PhillyInc: Cephalon finds it's not so easy being a middle fish

When you're a small company, you usually pine to get bigger. When you're a big company, you get to throw your weight around.

It's no fun being in the middle.

Take it from two Philadelphia-area companies in the pharmaceutical business, Cephalon Inc. and Endo Pharmaceuticals Holdings Inc.

Both have outgrown their 'tween personas and lost a lot of the cuteness that newly minted enterprises have. And at $2.81 billion in 2010 revenue for Cephalon and $1.72 billion for Endo, they'd never hold their own in a fight with the $67.81 billion Pfizer Inc. or the $45.99 billion Merck & Co. Inc.

As adolescents in the pharmaceutical industry, Cephalon and Endo can't stand pat: They have no choice but to keep moving or wind up in trouble.

Companies of their size make inviting targets for the top-tier companies, which may not be hungry for sales right now but want to stockpile their drug pantry for lean years to come as generic competition erodes their pricing power.

Trying to avoid becoming fish food for the bigger hunters that roam the pharmaceutical ocean, Cephalon and Endo both have been feasting on

the small fry and expanding their diets

to include products outside their cultural experience.

It's why Endo, built by pain medications, has acquired four very different companies in the last two years for a combined $1.5 billion. And on Monday, the Chadds Ford company said it had hooked American Medical Systems Holdings Inc., a Minnesota-based medical-device maker, for a whopping $2.9 billion in cash.

And why Cephalon, which turned a treatment for excessive sleepiness into a blockbuster seller, has spent $1.11 billion on four acquisitions in the last two years and more on strategic partnerships with other drug companies.

However, in Cephalon's case, its regular hunting activity did not prevent the Frazer-based company from becoming prey for another restless teenager, Valeant Pharmaceuticals International Inc. At $1.18 billion in 2010 revenue, the Ontario-based company has picked a fight with the bigger Cephalon for declining to "engage in discussions."

Last week, Cephalon rejected Valeant's $73-per-share all-cash offer. It's not easy to say no to a $5.7 billion hostile offer, but Cephalon's board says the offer undervalues the company. Now Valeant wants to replace Cephalon's board.

And so trouble has found Cephalon, which lost its father - founder and CEO Frank J. Baldino, who died in December. Until Valeant wins or gets bored and goes home, Cephalon's 3,700 employees will have to endure a number of sleepless nights.

Contact Mike Armstrong

at 215-854-2980 or ma mstrong@phillynews.com. See his blog at www.phillyinc.biz .