Dealtalk: Valeant bid wakes up market to drugmaker targets

By Lewis Krauskopf

NEW YORK (Reuters) – Valeant Pharmaceutical International’s (VRX.TO: Quote, Profile, Research) $5.7 billion bid for Cephalon Inc (CEPH.O: Quote, Profile, Research) challenges the industry wisdom that a drugmaker about to lose patent protection for top products does not make an attractive buyout target.

That could open the door for takeover proposals for companies such as Endo Pharmaceuticals Holding (ENDP.O: Quote, Profile, Research) and Forest Laboratories Inc (FRX.N: Quote, Profile, Research), which face patent threats to top products in the coming years that could seriously hurt their revenues.

Since Valeant announced its unsolicited bid on March 29, Endo shares have climbed 16 percent, while shares of larger Forest are up 6 percent as analysts say takeover premiums are building into the stocks.

“You’ve got a lot of these companies that are facing big patent expiries, not just in Big Pharma. A lot of these companies are bloated as well,” Jon LeCroy, an analyst with Hapoalim Securities said in an interview this week.

“They spend a lot on R&D, they don’t get much out of it. For what they trade at, if another company can get in there and really chop costs it makes a lot more sense than leaving these companies on their own.”

The Valeant announcement also has sparked Wall Street enthusiasm for other stocks, such as Medicis Pharmaceuticals Corp (MRX.N: Quote, Profile, Research), up more than 9 percent in the past week.

“Some of these stocks that have what people view to be similar profiles and relatively attractive valuations, now they say, ‘If this M&A market is really that hot, then how do you not own some of these stocks,’ ” said Gary Nachman, an analyst with Susquehanna Financial Group.


The bid for Cephalon underscored a new potential dynamic for the pharmaceutical industry’s much-discussed “patent cliff,” under which many of the industry’s biggest-selling drugs will lose exclusivity and see revenues fall due to generic competition over the next few years.

Many large drugmakers have looked to fill those revenue gaps with deals for companies with either promising experimental medicines or new biotechnology drugs that do not face impending patent issues.

The most prominent recent example is Sanofi-Aventis’ (SASY.PA: Quote, Profile, Research) $20 billion bid for rare-disease drug specialist Genzyme Corp (GENZ.O: Quote, Profile, Research).

By that logic, Cephalon would seem an unlikely takeover candidate. It faces the U.S. patent expiry in 2012 for its Provigil sleep disorder drug, which amounted to about 40 percent of its revenue last year. But the U.S. drugmaker made an alluring target for Valeant and the Canadian company’s low-cost operating structure.

“A patent cliff is not something that happens in a vacuum. A patent cliff, and a major earnings gap associated with it, happens when there’s a lot of spend,” said David Amsellem, an analyst with Piper Jaffray.

“In the case of Cephalon, why did they make an interesting target? Because there was enormous amounts of cash flow generation that could be unlocked if they took a more careful look at their spend.”

Some see the potential for replicating that situation with other companies that have products with strong cash flow.

“You end up with situations where a strategic acquirer says, ‘I can harvest more value from that asset than current management has so I am going to take my case to the shareholders’.” Drew Burch, head of healthcare mergers and acquisitions for Barclays Capital Burch told the Reuters Global M&A Summit this week.

Like Cephalon, Forest Labs faces a daunting patent cliff. The company, with a market value of $9.5 billion, is set to lose exclusivity next year over its top-seller, the anti-depressant Lexapro, while Alzheimer’s drug Namenda is expected to lose protection in 2015.

Compared with Cephalon, Amsellem said Forest’s business model involves promotion-sensitive products that may make it more difficult to find savings.

“Forest has a lot of primary-care-focused products that are going to require significant spend in order to drive adoption so that kind of goes against the whole idea of slashing costs,” Amsellem said.

Forest is on the larger end of specialty drugmakers and also could be a buyer, along with Allergan Inc (AGN.N: Quote, Profile, Research) and Shire Plc (SHP.L: Quote, Profile, Research) — two companies that also have been long-mentioned as potential prey for large pharmaceutical companies.

But the most likely company to follow Valeant’s lead could be Valeant itself. Acquisitions are a clear part of Valeant’s strategy, which also involves a low tax base as well as minimal research and promotional spending.

Some analysts see Valeant as a unique acquirer because of the savings and benefits it appears to be able to wring out of deals.

Valeant has vowed to be disciplined with its Cephalon bid and move on quickly if shareholders show no interest, leaving analysts to speculate who else could be in the company’s cross-hairs.

Endo, which has major pain franchises, and Medicis, which sells the Solodyn acne drug, could be targets for Valeant, according to Piper’s Amsellem.

Susquehanna’s Nachman said Medicis or Jazz Pharmaceuticals (JAZZ.O: Quote, Profile, Research), which sells neurology products, could fit with Valeant.

“We don’t know if it is a done deal with Cephalon…Obviously (Valeant is) hungry, they’re looking for deals,” Nachman said. “There’s definitely some of that built into the stocks now, there’s no question.”

(Reporting by Lewis Krauskopf; editing by Carol Bishopric)

Dealtalk: Valeant bid wakes up market to drugmaker targets