Provigil modafinil, its biggest seller, starting in April 2012.

Provigil sales accounted for 41% of Cephalon's total net sales in 2010, but 94% of the $1.1 billion in sales of Provigil were recorded in the U.S.

"Cephalon has been trading cheaply recently because the Street doesn't see any light at the end of the tunnel" to compensate for lost revenue from generic competition, noted Sven Borho of OrbiMed Advisors.

Cephalon has been buying earlier stage assets in inflammatory and cardiovascular disease and - most notably - cancer.

However, the company has not been rewarded for its investment in R&D. Quite the contrary, said Borho, "because people were expecting that their cash flow would get wasted on unproductive R&D."

That has left Cephalon in a poor position to defend itself against a buyout offer from Valeant, according to venBio's Kurt von Emster.

Borho and von Emster are not investors in either company.

Valeant Chairman and CEO J. Michael Pearson offered Cephalon a pair of options.

The first is a buyout in which Valeant would pay $73 per share in cash for Cephalon, valuing it at $5.7 billion. The offer is a 29% premium over the company's 30-day trading average.

Under an alternative proposal, Valeant would...

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