Bang goes the theory! We speculated recently that acquisitive US drugs group Cephalon (NASDAQ:CEPH) might turn its sights on AIM-listed ImmuPharama (LON:IMM) after agreeing to take over two of its smaller partners.
Overnight the predator became the prey, with Valeant Pharma (NYSE:VRX) launching a $5.7 billion for Cephalon, which has been struggling like many others in the sector with the looming spectre of patent expiries.
Counting in Valeant’s favour is the fact it has pitched the offer at 29 per cent premium to the average Cephalon share price over the past month.
Against it is the fact that this is a debt-backed deal, and Valeant is already carrying a rather substantial $3.6 billion-worth of borrowings.
Rather inconveniently it blows our thesis that Cephalon might bid for ImmuPharma right out the water.
It also may have some rather longer-term connotations – both negative and positive.
Bid target Cephalon and ImmuPharma are partners on Lupuzor, a potentially block-busting drug for the auto-immune disease Lupus.
As Savvas Neophytou, drugs analyst at Panmure Gordon, points out: “Clearly, with change of control, a modicum of risk is introduced to any company’s pipeline.
“If the transaction goes through, we expect that Valeant will review its pipeline to decide what it chooses to invest in. This may result in Lupuzor being dropped.”
Navid Malik, of City research firm Matrix, reckons the California-based drugs group would be foolish to overlook the potential of the ImmuPharma Lupus drug – and he says Valeant’s intervention might actually “flush out more bidders”.
Pivotal phase IIb results of a study of Lupuzor initiated by Cephalon are expected this summer.
Earlier research suggested the treatment is easier to administer and may be more effective than Benlysta, the first new Lupus drug to be given regulatory approval in almost half a century.
Estimated peak sales for the GlaxoSmithKline product are put at $3.6 billion, which underlines the potential scale of the opportunity open to the ImmuPharma compound if it passes all the clinical and regulatory hurdles.
But will Valeant spot the opportunity or spurn it given its areas of expertise are dermatology and neurology, not auto-immune disease.
Panmure’s Neophytou, who is a buyer of the stock up to 300 pence, says: “The one saving grace for the prospects of Lupuzor is that that lupus, has quite significant manifestations of neurological disease and is often treated by neurologists.
“These include epilepsy, headache, myelitis, neuropathy and psychiatric problems.
“Some mild forms of Lupus are also treated by dermatologists, so there may be some significant synergy with Valeant’s existing sales force to benefit Lupuzor.”
The existing deal with Cephalon poses an interesting conundrum, whoever is in control of the business.
ImmuPharma’s tie could see it receive as much as $1 billion in milestone payments and royalties for successfully developing Lupuzor.
As such it might be much cheaper to take ImmuPharma out of the game early – particularly given the company’s current market cap is around a tenth of the value the scheduled payments.
Indeed, the market has long surmised that Cephalon’s strategy was to acquire ImmuPharma, the only question marks seemed to be the timing and the commercial potential of Lupuzor.
Matrix analyst Malik, who values ImmuPharma at 375 pence a share, expects Cephelon to mount a strong defence to the Valeant bid, which means it may be forced to give its sales projections Lupuzor.
“We have stated previously (it) could be a transforming product for Cephalon and potentially lead to ImmuPharma becoming an acquisition target,” he added.
“Cephalon has already stated that it plans to take a look at interim data from the current Phase IIb Lupuzor trial (in the US) during the summer.
“We expect Cephalon to mount a strong defence against this bid, meaning that more commercial information related to Cephalon’s expectations of sales for Lupuzor are likely to emerge, especially following the approval of Benlysta for Lupus – although we don’t expect to see any data on Lupuzor before the summer.”
Speculation of a potential bid for the ImmuPharma began to heat up last week when Cephalon announced it would pay up to US$300 million for partner Gemin X Pharmaceuticalst to augment its late stage drug pipeline.
What in effect it is buying is the rights to a lung cancer drug at the identical phase development as Lupuzor – ie “pre-phase IIb”.
The US biotechnology giant then made a bid for another partner, ChemGenex Pharmaceuticals (ASX:CXS).
It will be interesting to see how this complicated web unwinds in the next few weeks.