Deals of the Week Is Not Ripe for Restructuring

Have you been missing the back-and-forth, he-said he-said of Sanofi-Genzyme? Well, stop crying yourself to sleep at night, because there’s a new takeover battle in town. What it lacks in size – only $5.7 billion for now – it makes up in brashness.

Valeant is gearing up for a proxy fight with Cephalon, and on Wednesday morning, Valeant chairman and CEO J. Michael Pearson lashed into his target company, noting that it "has a deteriorating set of assets, earnings and cash flows due to the upcoming risk of patent cliffs and generic competition for their products.”

What more could a guy want? The situation is dire! And so of course, he wants to buy it. (And some of Cephalon's investors are seemingly on board.)

"We believe that Cephalon management is spending their cash unwisely as evidenced by their two recent deals, Gemin X and ChemGenex, and their continued investment in high-risk development programs," he said during a call with analysts in which he outlined Valeant's rationale for pursuing Cephalon.

High-risk development programs? Wait: you mean Cephalon is a … a … biopharmaceutical company?

Indeed it is. And instead of borrowing money to finance the acquisition of revenue streams – a not particularly outlandish strategy these days – it’s the kind of biopharma that tries its hand at the ancient, dying art of R&D.

But Pearson was confident that Cephalon can be turned away from its dark pursuits. Its mature product portfolio, strong balance sheet, and diversification -- both therapeutic and geographic -- would provide Valeant with financial and strategic benefits, he said. Even its quaint R&D-centric business model is an advantage for Valeant: it is so different and therefore ripe for changing. (We didn't quite follow that logic.)

Valeant wanted to negotiate quietly but went public after Cephalon's board did not respond to three solicitations and after the company announced a spate of new "risky" deals [see our coverage below]. To stop the, ahem, madness, Valeant seeks to replace Cephalon's board of directors with representatives more friendly to its offer. Unlike other hostile melodramas, you might miss this one if you blink: the tender process forces Valeant to abandon pursuit in 30 to 45 days, more or less, if it doesn't get its way.

Valeant's stock was up 20% to close the week at $53.25, and Cephalon up 29%, closing at $76.04. That’s above the $73-per-share offer (a 29% premium to a 30-day trading average), implying Wall Street optimism that a deal will be struck at a higher price. Some analysts speculated the price could go as high as $80 per share.

Cephalon, only months after the death of founder and long-time leader Frank Baldino, Jr., is vulnerable thanks to the impending genericization of lead product Provigil and the less-than-stellar performance of its next-generation chemical cousin Nuvigil.

"Whether they want to admit it or not,” said Valeant's Pearson, “they face a big restructuring and we are actually pretty good at restructuring."

But what kind of restructuring, exactly? Valeant will need to borrow $6.7 billion, spiking its debt level from $4.5 billion to $11.2 billion and boosting its leverage ratio to just over 4.1 after the transaction. To pay down that debt and improve cash flow, Valeant is likely to sell Cephalon’s assets and dissolve its R&D deals. At close to $700 million, Cephalon’s current cash flow should top $1 billion by the end of 2012. Moreover, Pearson also indicated that, at the right price, he would be interested in selling the oncology franchise, which is dominated by the hematological oncology drug Treanda.

--CM & Wendy Diller

We look forward to hearing from Cephalon next week. For now the unfolding Valeant/Cephalon drama remains above the fold. It'll take more than Goldman Sachs' checkbook to get you into ...


Cephalon/ChemGenex: To add to its oncology pipeline -- and enrage hostile suitors -- Cephalon has struck an agreement with Australian biopharma ChemGenex Pharmaceuticals. The Frazier, Pa.-based biotech will pay A$159 million ($163 million) for the 76% of ChemGenex it doesn't already own, which values ChemGenex around A$225 million. The offer represents a 59% premium to ChemGenex's current trading price, according to a company statement. If the deal goes ahead, it would come as the latest in a string of Cephalon acquisitions including Gemin X Pharmaceuticals, Ception Therapeutics, and BioAssets Development Corp. Cephalon has been trying to shore up its pipeline before the patent expiration of its lead product, the narcolepsy drug Provigil (modafinil). – Lisa LaMotta

Ariad/MolecularMD: Ariad Pharmaceuticals has signed a deal with Portland, Ore.-based molecular diagnostics company MolecularMD to make and commercialize a companion diagnostic test for its pan-BCR-ABL inhibitor, ponatinib. The diagnostic test will identify the T315I mutation in patients with chronic myeloid leukemia (CML) and Philadelphia positive (Ph+) acute lymphoblastic leukemia. The drug is currently in Phase II, and Ariad hopes to file for regulatory approval in 2012. The biotech began building an oncology commercialization infrastructure when it opted to co-promote its lead compound, the mTor inhibitor ridaforolimus, with Merck & Co. The mTor co-promotion lets Ariad prepare to commercialize ponatinib on its own, but Ariad needs the companion diagnostic to include the mutation distinction on its label. That distinction would differentiate it from the three CML drugs currently on the market, plus one more being developed by Australian biopharma ChemGenex (soon to be wholly owned by Cephalon, provided Valeant doesn't scuttle the deal). The approval of ChemGenex’s compound was deterred by its lack of a diagnostic to test for the specific mutation. -- LL

RXi/Apthera: Progress has come slowly for RNA interference companies, and if RXi Pharmaceuticals hasn’t given up completely in that area, it’s at least started to look elsewhere to build its future. This week, RXi acquired Scottsdale, Ariz.-based Apthera, a cancer immunotherapy developer whose primary product NeuVax is headed into Phase III trials, for $7.2 million in stock upfront and $32 million in potential milestones, payable in either cash or stock at RXi’s discretion. In conjunction with the acquisition, RXi replaced CEO Noah Beerman with board member Mark Ahn and revealed new plans for its RNAi programs. Spun out of CytRx Corp. in 2007 with an all-star advisory board, publicly traded RXi once aimed to discover many drugs via its platform, but will now concentrate on a single RNAi product, a preclinical anti-scarring therapy, with other projects shifting to the back burner. In the meantime, it will divert considerable resources to NeuVax, on which development had stalled when Apthera had trouble raising capital. The injectable product has received a Special Protocol Assessment from the FDA and will be tested in early-stage breast cancer patients not considered eligible for Genentech’s Herceptin (trastuzumab) beginning next year. -- Paul Bonanos

Astellas/Cardeus: Large pharma out-licensing is an oft-discussed but rarely seen phenomenon. This week Astellas added to that short list of deals by licensing to newcomer Cardeus Pharmaceuticals non-Japanese rights to two clinical stage assets, the I(f) channel inhibitor YM758 and the selective Cox-1 inhibitor ASP6537, and an undisclosed preclinical compound. Cardeus was seeded by Mitsui & Co. Global Investment and has lined up MGI and Astellas' venture arm for further funding. That mix of investors goes some way to illustrating why Cardeus' licensing success is a rare phenomenon: the biotech is naturally on the hook for upfront, milestone and royalty payments to the Japanese pharma, but also gives up a blend of rights of first-refusal (in China) and first-negotiation (US and EU) to its new partner. -- CM

image from flickr user JTony used under a creative commons license