Running Head: Midterm Case Study 3-1 1

Kimberly Davis

Dr. Tanae

AC552 Business Reorganization and Restructuring

Unit 3 Midterm Case Study 3-1

Teva Acquires Cephalon in a Hostile Takeover

April 14, 2015

Running Head: Midterm Case Study 3-1 2

Introduction and Summary

Teva and Cephalon had been discussing the possibility of a merger for the span of about

one year, but the hostile bid by Valeant Pharmaceuticals hastened the decision to seal the deal.

Valeant was only interested in Cephalon’s non-oncology drugs and also in changing the

composition of Cephalon’s board. Cephalon refused to dismember the firm and actually

acquired Gemin X Pharmaceuticals, Inc. and purchased outstanding shares of ChemGenex

Pharmaceuticals, Ltd. This was a positive increase in assets for the acquiring company.

Teva wanted the entire company and willingly paid a higher purchase price because of

greater perceived synergy between the two companies. As mentioned by DePamphilis (2014),

“synergy consists of sources of value that add to the economic value of the combined firms”

(p.310). In an analysis, Teva concluded that they can realize the synergies in the span of three

years.

Teva is best known as the world’s largest maker of generic drugs. In recent years, the

company has looked for opportunities to expand its portfolio of branded drugs (Feuerstein,

2011). There is a higher profit margin for the sale of brand name drugs and Teva was

considering undertaking this endeavor. Cephalon was the perfect prospect to help the company

fulfill its vision for expansion. Teva paid $6.8b cash for Cephalon which ended the hostile

takeover attempt by Valeant Pharmaceuticals.

Strengths, Weaknesses, & Alternatives

Cephalon has a strong product line of strong drugs. It has fast growing cancer drugs and

pain medications which complement Teva’s portfolio of drugs. The strength of this acquisition

is the ability for Teva to gain the ability to produce specialty drugs. This combination allows for

Running Head: Midterm Case Study 3-1 3

a stronger footprint in the industry. The fact that they are both in the same industry makes it

easier to integrate processes.

A weakness for Teva is the potential loss of a patent for the only brand name drug they

manufacture which accounts for 21% of their 2010 revenue. Cephalon presents a weakness as

well because they are facing the loss of patent protection on key products (Rockoff, 2011). This

will cause them to lose billions of dollars in sales. If this is not handled by Teva, this acquisition

will become fatal.

Teva should achieve a balance between the brand name products and the generic brand.

Diversification between the offerings can increase profitability and market share.

Analysis & Recommendations

The Israeli drug maker known as Teva made an aggressive decision to takeover

Cephalon. This was a horizontal merger. Valeant exhausted 29 failed attempts to acquire the

target company. They took the bid public in an attempt to break the impasse of the negotiations.

“A hostile tender offer circumvents the target’s board and management to reach the target’s

shareholders directly with an offer to purchase their shares” (DePamphilis, 2014).

Teva and Cephalon was a friendly merger. Together, their value is better than if the

companies stand alone. Both companies are at risk of losing patents, but they have a great

opportunity to build a diversified pharmaceutical company. Teva has to develop an efficient

integration plan to marry the two companies’ product lines. According to DePamphilis (2014),

successful integration efforts are those that are well planned with an appointed integration

management team (p.206). The lines of authority for the manager and team must clearly be

defined. The company may benefit from the following:

Running Head: Midterm Case Study 3-1 4

1.) Teva must create an integration team to handle the immediate concerns that must be

handled in a timely manner (ex. Patent renewal). This is critical to making sure that the

synergies are actually realized as anticipated.

2.) The application for the patents for each company needs to be renewed to deter third

parties from attempting to own the rights to the companies’ drugs. In order to make sure

that they can expand effectively and make a difference, Teva must secure the patents for

the drugs that make the company the success that it is.

3.) There needs to be an official and detailed internal analysis of the companies to determine

all the strengths and weaknesses. This will help determine what changes need to be made

in marketing, sales, manufacturing, and leadership.

4.) A new business strategy needs to be developed to reflect the integration of the both

companies’ human resources, manufacturing, product line, etc.

5.) The company needs to develop a new company culture to reflect the combined values and

new vision of the company.

6.) Teva will need to integrate leadership and have management from Cephalon to remain in

place to maximize the transition and help everyone to understand the function of each

other’s roles.

Conclusion

According to DePamphilis (2014), the term takeover is used when one firm assumes

control of another (p.17.). Valeant wanted to takeover Cephalon by any means necessary. Their

offer was valued at $5.7 billion but was outbid by the $8.5 billion made by Teva. There were

two different aggressive approaches in this case. Valeant only wanted to get the shareholders on

its side to accomplish the desired goal and do away with the parts that could not serve Valeant’s

Running Head: Midterm Case Study 3-1 5

purpose. Teva was aggressive in offsetting the hostile takeover. If they had not succeeded that

would keep them from moving to the next level. They are now able to utilize all of the assets of

Cephalon to fulfill the company objectives.

Teva accomplished what Valeant could not because they were willing not to dismember

the company. The combination of Teva and Cephalon will produce a line of 20 brand name

drugs which produce sales of $7b annually (Rockoff, 2011). The acquisition of Cephalon

enhances Teva opportunity to achieve high growth rates. This is a horizontal merger that can

create a pharmaceutical company combination that does not rely on only one brand or one type

for advantage in the market.

Running Head: Midterm Case Study 3-1 6

References:

DePamphilis, D (2014) Mergers, acquisitions, and other restructuring activities. 7th Edition.

Elsevier

Feuerstein, A (2011) Teva acquires Cephalon for $6.8 Billion. The Street. Retrieved from

www.thestreet.com

Rockoff, J (2011) After long pursuit Teva wins Cephalon. Wall Street Journal. Retrieved from

www.wsj.com