Staff Writer

The experts at Ernst & Young previously predicted pharma's acquisition tastes in 2010 would run toward international firms, particularly those that provide a toehold in emerging markets, and players in the fragmented branded generics space, which is ripe for consolidation.

Cephalon Inc.'s $590 million purchase of Mepha AG blends both flavors.

Geographically, Frazer, Pa.-based Cephalon boasts strong ex-U.S. sales capabilities in France, the UK, Germany, Italy and Spain. Meanwhile Aesch, Switzerland-based Mepha is strongest in Switzerland, the Middle East and Africa, Portugal, Poland and the Ukraine. The two firms have little geographic overlap, which Cephalon executives said contributed to their ability to win the "very competitive" bidding for Mepha's business.

The Mepha acquisition "fundamentally doubles" Cephalon's presence in Europe and provides new distribution channels in Eastern Europe and Southeast Africa, Cephalon Chairman and CEO Frank Baldino said during a conference call. The combined company will have 3,500 employees selling products in 100 countries, and about 30 percent of its sales will come from ex-U.S. sources, Baldino noted.

Investors can expect more geographic expansion from Cephalon in the future. With European growth now well under way, Baldino said the firm will focus on its "stated goal of acquiring businesses in China." He added that increasing Cephalon's global footprint not only provides access to more patients, it makes the firm a more desirable global partner.

What will Cephalon sell to all the patients it can now access? Whatever they want.

Mepha markets generic and branded generic products, but Oppenheimer and Co. analyst Bret Holley wrote in a research note that the deal is "an add-on to Cephalon's core business, not a philosophy shift."

Baldino emphasized that Cephalon remains focused on branded, proprietary pharmaceuticals and biologics. Yet he noted that the company already had a generics and branded generics presence in the U.S., and that helps achieve a similar balance in Europe.

"We have multiple strategies that we execute simultaneously. . . . That's the trend that you see most successful companies going toward," Baldino said.

Cephalon's historic success was built on wakefulness drug Provigil (modafinil), which faces patent expiration in April. The firm has thus far outperformed expectations in switching patients to Nuvigil (armodafinil) and is seeking to expand the market with new indications: An FDA decision on jet lag is due at the end of March and clinical trials are ongoing for fatigue associated with traumatic brain injury, bipolar depression and schizophrenia.

Cephalon also has a pain franchise that includes Actiq (oral transmucosal fentanyl citrate), now generic, as well as Fentora (fentanyl buccal tablet) and muscle relaxant Amrix (cyclobenzaprine hydrochloride extended-release capsules). Higher growth is forecasted for the relatively new oncology franchise, led by leukemia and lymphoma drug Treanda (bendamustine hydrochloride).

Cephalon has moved into biologics, too, holding an option to Ception Therapeutics Inc.'s Cinquil (reslizumab) and buying Arana Therapeutics Ltd. for its Phase II TNF inhibitor. But a few recent late-stage setbacks have caused some analysts to question Cephalon's pipeline.

Mepha's pipeline, though a world away from high-margin biologics, offers bulk. The firm markets 120 products, among them generic or branded generic versions of amoxicillin, diclofenac, ciprofloxacin and omeprazole. The firm is profitable and posted $377.8 million in sales last year, with compound annual growth rates of more than 13 percent over the last five years.

Another 50 new products are slated for launch by Mepha in the next five years, including statins and antidepressants. Baldino noted the firm also has several biosimilars in development.

Additionally, Mepha boasts patch, gel, film, suppository, disintegrating tablet and various extended-release delivery technologies that may be applicable to Cephalon's products.

Baldino said the acquisition has other synergies, too, like Mepha's "fantastic" manufacturing and supply chain capabilities and tax benefits. "On a synergistic basis is really where the rubber meets the road," he said.

Cowen and Co. analyst Eric Schmidt said the Mepha purchase was "relatively inexpensive" at 1.5-times sales, while generic companies are often bought for two or three times sales.

Cephalon said the deal will be accretive to adjusted earnings per share in 2010 and withdrew its previous 2010 guidance. More details will be provided in the Feb. 11 earnings call.

Shares of Cephalon (NASDAQ:CEPH) rose 96 cents to close at $64.80 on Monday.

Published  February 2, 2010