Canada's Valeant Pharmaceuticals has gracefully bowed out of the fight to acquire American drug developer Cephalon Inc. , leaving the way clear for a friendly $6.8-billion (U.S.) bid by Teva Pharmaceutical Industries Ltd.
Teva announced Monday morning that it would offer $81.50 per share in cash for Cephalon, 12 per cent higher than a hostile $5.7-billion bid made by Mississauga-based Valeant.
A few hours later, Valeant, which was rebuffed by Cephalon's directors over the pricing of its offer, said it would withdraw its direct pitch to the company's shareholders.
"We believe that this announcement is positive news for Cephalon stockholders and we are pleased that Teva has paid what we believe is a very full value for the company and as a result, have withdrawn our consent solicitation," Valeant CEO Michael Pearson said in a statement.
"As Cephalon stockholders ourselves with over a million shares owned, we will benefit from this transaction without participating further in the process."
Valeant last week sent out letters asking individual shareholders to not only accept their offer despite Cephalon's official refusal, but to help replace Cephalon's board of directors with nominees backed by Valeant.
While Cephalon's board was obstinate in its refusal to open its books to Valeant, Teva said it had unanimously agreed to the friendly bid, which is not conditional on financing.
"After we got the unsolicited proposal, our board took a very, very careful look at that proposal, analyzed it, and came to the conclusion that it was inadequate," Kevin Buchi, CEO of Cephalon, said in a conference call.
"We then looked at a wide range of possible transactions including strategic and other types of transactions which we thought could increase value to shareholders. I think the deal that we signed with Teva is the one which provides maximum value to our shareholders."
If successful, the deal will continue a series of multibillion-dollar mergers in the global drug industry as companies consolidate to generate efficiencies and seek new drug development opportunities.
Valeant, formerly known as Biovail, emerged late last month with an unsolicited bid of $73 per share for the Pennsylvania-based company. However, Cephalon reacted to the offer negatively by saying that it "significantly" undervalued its operations.
Valeant had said earlier that it was prepared to modestly increase its bid if Cephalon agreed to open its books, allowing Valeant to determine whether the company is worth more than indicated in its public filings. However, the company had also earlier said that it was not prepared to enter a bidding war and if its appeal to shareholders was unsuccessful, it would walk away and pursue other opportunities.
"We will remain disciplined on our (mergers and acquisitions) strategy and will look to deploy our freed-up capital on other opportunities to create value for our shareholders," Valeant said Monday.
Valeant shares fell 8 per cent, or $4.02 to $45.89 in Monday morning trading.
Meanwhile, shares in Cephalon were up 4.2 per cent, or $3.29 to $80.31 on the Nasdaq exchange after Valeant issued its response. That was down from $80.65 reached earlier in the session. The company has a 52-week high of $81.11 and low of $54.15.
Teva shares gained 2.9 per cent, or $1.32 to $47.05.
Israel-based Teva, which is best known as a generic drug maker, will now have a portfolio of branded drugs with $7-billion in annual sales and more than 30 potential drugs in the last stages of development.
"Clearly, this acquisition is a game-changer for Teva. We will now not only be the world's largest generics company, but also one of the world's largest specialty pharma companies," Shlomo Yanai, president and CEO of Teva said in the conference call.
"The economics of this deal are extremely compelling as we are expected to achieve synergies of at least $500-million within three years after closing."
The boards of both Cephalon and Teva have approved their deal, which is expected to be finalized in the third quarter.
Teva makes a large number of Canada's generic drugs and acquired a key stake in the domestic industry with the purchase more than a decade ago of Novopharm, an early generic drug maker. It has the capacity to produce billions of pills and tablets each year at its manufacturing plants and employees 10,000 people in Canada.
If the deal is completed, it will add Cephalon's central nervous system, pain, cancer and inflammatory disease drugs to its portfolio, helping it to diversify away from low-cost generic drugs as a revenue base.
Cephalon's strategy includes buying late-stage drug candidates, then marketing them heavily. It's most successful acquisition has been Provigil, which treats excessive sleepiness and pulls in about $1-billion a year.
But with Provigil's patent set to expire, opening the door to generic competition, analysts have questioned the company's growth potential going forward.