Cephalon, looking for sales growth, finds Mepha

Neatly providing evidence that it is not just big pharma seeking answers to problems through diversification, Cephalon announced today the acquisition of Swiss generics firm Mepha for $590m (Vantage Point - Big pharma on a diversification spending spree, February 1, 2010).

This is a surprising move from the US specialty drugs group, the quote from Frank Baldino, chairman and chief executive, in the press release, saying that the addition of Mepha would “transform our international business overnight”, is certainly no exaggeration. However, despite this left field move, it might just provide a solution for a company searching for sales growth.

Brave new world

Best known for its narcolepsy treatment Provigil, Cephalon is now taking a stride into the world of generics; the move means it will sell branded, branded generic and generic products. Mepha also has a formulation improvement unit, which may also have caught the company's eye.

In terms of geographical fit, the move takes Cephalon into countries like Switzerland, Poland, the Middle East and Africa for the first time and doubles the size of its international business, adding SFr400m in sales in total, generated in over 50 countries. Cephalon, which is due to report annual results on February 11 and is forecast to reveal sales of $2.19bn, has historically derived around 80% of group sales in the US, with the remainder in Europe.

Revealingly, Cephalon highlighted that Mepha achieved compound annual growth rates (CAGR) in sales of more than 13% over the last five years; Cephalon itself actually beat that in the same period, generating CAGR of 22.5% on the top line.

However, it is the future that the company is looking to, and that future is not so rosy. According to EvaluatePharma, CAGR is forecast to turn negative, by 1%, between 2010 and 2014.

Clearly, Cephalon is hoping that Mepha can reinvigorate that figure. The Swiss firm, which is being sold by the Merckle family, targets future “high selling off patent products”, and had close to 150 launches planned for between 2010 and 2014, from 50 chemical entities.


However, what this will do to profit margins is less clear. The big pharma companies that have been pursuing the generics route in the last year or so have made much of the argument that generics does not need to be a low margin business.

It is hard to believe that Mepha margins will be as healthy as those achieved on Cephalon's specialty business, or in areas like cancer, where the company has also been expanding recently. Still, it expects the deal to add to adjusted earnings this year, and more detailed guidance will be given alongside annual results next week.

Investors took the news in their stride today; Cephalon stock was up 1.5% in early trade, at $64.76. For the biggest deal in its history to date, the company has certainly picked a surprising path to embark upon.

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