Cephalon Buys Swiss Generics Firm Mepha, Talking Up Diversification

In a move that seems like an about face for a specialty pharma, Cephalon announced plans on Feb. 1 to buy the Swiss generics maker Mepha, citing international expansion and portfolio diversification. Under the arrangement, Cephalon will pay CHF 622.5 million ($590 million) in cash to the Merckle family-owned Mepha Holding AG.

Cephalon is best known for marketing brand drugs like the Provigil / Nuvigil 'wakefulness' franchise and the Treanda cancer drug, but CEO Frank Baldino maintained during a conference call that the acquisition makes strategic sense and builds on a plan already in place to vary the company's business model.

"One of the strategies we've pursued over the years is to continue to diversify our business in terms of products, in terms of type of business (generics, branded generics and brands), as well as territorial diversification," Baldino said. "The more diversified we become the more stable our business becomes as well."

Cephalon does sell generic versions of the fentanyl pain drug Actiq , as well as what Baldino deemed a branded generic in the form of the faster acting fentanyl formula, Fentora , and has been making a push into the European market through acquisitions. The firm made its first significant step into Europe in 2001 with the acquisition of France's Groupe Lafon, followed four years later by the $360 million acquisition of Zeneus Pharma.

Indeed, RW Baird & Co. analyst Thomas Russo stated in a same-day research note, "A geographic expansion comes as no surprise, and we suspect this deal will end up looking fine, financially."

At $590 million, the transaction appears to be attractively priced at about one and a half times Mepha's CHF 400 million ($378 million) in 2008 sales. Cephalon expects the acquisition will be accretive to adjusted earnings per share in 2010. The company said it would release revised earnings guidance during its year-end financial report Feb. 11.

Bidding for Mepha was competitive, according to Baldino, although Germany's Merckle family was a motivated seller. Mepha has been up for sale, along with sister company ratiopharm, since patriarch Adolf Merckle committed suicide last year during the financial crisis. Teva is thought to be the leading contender to buy out ratiopharm ('The Pink Sheet' DAILY, Jan. 25, 2010).

With the addition of Mepha, Cephalon stands to double the size of its international business. Mepha will expand Cephalon's geographic footprint in Western and Eastern Europe in countries like Switzerland, Portugal and Poland, and also outside of Europe in the Middle East and Africa. The combined company will employ about 1,500 people in Europe with distribution extending to 100 countries. About 30 percent of sales will come from outside the U.S. About 19 percent of Cephalon's sales came from Europe in 2008.

The international operation will be run by Alain Aragues, who was recently promoted to exec vice president and president of Cephalon Europe.

The Mepha business is made up of generics and branded generics, a business area where growth is outpacing branded pharmaceuticals and looking more attractive as the U.S. drug market becomes increasingly challenging. "Unlike businesses in the U.S., these European businesses are lower margin, but stable," Baldino said. Mepha's five-year compound annual growth rate is about 13 percent, the firm said.

Mepha is the leading Swiss generic drug company with a 38 percent market share and a product portfolio of about 120 products, including branded generics with improved formulations. The firm owns patent protected technologies in patches, gels and micro-tablets. Between 2010 and 2014, the company plans 150 commercial launches (including 50 new chemical entities), of which 34 are targeted for 2010. The 2010 lineup includes statins, antidepressants and a " Nexium -like" generic, Baldino said. Mepha also apparently has some presence in biosimilars.

Cephalon execs also argued there are tax advantages to buying a Swiss-based company, notably the ability to establish a presence and get a lower tax rate than in other countries. "We thought we had an opportunity to build an infrastructure in Switzerland to allow us to take advantage of those [tax] opportunities for our shareholders. This just gets us there a lot faster and a lot more securely," Baldino said.

Cephalon Joins Bandwagon As Provigil Faces Generics In 2012

Diversification is a theme that has become familiar of late, in line with the actions other drug makers are taking when product pipelines won't sustain growth through near-term patent expirations. Drug companies from Abbott to Pfizer have been talking up emerging markets and expansion into new areas like branded generics.

Cephalon's situation is no different. With $988.4 million in 2008 sales, Provigil (modafinil) accounted for close to half of Cephalon's revenue, but is on track to face generic competition in 2012. The company is already switching patients to a follow-on called Nuvigil (armodafinil), but competing against a low-cost generic version of Provigil once it is on the market will prove tricky.

While the company has a robust early- to mid-stage pipeline it will need to tap new areas for near-term growth to makeup the shortfall from Provigil. Mepha may help to fill the short-term void, but the deal nonetheless, marks a change from the company's recent deal-making efforts, which focused more on licenses and options for single products.

From its 2009 deal activity, Cephalon seemed poised to reinvent itself as a biotech with an emphasis on biologics. The company signed three option deals and completed one acquisition last year, all aimed at the biologics market. During an R&D day in November, the company highlighted the biologics portfolio above all else, including one near-term opportunity, Ception's Cinquil (resilizumab), which Cephalon owns an option on and had hoped might reach the market in 2010 for the rare autoinflammatory condition eosinophilic esophagitis ('The Pink Sheet,' Nov. 16, 2010).

Shortly after the meeting, however, a Phase II/III study of the anti-interleukin 5 monoclonal antibody failed to show a statistically significant benefit over placebo in patients with the disorder, requiring the companies to turn their focus to an ongoing Phase II study of reslizumab in asthma patients.

-Jessica Merrill (j.merrill@elsevier.com)

This article is reprinted from "The Pink Sheet" DAILY –Feb 1, 2010

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