Cephalon Buys Generic Drug Co. - Analyst Blog

Cephalon, Inc. (CEPH) recently announced the completion of its acquisition of Mepha AG, a privately-held Swiss generic drug company, for CHF 662.4 million (approximately $615.4 million). This acquisition marks Cephalon’s entry in the generics market.

This deal is in-line with Cephalon’s goal to reduce its dependence on its central nervous system (CNS) franchise for long-term growth. The company’s CNS franchise, which consists of Nuvigil, Provigil and Gabitril, is its primary growth driver. However, Provigil is slated to face generic competition from 2012 and Nuvigil is facing patent challenges from generic players like Teva (TEVA) and Mylan (MYL).

As such, Cephalon is looking to supplement long-term growth by acquiring/in-licensing products. The Mepha acquisition will not only allow Cephalon to enter the generic drug market, it will also allow the company to expand its footprints in ex-US territories including emerging markets which represent significant opportunity for growth. Cephalon expects to double the size of its international business.

Going forward, Cephalon will serve all three types of pharmaceutical markets -- proprietary branded, generic and branded generic. Mepha specializes in innovative dosage formulations and markets both generic and branded generic products. Mepha sells more than 120 products in 50 countries and recognized sales of about CHF 400 million in 2009. Moreover, Mepha’s pipeline consists of about 50 chemical entities which could hit the market over the next five years.

For 2010, the company expects adjusted net income in the range of $518 - $533 million on total revenues of $2.610 - $2.690 billion.

We currently have a Neutral recommendation on Cephalon. We believe that the company will continue pursuing similar deals going forward. Over the past few quarters, Cephalon has been looking to expand into new therapeutic areas to drive long-term growth. Besides the recently concluded Mepha acquisition, Cephalon also completed its acquisition of Ception Therapeutics and Arana Therapeutics.

The company has also acquired rights to Lupuzor from ImmuPharma for the treatment of systemic lupus erythematosus and signed an option agreement to buy the assets of BioAssets Development Corporation.
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