West Coast Editor
Paying $55 million, Cephalon Inc. bought back the interest of two unaffiliated investors in a joint venture formed in December to put as much as $50 million into U.S. commercial efforts on behalf of Provigil for sleep disorders and Gabitril for epilepsy.
“We decided, frankly, we just don’t need it,” said Robert Grupp, vice president of corporate communications for West Chester, Pa.-based Cephalon.
“I think the [JV] spent maybe a couple of million dollars in the first quarter,” he added. “Very little had been spent.”
The company issued to investors, through a private placement, $55 million of 3.875 percent subordinated notes due in 2007 and convertible into Cephalon’s common stock at a price of $70.36 per share.
Cephalon’s stock (NASDAQ:CEPH) closed Monday at 64.63, up $1.63.
The JV was formed to fund a stronger sales push for the pair of products Provigil (modafinil) was expected to sell $200 million to $205 million this year, and Gabitril (tiagabine hydrochloride) $40 million to $45 million and possibly to pay for Phase IV trials for the drugs. (See BioWorld Today, Dec. 21, 2001.)
In February, a short report by Sterling Financial Investment Group, of Boca Raton, Fla., cast doubt upon the JV and sent Cephalon’s stock into a 13.4 percent decline. The report, echoing a paper in January by the Rockville, Md.-based Center for Financial Research and Analysis, questioned Cephalon’s JV at a time when the Securities and Exchange Commission said it had opened a probe into accounting practices of Elan Corp., of Dublin, Ireland. A new era of bookkeeping scrutiny seemed to have begun. (See BioWorld Today, Feb. 11, 2002.)
“It’s this post-Enron environment we’re in,” Grupp told BioWorld Today. “Things settled down again, but when we reflect on the clarity investors want in accounting, we thought it best to eliminate. It became a distraction from the growth story that is Cephalon.”
With regard to forming the JV, Grupp said, “We didn’t have a crystal ball. We couldn’t tell where we would be at the beginning of [the second quarter of 2002].” Now, the company’s strength is such that the JV isn’t necessary.
On the company’s balance sheet, the buyback means a $7.1 million extraordinary charge during the first quarter of 2002, which includes the write-off of $4.6 million of costs capitalized in connection with the formation of the JV, and the company’s quarterly report of operations for the period ending March 31 will show charges of about $7 million related to the deal.
Excluding those charges, the company’s sales and earnings estimates remain the same. In February, Cephalon said it expects sales of $415 million to $420 million.
Grupp acknowledged that Cephalon now must pay for the Provigil and Gabitril trials itself, and will spend $8 million on these trials in 2002 and 2003. Still, shareholders win, since the cost of capital in the JV was 20 percent; the company would have had to pay the investors $72 million two years after the arrangement was begun, noted Peter Ginsberg, senior biotechnology analyst at U.S. Bancorp Piper Jaffray in Minneapolis.
Ginsberg reduced his earnings-per-share estimate from $1.15 to $1.05 for 2002 (not including $14 million in first-quarter charges related to the JV), still within the guidance provided by the company of $1.05 to $1.08, and reduced the 2003 forecast from $1.56 to $1.45.
Buying back the JV “removes an obstacle to upside for the stock,” Ginsberg told BioWorld Today. “Cephalon had an opportunity to disband the JV at what we view as a low cost, and they just decided this would be a good time to get rid of it.”