we rate chemgenex an on-market sell at a small

Don't get in the way of hungry Cephalon
* CRITERION: Tim Boreham
* From: The Australian

IN lobbing a 70c-a-share takeover offer for the leukemia drug house ChemGenex, Philadelphia-based big pharma outfit Cephalon is taking a $225 million punt on the US drug regulator approving ChemGenex's potential drug, Omapro.
Doubts have dogged ChemGenex shares since the Food and Drug Administration early last year told the company to go away and do more work on its sloppy application (!!!!)

Cephalon's move comes before a March 31 deadline for converting $15m of convertible notes (at 50c a share) and exercising an option to acquire 19.9 per cent of the company at 70c.

In doing both, Cephalon acquires a 27.6 per cent stake -- and a springboard for the full offer (not that it was legally obliged to make one).

The friendly offer values ChemGenex at a 59 per cent premium to Fridays closing price of 44c (before the stock entered trading halt) and a 31 per cent premium to the mid point of BDO Corporate Finance's valuation range of 46c-61c.

Some holders may be disappointed they're giving the upside of an approved drug away to Cephalon. Before the FDA jitters, the shares were trading at around $1. Marc Sinatra of Biotech Daily once valued the stock at $5.50 if ChemGenex went all the way with Omapro.

Still, it's been known for some time Cephalon had the potential beach head, which negated the prospect of someone else lobbing an offer.

For Cephalon, there's a strong motive to acquire new compounds: its main drug Provigil (for narcolepsy) comes off patent in 2012.

Ownership of Chemgenex fits in with the strategic direction they are keen to take,says Southern Cross Equities biowatcher Stuart Roberts.

Cephalon late last year bought a 19.9 per cent stake in the local stem-cell developer Mesoblast at a whopping premium and entered a $US1.7 billion milestone payment deal.

In late 2009, Cephalon acquired local inflammation and cancer house Arana Therapeutics for $318m.

Earlier this week Cephalon bought the private US early-stage lung cancer specialist Gemin X for $225m, with $300m of milestone payments.

The moral of the story: don't stand in the way of hungry big pharma.

We rate ChemGenex an on-market sell at a small discount to the offer, which is subject to 90 per cent acceptance.