The plot thickens with news that Teva Pharmaceuticals (TEVA) is going to buy Cephalon (CEPH) for $81.50 (article here). Teva’s offer exceeds Valeant Pharmaceuticals’ (VRX) previous bid of $73.
We originally recommended Cephalon (CEPH) in August of 2009. After our August 2009 recommendation of Cephalon, we recommended selling the stock near the high of $71 in March 2010 before the decline to $56. In February 2011 we recommended readers consider Cephalon at the $58 level. From there the stock has appreciated 39% in less than 3 months. The most recent run of Cephalon was followed by a sell recommendation on March 30, 2011 at slightly above $75. We wagered that despite the prospect of getting a sweetened offer closer to the true value of the company, we didn’t need to argue with a nearly 200% annualized return.
Our recent recommendation of Teva Pharmaceuticals (TEVA) on April 5, 2011 puts a twist on our selling of Cephalon. It has been reported that Cephalon’s board rejected the Valeant offer and has already accepted the Teva offer.
Interestingly, both Teva Pharmaceuticals and Valeant Pharmaceuticals got a boost in their share price at the announcement of the acquisition of Cephalon. Typically, the acquiring company shares would decline at the announcement of a major purchase. This seems to indicates that the market recognizes the positive impact that Cephalon will have on the ultimate acquirer.
Investors seeking the qualitative elements of Cephalon but cannot justify the purchase at the current price can hedge their bets by buying Teva at the current undervalued levels and gain the growth prospects clout of both companies. Obviously, this assumes that the deal goes through between TEVA and CEPH. If the deal with Teva and Cephalon doesn’t go through, we still believe that Teva represents a solid value at the current price.
