Cephalon Chugging Along

Cephalon (CEPH - Analyst Report) shares are currently trading at 9.6x our 2009 EPS estimate of $5.90 (fully-diluted). The shares declined significantly early last year on concerns regarding the growth prospects of Provigil and Fentora.

The FDA complete response letter on Fentora for the management of breakthrough pain in opioid tolerant patients with chronic pain conditions also hit the stock hard. The letter asked the company to implement and show the effectiveness of proposed enhancements to the current Fentora risk management plan.

Given these setbacks, investor focus has shifted to the company’s emerging oncology pipeline, Amrix, and the switching of users to Nuvigil. Amrix should be a major contributor to revenues going forward.

Cephalon has also made significant progress with its oncology pipeline. We saw encouraging phase III results on oncology candidate Treanda at the annual meeting of the American Society of Hematology, and were pleased to see Treanda receive FDA approval for the treatment of CLL. Treanda is already off to a good start for the CLL indication. With the approval for the indolent NHL indication, Treanda should contribute significantly to revenues.

We were also pleased about the company’s agreement with the U.S. Attorney’s Office in Pennsylvania and the U.S. Department of Justice (DoJ) with respect to investigations into its marketing and promotion practices. This removes a significant overhang from the shares.

Nevertheless, the FTC’s lawsuit related to the company’s Provigil settlements remains a matter of concern. A similar settlement between Bristol (BMY - Analyst Report)/Sanofi (SNY - Analyst Report) and Apotex failed to receive antitrust clearance.

The company’s financial guidance for 2009 was well above ours and the Street’s expectations. The company expects to deliver adjusted net income in the range of $452 - $459 million on total revenues of $2.175 - $2.225 billion. We have adjusted our model and we see Cephalon delivering diluted EPS of $5.90 per share on total revenues of $2.20 billion.

We currently rate the shares a Hold with a $60 price target, which is based on 10.2x our 2009 earnings estimate of $5.90 per diluted share. Potential positive catalysts could be: favorable data on CEP-701, continued strong uptake of Amrix and Treanda, and a steady flow of favorable data on Nuvigil and Treanda in the coming months.