MJacob Bliberg (jb3975@stern. nyu. edu) Jasper Buntinx (jasper@buntinx. eu) April 2013 Post-Acquisition Report Teva Pharmaceutical Industries Ltd. (NASDAQ: TEVA) $6. 8Bn acquisition of Cephalon, Inc. (NASDAQ: CEPH) – October 14, 2011| Teva Pharmaceutical Industries Ltd. (NASDAQ: TEVA) is a leading global pharmaceutical company which develops, produces and markets affordable generic drugs. Teva is the world’s largest generic drug maker, with a direct presence in about 60 countries.
Teva’s branded businesses focus on neurological, respiratory and women’s health therapeutic areas as well as biologics. | FINANCIAL FIGURES $Mn| Teva| Cephalon| Market CAP:| 46,029 | 4,848 | Debt:| 5,612 | 1,390 | Cash:| 2,248 | 1,648 | EV:| 49,393 | 4,591 | Sales:| 13,899 | 2,152 | EBITDA:| 4,761 | 721 | Net Income:| 3,029 | 335 | SE Book Value:| 19,222 | 2,262 | | Cephalon Inc, founded in 1987 is a biopharmaceutical company that develops and markets pharmaceuticals products for mainly central nervous system disorders, pain, oncology, and addiction.
The company distributes eight proprietary products in the United States, and more than 100 products internationally. | DEAL SUMMARY| On May 2nd 2011, Teva Pharmaceutical Industries Ltd agreed to buy the biopharmaceutical company Cephalon for $81. 50 per share or $6. 8 billion in a bid to increase their presence in specialty, branded products. The offer followed after an earlier made hostile bid of $5. 7 billion by Valeant Pharmaceuticals was rejected. It was said that Valeant’s $73. 00 per share offer undervalued the company and was too opportunistic.
Teva’s cash bid of $81. 50 a share represents a 39% premium to Cephalon’s share price before Valeant’s unwarranted offer was announced, and a 12% premium on Valeant’s offer. As soon as Teva made its bid, Valeant, who owned 1million shares of Cephalon, announced it was good news and withdrew its offer immediately stating that it was not willing to get involved into a bidding war. The all-cash deal will be financed through existing cash at hand, credit facilities and the public. On October 15, four and a half months after the announcement and after the approval of the U.
S. Federal Trade and European Commissions the deal was completed and all common stock had been converted into rights to receive $81. 50 in cash. However, in order to get approval, Teva was forced to sell some of its assets and share products with competitors in order to preserve competition in the market. Together, the two companies will have more than 20 branded products augmenting Teva’s sales for branded products from $4. 6 billion to $7. 0 billion. Overall sales of the combined companies are expected to reach $20 billion.
In addition Teva and Cephlon combined will have a pipeline with over 30 products in late-stage trails. With the acquisition Teva has also strengthen its position in areas like pain management, oncology and respiratory diseases. MULTIPLES ANALYSIS| Cephalon was valued at a lower sales and EBITDA multiple in the market around time of acquisition to the pharmaceutical drugs industry average financial multiples. Using an industry average sales multiple of 4. 3x and EV/EBITDA multiple of 14. 3x, Cephalon would be valued at 9. 2 and 10. billion USD respectively. Cephalon was market valued at 4. 6 billion USD around the time of the acquisition, and Teva paid a Sales multiple of about 3. 2x and an EV/EBITDA multiple of about 9. 4x. The sales multiple is on lower side of the industry average, as well as the EBITDA multiple, however this seems appropriate relative to Cephalon’s already low market multiples. Teva did purchase Barr Pharmaceuticals for a similar EBITDA multiple in 2008. | Sales Multiple| EV/EBITDA Multiple| P/E Multiple| P/BV Multiple| Cephalon Inc. | 2. 1 | 6. | 14. 5 | 2. 1 | Industry Average| 4. 3 | 14. 3 | 28. 3 | 3. 4 | Diff| (2. 1)| (7. 9)| (13. 8)| (1. 2)| BUYER / SELLER MOTIVATION| The acquisition of Cephalon came at the right time for Teva as it was looking for ways to become less dependent on Copaxone, a multiple sclerosis drug which contributed to about 20% of Teva’s sales and is expected to lose patent protection in 2014 while competition is rising. The acquisition is also in line with Teva’s long term strategy to create a company which is strong both on the generic and the branded side.
