Cephalon Inc.'s (CEPH) rejection of a $5.7 billion takeover offer from Valeant Pharmaceuticals International Inc. (VRX) has put the future of Cephalon in the hands of its shareholders.

Canada-based Valeant has started the process of trying to unseat Cephalon's board in order to move the offer forward. Although the process could theoretically take months, preliminary indications over the next few weeks could determine whether Valeant will continue its fight or walk away.

Late Tuesday, Cephalon rejected the cash bid of $73 a share as inadequate, and Valeant responded by proposing a slate of seven directors.

"We anticipate a flurry of activity over the next couple weeks as Cephalon either lobbies its existing shareholder base regarding Valeant's low offer or potentially seeks a 'white knight'," Stifel Nicolaus analyst Annabel Samimy said in a note to clients Wednesday.

A Cephalon spokesman declined to comment beyond the company's press releases. A Valeant spokeswoman also declined to comment other than saying the company is "dealing with Cephalon shareholders at this point."

According to the consent solicitation process, Valeant's preliminary proposal to remove the board will be reviewed and approved by the Securities and Exchange Commission before shareholder voting can begin. Valeant can't begin actively soliciting votes until that approval, but the company said Tuesday that it's gotten "positive feedback from many of the largest stockholders of Cephalon." The two companies have many major shareholders in common.

In order to unseat the board, Valeant needs a majority vote, or about 37.9 million shares. Although the voting will be open for 60 days after the first vote is cast, it could stop once a majority is obtained in either direction.

While some proxy fights drag on for months, Valeant has stated it will move fast in deciding its next move. Last week, Valeant's Chief Executive J. Michael Pearson said he expects to "quite quickly get a sense of whether this is going to be supported or not by their shareholders." RBC Capital Markets analyst Douglas Miehm believes the process will be concluded within two weeks.

If successful, Valeant will push the new board to remove a poison pill that blocks a hostile takeover and ask to conduct due diligence. Reviewing the company's books should take another two to three weeks, Valeant said, and could result in a "modest increase" in the offer.

Traders are expecting a higher offer from Valeant, or a competing bidder, as the stock has traded above the offer since it became public. It recently changed hands at $77.35. Expectations of a takeover can make it difficult for an acquisition target to walk away and allow its stock to fall to previous levels. Cephalon shares closed at $58.75 before the offer.

Cephalon argues that Valeant's offer is opportunistically timed and doesn't offer value for its pipeline. Genzyme Corp. (GENZ) made a similar argument in trying to fend off a takeover by Sanofi-Aventis SA (SNY, SAN.FR). Genzyme resisted the public overtures for more than six months before agreeing to a deal that boosted the original bid by 7% along with potential future payments. A similar increase would put Valeant's offer at about $78 a share.

But unlike Sanofi's open commitment to closing a deal with Genzyme, Valeant has made it clear that it will walk away from its offer and won't waste time courting the smaller company.

Samimy expects that a competing offer for Cephalon is unlikely, which places all hope on an increased bid from Valeant.

"Should the acquisition fail to materialize, we believe CEPH shares have significant downside risk," she said.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com
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