Cima Labs ( CIMA) agreed Friday to discuss a revised takeover offer from Cephalon ( CEPH), leaving Cima's original merger partner, aaiPharma ( AAII), alone at the altar. Cima and aaiPharma announced in early August that they would merge; but they never issued merger proxies or set dates for shareholders to vote on the merger. In early September, Cephalon made a $26-a-share cash offer for Cima, which the Eden Prairie, Minn.-based company rejected as inadequate. Then Cephalon approached Cima again on Sept. 10, saying it was flexible in its desire and that it would be glad to discuss an offer that included a mixture of cash and stock. That was enough to sway Cima's directors to at least talk to Cephalon, which is based in West Chester, Pa. "In its latest proposal, Cephalon indicated that it is flexible with its offer and strongly believes that it can negotiate a proposal that could result in a superior outcome for Cima's shareholders," said Steven B. Ratoff, Cima's chairman and interim chief executive, in a prepared statement. aaiPharma, based in Wilmington, N.C., was left saying a variation of the same thing it has said every time Cephalon has stepped into the picture during the last two months. "We view the merger of Cima and aaiPharma as providing significant strategic advantages for both companies which will create substantial shareholder value," said Dr. Philip S. Tabbiner, president and CEO of aaiPharma, in a prepared statement. "As we have stated before, we are committed to completing the transaction with Cima under the terms agreed upon." Those terms called for Cima shareholders to receive 1.3657 shares of stock in the new company for each Cima share. When Cephalon made its first offer, the $26 a share topped the value of the merger for Cima's shareholders by $1.39 a share.
But aaiPharma convinced Cima's board that its deal was better, arguing that Cima's shareholders' investment could grow over time as the stock of the merged company grew. However, when Cephalon proclaimed its flexibility, Cima's board members took notice. "I think that it's encouraging that Cima's board is willing to negotiate," said Lance Helfert, president of West Coast Asset Management in Ventura, Calif. His firm owns just over 400,000, or 2.5%, of Cima's shares. He never liked the aaiPharma merger, and said a fair price from Cephalon would be $35 a share. "I hope Cima's board can extract as much value as they can for their shareholders," Helfert said. The latest development sent Cima's stock up 2.4%, or 67 cents, to $29 in midafternoon trading. Cephalon's shares rose 0.7%, or 35 cents, to $49.06. But aaiPharma's stock slipped 0.9%, or 18 cents, to $19.04. In addition to the fundamentals of any deal, several other issues may play a role in whether Cima decides -- in the words of Monty Hall -- to choose Door No. 1 or Door No. 2. (Some analysts and investors haven't written off Door No. 3 -- the entrance of another Cima suitor.) First, there's the $11.5 million breakup fee that Cima will owe aaiPharma if it walks away from the merger. Cima can afford it -- the company had $134 million in cash as of June 30 -- and aaiPharma could use the extra money due to its heavy debt load. Then there's the question of what happens to Cima's Steven Ratoff. The merger with aaiPharma would result in his becoming vice chairman of the new company. Executives of aaiPharma would hold the jobs of chairman, president and chief executive, and chief financial officer of the merged company. It's too early to tell what, if any, job Ratoff or other Cima executives would hold in Cephalon. If aaiPharma and Cima merged, shareholders of aaiPharma would hold three-fifths of the stock in the new company; the eight board members would be divided evenly between Cima and aaiPharma representatives.
And then there's an advisory panel of the Food and Drug Administration, which may have an impact on how strong a bid Cephalon wants to make for Cima. On Thursday, the panel will decide if Cephalon's drug Provigil can be extended beyond its FDA-approved use for treating people with narcolepsy, a disorder in which people fall asleep frequently. If the panel recommends a broader label for helping people with "excessive sleepiness" linked to other disorders, Cephalon's Provigil sales could jump. A Friday research report by Michael King, of Banc of America Securities, notes that Provigil's narrowly defined label limits Cephalon's sales force to marketing the drug to psychiatrists, neurologists and sleep disorder specialists. However, King adds, 80% of Provigil's sales are from off-label uses in treating fatigue and sleepiness due to depression, multiple sclerosis and other ailments. If the FDA panel approved and expanded the Provigil label, and if the FDA agreed with the advisory committee's opinion, Cephalon could promote the drug to general practitioners and significantly expand sales. And that news would boost Cephalon's stock, giving the company more ammunition to sway Cima's directors. Of course, if the FDA panel keeps the Provigil label limited, Cephalon might still have a strong reason to romance Cima. One of Cephalon's key products is Actiq, a lollipop-type prescription drug containing fentanyl, a narcotic analgesic for treating cancer pain. Cima is developing its own fentanyl drug, OraVescent Fentanyl. As Cima shareholder Helfert pointed out, if a company like Johnson & Johnson ( JNJ), which also has a fentanyl product, acquired Cima, J&J's fentanyl franchise "would not only compete with Cephalon's Actiq, it would likely surpass it."