Cephalon Inc. (CEPH) has recently signed a deal which should mark the company’s entry into the generics business. The company announced that it intends to acquire Mepha AG, a privately held Swiss generic drug company for approximately $590 million (CHF 622.5 million).

This deal is in-line with Cephalon’s goal to reduce its dependence on its central nervous system (CNS) franchise for long-term growth. The company’s CNS franchise, which consists of Nuvigil, Provigil and Gabitril, is its primary growth driver. However, Provigil is slated to face generic competition from 2012 and Nuvigil is facing patent challenges from generic players such as Teva (TEVA), Watson Pharmaceuticals (WPI) and Mylan (MYL).

Given this scenario, Cephalon is looking to supplement long-term growth by acquiring/in-licensing products. The Mepha acquisition will not only allow Cephalon to enter the generics drug market, it will also allow the company to expand its footprints in ex-US territories including the emerging markets, which represent a significant opportunity for growth. Cephalon expects to double the size of its international business.

Following the completion of this acquisition, Cephalon will serve all three types of pharmaceutical markets ? proprietary branded, generic and branded generic. Mepha specializes in innovative dosage formulations and markets both generic and branded generic products. Mepha sells more than 120 products in 50 countries and recognized sales of about CHF 400 million in 2009. Moreover, Mepha’s pipeline consists of about 50 chemical entities which could hit the market over the next five years.

Cephalon expects the acquisition to be accretive to 2010 earnings. The company withdrew the 2010 guidance provided by it in Oct 2009 and intends to issue an updated guidance on Feb 11, 2010, at the time of reporting full year 2009 results.

The acquisition is scheduled to close in the next few weeks. We believe that Cephalon will continue pursuing similar deals, going forward. We currently have a Neutral recommendation on the stock.

Zacks Investment Research

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