National Editor

Cephalon Inc. priced $600 million worth of convertible subordinated notes in an offering, with the sale expected to close June 11.

"We've got some notes out there that expire three different dates in 2006 and 2007," said Robert Grupp, vice president of corporate communications for West Chester, Pa.-based Cephalon.

"We're taking advantage of the exceptionally strong market out there for convertibles to refinance and buy down our more expensive, high-cost debt," he told BioWorld Today.

"We're going to accumulate a little more cash in the process," he added, putting the number at about $350 million. "We have about $550 million now, and we'll be up around $900 million. That will continue to fuel our [merger-and-acquisition] strategy."

The notes, to be issued in two tranches, will include $300 million in notes with a put option that can first be exercised in June 2008 and another $300 million with the first put option time of June 2010.

In both cases, the zero-coupon convertible subordinated notes are due 2033 and carry up to an additional $75 million aggregate principal amount if the initial purchasers' 13-day option to buy more notes is exercised in full. Both are puttable at a price of 100.25 percent of the aggregate principal amount.

The 2008 notes are convertible before maturity, subject to certain conditions, into shares of Cephalon's common stock at a conversion price of $59.50 per share, which is a conversion rate of approximately 16.8067 shares per $1,000 principal amount of notes.

That initial conversion price represents a 23.8 percent premium to the last reported Nasdaq composite bid for Cephalon common stock (NASDAQ:CEPH) on June 5, which was $48.05 per share.

Cephalon's stock closed Friday at $46.05, down $2.09.

Under the terms for both tranches, Cephalon may redeem any outstanding 2008 notes for cash on June 15, 2008, at a price equal to 100.25 percent of the principal amount of such notes redeemed after June 15, 2008, at a price equal to 100 percent of the amount.

For the 2010 notes, the early conversion price is $56.50 per share, which works out to about 17.6991 shares per $1,000 principal amount of notes - the initial conversion price being a 17.6 percent premium to the last reported composite bid on June 5.

Cephalon plans to use the money to redeem all of its outstanding 5.25 percent convertible subordinated notes due 2006, which have $174 million aggregate principal amount outstanding, at the price of 103.15 percent of the principal amount, plus accrued and unpaid interest.

The company also will buy from Credit Suisse First Boston International a convertible note hedge strategy with respect to Cephalon's common stock, which has the effect of increasing the effective conversion price of the notes to $72.08 per share, a price that represents a 50 percent premium to the June 5 composite bid on Nasdaq. CSFBI will take positions in Cephalon's common stock in secondary market transactions and/or enter into various derivative transactions in anticipation of pricing the notes and after.

Other plans for cash, the company said, include corporate purposes such as buying other businesses, products, product rights or technologies and the repurchase, redemption or retirement of other existing indebtedness, though no agreements along any of those lines are definitive.

The company's marketed drugs include the flagship narcolepsy drug Provigil (modafinil), Actiq for cancer pain and Gabitril for epileptic seizures.

Last month, Cephalon reported data from two Phase II studies at the 156th annual meeting of the American Psychiatric Association in San Francisco, showing that Provigil (modafinil) C-IV improves attention deficit hyperactivity disorder symptoms in children in both school and home settings.

"We're going to initiate Phase II/III trials in the fall at the start of the school year," Grupp said.

The company had less happy news last month, when the acceptance period expired on Cephalon's bid to acquire SIRTeX Medical Ltd., of New South Wales, Australia, for A$4.85 (US$3.16) per share, a deal valued at $161 million. Cephalon said its bid was contingent upon at least 90 percent of SIRTeX shares being tendered before the deadline, and about 88 percent had been when the clock ran out. (See BioWorld Today, Feb. 13, 2003.)

Cephalon is keeping an eye out for other such deals, though.

"We're not doing [the convertibles transaction] because we have any deal on the table, but we're looking for good opportunities all the time, and we want to have enough cash when one of those presents itself," Grupp said.