Investors Look Past Cephalon’s Leukemia Setback

Cephalon Inc. (CEPH - Analyst Report) recently announced results from a pivotal phase II/III trial that was conducted with lestaurtinib (CEP-701) in patients with relapsed acute myelogenous leukemia (AML) expressing FLT3 activating mutations.

Results showed that patients treated with lestaurtinib demonstrated similar rates of complete response compared to patients receiving induction therapy. However, no increased benefit in overall survival was observed in the lestaurtinib group. Cephalon intends to present results from the AML study at a future medical meeting.

Lestaurtinib is an oral small molecule tyrosine kinase inhibitor which is being developed for the treatment of AML and myeloproliferative disorder (MPD). A phase II study for the MPD indication is currently ongoing – results should be available shortly.

Following the release of the AML study results, Cephalon maintained its previously issued financial guidance for 2009. Our model remains unchanged as we had not included any sales estimates for lestaurtinib.

Although the AML results were disappointing, we do not expect this pipeline setback to have much of an impact on the shares. We believe investor expectations for this candidate were low. The company had already experienced a major delay in its development plan for the candidate and had postponed the trial completion date several times. Going forward, we would not be surprised to see the company discontinue development of the candidate for the AML indication.

In the coming quarters, we believe investor focus will remain on the Nuvigil conversion process. Nuvigil was launched this June and the company is currently working on switching users from Provigil to Nuvigil prior to the entry of generic versions. Generic players Mylan (MYL - Analyst Report), Teva (TEVA - Snapshot Report) and Ranbaxy will be launching generic versions of Provigil in 2012.

There could be some volatility in the stock if the initial Nuvigil ramp-up lags expectations. However, the continued uptake of Amrix and Treanda and a steady flow of favorable data on Treanda, Nuvigil and other pipeline candidates should act as positive catalysts. We maintain a Hold rating on Cephalon with a $60 price target.