CEPH Cephalon (MM)

In an effort to expand its European branded generics business, Valeant Pharmaceuticals International Inc. (VRX) recently announced that it has entered into an agreement to acquire Kaunas, Lithuania-based specialty pharmaceuticals company AB Sanitas for approximately EUR314 million in cash.

87.2% of the outstanding shares of Sanitas have already been agreed to be sold to Valeant Pharma. Following acquisition of the controlling interest, Valeant Pharma will proceed to make a mandatory tender offer to acquire the remaining minority interest. The company will also take over approximately EUR50 million of Sanitas’ debt. The acquisition of the controlling interest is expected to close in the third quarter of this year and the mandatory tender offer is expected to close in the fourth quarter.

Sanitas has a broad branded generics portfolio, which is marketed across Central and Eastern Europe, primarily Poland, Russia and Lithuania. Sanitas’ 390 products, primarily dermatology, ophthalmology and hospital injectables, will boost Valeant Pharma’s European branded generic portfolio. Approximately 80% of Sanitas’ products are non-reimbursable and not exposed to pricing pressures imposed by governments.

The Sanitas deal comes on the heels of Valeant Pharma’s failed offer to acquire Cephalon Inc. (CEPH). Valeant Pharma had expressed an interest in acquiring Cephalon for $5.7 billion. However, Cephalon rejected the offer and subsequently entered into a definitive agreement to be acquired by Teva Pharmaceutical Industries Ltd. (TEVA).

Valeant Pharma is expanding its global presence through accretive acquisitions. Valeant Pharma in its current form in fact emerged from the merger of Biovail and Valeant in September 2010.

Our Recommendation

We have a Neutral recommendation on Valeant Pharmaceuticals. Our long-term stance is supported by the Zacks #3 Rank (Hold rating) carried by the company in the short run.

Overall, we believe the combined Biovail/Valeant entity is a unique company as it offers global reach, a diversified revenue base, a favorable tax structure and limited patent exposure. Moreover, accretive acquisitions add to the company’s investment thesis. However, the company’s failure to clinch the Cephalon acquisition disappointed us. We therefore prefer to remain on the sidelines.

 
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