Teva Pharmaceutical Industries struck a deal to acquire U.S. specialty drugmaker Cephalon for nearly $7 billion, topping an unsolicited bid by Canada's Valeant Pharmaceuticals International. The deal would boost the brand-name business of Israel-based Teva, best known as the world's largest maker of generic drugs. Cephalon's pain, sleep and cancer drugs will help Teva reduce its reliance on the big-selling Copaxone multiple sclerosis medicine, which faces increasing competitive threats.

Teva's $81.50-a-share deal represented a nearly 12% premium over Valeant's $73-a-share offer, which Valeant made public on March 29. Valeant said after the joint Teva-Cephalon announcement that it was withdrawing its offer. The combined company would have about $7 billion in branded drug sales, representing 36% of Teva's sales last year. The deal is worth $6.8 billion, including the conversion of Cephalon's convertible debentures and stock options.

Pipeline Hopes
Discussions between the companies began about a year ago, Teva CEO Shlomo Yanai said, with Teva Americas CEO Bill Marth talking to Cephalon founder and former CEO Frank Baldino.

Baldino died in December from complications associated with leukemia. The conversations intensified after Valeant's offer.

"When we heard about the hostile proposal, we thought that this is the time to move in fast," Yanai said.

Cephalon CEO Kevin Buchi said the deal with Teva followed a review of a range of strategic options.

Cephalon had urged shareholders to rebuff Valeant's overtures, and Cephalon shares had been trading above the Canadian company's offer.

Cephalon's top-selling Provigil sleep disorder drug is set to lose patent protection next year, while adoption of a newer version, Nuvigil, has been disappointing. Other Cephalon products include fast-growing cancer drug Treanda and pain medicine Fentora. But Teva also pointed to Cephalon's experimental drug pipeline for driving the deal. The combined company will have more than 30 medicines in at least mid-stage, Phase II testing. Valeant had indicated it would either sell off or seek partners for Cephalon's experimental drugs, and seemed poised to cut research costs drastically given its track record.

"The big difference is Teva values the pipeline," analyst Thomas Russo of Robert W. Baird said in a research note. Cephalon also has a smaller generics business that Teva said would complement its own presence in countries such as Switzerland.

The deal is not conditioned on financing and is expected to close in the third quarter, the companies said. Teva expects the deal to immediately add to its non-GAAP earnings per share. Teva projected at least $500 million in annual cost savings and synergies within three years.

"If Teva succeeds in achieving synergies of this amount then the purchase price is certainly reasonable," Gotlieb said, who added that, at 16 times net profit, the deal was fair for specialty drug companies.

The deal is worth $6.8 billion, including the conversion of Cephalon's convertible debentures and stock options.

Credit Suisse Securities is serving as Teva's financial adviser, while Deutsche Bank Securities and BofA Merrill Lynch are advising Cephalon.