3rd UPDATE: Teva To Buy Cephalon For $6.8 Billion; Valeant Abandons Bid

Teva Pharmaceutical Industries Ltd. (TEVA) agreed to buy Cephalon Inc. (CEPH) for $6.8 billion, trumping a hostile offer from Valeant Pharmaceuticals International Inc. (VRX) by more than a billion dollars.

Teva has used acquisitions over the years to steadily expand beyond its traditional generic drug business. Monday's deal, which values Cephalon at $81.50 a share, builds and diversifies Teva's higher-margin branded drug business away from its dependence on multiple-sclerosis blockbuster Copaxone. The acquisition also would move the Israeli company closer to its 2015 financial targets.

Cephalon had been fighting a hostile $5.7 billion offer from Canada's Valeant, which had proposed to remove and replace board members in connection with its bid of $73 a share. Valeant said Monday that it plans to stop those efforts and will no longer pursue a takeover.

Cephalon shares rose 4.1% to $80.21, while Teva's American depositary shares climbed 2.6% to $46.90. Valeant shares slid 6.7 to $49.11.

"Clearly, this acquisition is game changer for Teva," Chief Executive Shlomo Yanai said on a conference call. "We will now not only be the world's largest generics company, but also one of the world's largest specialty pharma companies."

The companies said the purchase price represents a 39% premium to Cephalon's stock price on March 29, the last closing price before Valeant's proposal was announced; a 12% premium to Valeant's offer; and 6% over Cephalon's closing stock price on Friday.

The deal is expected to close in the third quarter with Teva using existing cash, lines of credit and newly issued debt. The company doesn't anticipate any antitrust issues related to the combination.

The deal comes as Cephalon faces significant business challenges. The company is in the middle of a long-term plan to replace sales of its top-selling product, wakefulness drug Provigil, with a similar follow-up drug called Nuvigil that launched in mid-2009.

Provigil made up about 40% of total sales last year of $2.8 billion, but it loses patent protection in 2012. Nuvigil had sales of $186.2 million last year.

Cephalon also is dealing with a leadership transition, caused by the death of founder and Chief Executive Frank Baldino in December from leukemia.

Teva has been eyeing Cephalon for years, Yanai said in an interview, as executives from both companies spoke periodically about various issues. Teva's Chief Executive of Americas, William Marth, had a "friendly dinner" with Cephalon Chief Executive J. Kevin Buchi just days before Valeant came out with its offer.

Teva expects the deal to add immediately to its adjusted earnings and boost its profit under generally accepted accounting principles within four quarters of its closing.

Teva expects cost savings of at least $500 million in the third year after the deal. Yanai said the savings would come from all areas of Cephalon's spending; J.P. Morgan analysts noted that the savings represent about a quarter of Cephalon's estimated 2014 operating expenses.

"We're pretty sure we can get to this number and even earlier," Yanai said.

The combined companies will have more than 20 branded products on the market and a pipeline of more than 30 products in late-stage development, with three already filed for U.S. approval.

Teva said the deal moves it closer to its goal of growing its branded revenue from $4.6 billion in 2010 to more than $9 billion in 2015. On a pro-forma basis, the combined company would have had branded sales of about $7 billion last year. Teva has projected $31 billion in revenue and $6.8 billion in profit for 2015.

Yanai said the 2015 financial goals are on track, targeting a 2015 revenue split of about 70% coming from generics and 30% from branded products. He declined to provide expectations for the split of profits.

The branded sales are much more profitable than generics, which are sold in a competitively priced industry that provides thin margins. The branded sales help lift the total profits.

"Teva's business model is about getting the best of the two worlds," Yanai said.

Although Teva gets most of its sales from its generic business, it has been aiming to diversify its branded products away from Copaxone, a drug that faces increased competition along with a potential generic challenge.

Copaxone provided about 20% of the company's sales last year, but UBS analysts estimate that the drug made up about 35% of Teva's total profit in the period. Last year, Copaxone made up about 70% of Teva's total branded revenue and Yanai projected that would fall to 47% or less in 2015 with the addition of Cephalon.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com

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