Valeant's Pharma Hit List: Cephalon Wasn't the Only Prey In Its Sights

Last Updated Apr 28, 2011 11:40 AM EDT

Employees at small and midsize pharma companies observing Valeant (VRX)'s attempted hostile takeover of Cephalon (CEPH) -- and the dismembering of the company that will surely follow -- should remind themselves that it could have been them.

Valeant's "background" statement to the SEC, which gives a blow-by-blow account of how the company approached Cephalon, starts by indicating that Cephalon was merely one of a bunch of companies it considered trying to buy:

During the second half of 2010 and the first quarter of 2011, Valeant management reviewed materials with assistance from representatives of Goldman, Sachs & Co. ("Goldman Sachs") relating to a number of companies in the pharmaceutical industry, ...
Who else is on Valeant's to-do list? The statement doesn't say, but the obvious candidate is Forest Labs (FRX), which is about to lose longtime CEO Howard Solomon because the feds regard him as a scofflaw who should be banned from selling drugs to the government. And I'd hazard that Shire (SHPGY), Allergan (AGN), and Medicis (MRX) are all similarly attractive candidates for the Borg-like Valeant, which prospers by selling off the R&D pipelines of the companies it buys and keeping the drugs that actually have FDA approvals.

The background statement also describes the comically fast pace at which Valeant tried to wrap up Cephalon. Recent mergers such as Roche/Genentech and Sanofi/Genzyme have taken the better part of a year; Valeant wants to swallow Cephalon in two months.

Valeant CEO J. Michael Pearson first approached Cephalon on March 3, and eventually offered $73 a share (or about $5.7 billion). Pearson then indicated to Cephalon that:

... a merger agreement and other customary ancillary documents could be completed within approximately one month.
One month! By March 25, however, Pearson changed his mind and made Cephalon a different offer: $2.8 billion or $37 a share for a pick-and-mix selection of Cephalon's assets. He gave Cephalon until April 1 to get back to him, but Cephalon's board said the proposal was "too complicated" to respond to in that timeframe. The Cephalon board offered to get back to Valeant during the week of April 4.

Even though this was the biggest corporate strategy decision Cephalon has ever had to make, and the board was doing it without the guidance of former CEO Frank Baldino Jr., who died in December, Pearson felt another two weeks was just too long to wait. On March 29, just four days after proposing two different deals, Valeant went hostile, giving shareholders until May 12 to tender their shares.

And Pearson isn't done. If Cephalon's holders say no, he'll go to the next most vulnerable company on his list, wash, rinse and repeat:

If we have stockholder support by May 12th, we will move forward. If not, we will move on.
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