They will accomplish this goal through expansion and diversification in the hope to reach their goal of $31 billion in revenue by 2015. Besides Cephalon’s strength in branded products, it has experienced branded personnel and an additional distribution network of generic drugs due to their acquisition of Mapha AG in Feb. 2010. Cephalon has more to gain from the acquisition than merely fencing off the hostile takeover threat by Valeant. Not only will it be able to use Teva’s operational excellence and extensive knowledge for their pipeline-products, it will also be able to enjoy Teva’s global distribution and large scale.
As the most important patents of Cephalon are about to expire in the short term, a promising pipeline is not enough to comfort the shareholders as the risk of failure is too high. This clearly affected Cephalon’s market valuation and may make a takeover by Teva more attractive for Cephalon. EVALUATION OF SYNERGIES| Teva is expecting to save at least $500million on synergies by taking advantage of the best of both companies and eliminating superfluous or duplicate operations.
The company expects to cut on sales, marketing and management and general costs by $300 million; research and development costs by $120-$150 million by removing overlapping activities; and the remaining $50-$80 million by reducing production costs. ACQUISITION VS OTHER OPTIONS| Both Teva and Cephalon were in positions where a merger made sense. One of Teva’s main goals were to diversify their future brand drug revenues, which they could have accomplished through a joint venture, however, Teva also had a long term strategic goal of growing their branded drug revenues to $9Bn.
Entering into a joint venture operation with Cephalon alone would not have increased their revenue enough to achieve their goals. Teva would need to enter into many joint venture agreements in order to achieve the magnitude of revenue increase they are seeking, which in themselves would provide many operational and control issues. In addition, Teva would lose on the overhead, operational, and R;amp;D synergies that a full acquisition would provide. Secondly, Cephalon had already been targeted with a hostile takeover, most likely due to their relatively low market valuation.
Cephalon’s main drugs were coming off of patent within two years, leaving them with a risky drug pipeline. Cephalon’s best case scenario at this point was to hope for a bidding war, where shareholders could obtain a premium to their current market price due to expected synergies. MERGER INTEGRATION| Teva decided to fully integrate Cephalon into Teva in order to realize the $500M synergies they estimated. The full integration was expected to occur within less than a year. Since Cephalon’s generic drug division was redundant to Teva, they closed down that line of business, and eliminated approximately 1,500 employees.
Kevin Buchi, then CEO of Cephalon, continued with Teva as VP for global branded products. Teva continued to integrate the branded drugs together, putting early stage experimental drugs on the back burner, and pushing through the ones in clinical trials. DEAL SUCCESS| The financial markets approved of the news of the acquisition the day of the announcement. Cephalon rose $3. 09, or 4 percent, to $80. 11 at the 4 p. m. New York time close of Nasdaq Stock Market trading. Teva’s American depositary receipts climbed $1. 54, or 3. 4 percent, to $47. 7. In addition to positive financial market reactions, both Teva and Cephalon achieved their objectives. Cephalon, seeking to enhance shareholder value and already under a hostile takeover bid, was able to enhance their 30 day trailing share price by 44%. With an estimated $500M in synergy savings within an estimated three years, an immediate non GAAP accretion, and a 68% jump in revenue in the fourth quarter 2012, primarily due to the Cephalon acquisition, Teva realized a financial return on investment in a relatively short amount of time.
In addition, Teva’s main goal was to diversify the future income reliance of their branded drugs, which they achieved through the acquisition; a move rewarded by the shareholders. Time will tell if the Cephalon pipeline of branded drugs will be able to provide long term extended revenues in an age of increasing difficulty in obtaining regulatory approval, declining patent protection coverage, and increased generic drug competition.
