Cephalon Beats, Provides Outlook

Cephalon Inc. (CEPH - Analyst Report) reported strong third-quarter earnings of $1.62 per share that easily surpassed the Zacks Consensus Estimate of $1.42 per share and the year ago earnings of $1.18. Revenues increased 10.2% to $549 million, consisting of $535 million in product sales and $14.2 million in other revenues. Higher revenues and lower costs contributed to the robust results.
 
Revenues were driven by contributions from the central nervous system (CNS) and oncology franchises, which posted sales of $291.9 million (up 7%) and $83.1 million (up 58%), respectively. Oncology drug Treanda continued to perform well, with sales coming in at $54.5 million. Additional data presentations on Treanda should help drive sales, especially in the indolent non-Hodgkin’s lymphoma (NHL) market.
 
Cephalon reported $20.9 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. The company reported that Nuvigil gained a 19% share of the market within the first four months of its launch. Cephalon has undertaken several measures to ensure the smooth transition of patients from Provigil to Nuvigil. Nuvigil has been priced at a significant discount to Provigil, and a co-pay assistance program has also been introduced to help reduce the financial burden on patients.
 
Cephalon is also looking to drive Nuvigil sales by gaining approval for additional indications like excessive sleepiness associated with traumatic brain injury, bipolar depression, schizophrenia, and excessive sleepiness associated with jet lag disorder. Unfortunately, generic player, Teva Pharmaceuticals (TEVA - Snapshot Report) is looking to market a generic version of Nuvigil.
 
Pain franchise sales continued to decline with sales coming in at $116.3 million, down 1%. Lower-than-expected sales of Amrix ($26.7 million, up 30%), continued generic erosion of Actiq ($52.6 million, down 5%), and declining Fentora sales ($37 million, down 11%) contributed to the disappointing performance of the pain franchise. Amrix sales were below expectations mainly due to the realignment of the sales force, which is currently focusing on the promotion of Nuvigil.
 
We expect the pain franchise to remain under pressure thanks to additional competition for Fentora in the form of BioDelivery Sciences’ (BDSI - Snapshot Report) Onsolis and the potential entry of new generic competition for Actiq later this year/early next year.
 
Cephalon updated its guidance for 2009. The company now expects net sales in the range of $2.125 - $2.175 billion, based on strong conversion of the CNS franchise and lighter sales in the pain franchise. R&D and SG&A expenditures are expected in the range of $400 - $415 million and $800 - $815 million, respectively. Adjusted net income guidance remains unchanged at $457 - $464 million.
 
The company also introduced guidance for 2010. Cephalon expects adjusted net income of $6.50 - $6.70 on net sales of $2.325 and $2.4 billion, an increase of approximately 10% over the 2009 net sales guidance. CNS sales are expected in the range of $1.18 - $1.22 billion. Pain franchise sales are expected in the range of $535 - $570 million. Oncology sales are expected to come between $400 and $430 million. Both R&D and SG&A spending should increase in 2010. While SG&A guidance stands in the range of $840 - $860 million, R&D is expected to increase to $470 - $490 million.
 
We currently have a Neutral rating on Cephalon. We expect investor focus to remain on Cephalon’s emerging oncology pipeline, Amrix, and the conversion of patients to Nuvigil. Meanwhile, we are encouraged to see that Cephalon is working on reducing its dependence on the CNS franchise by expanding into new therapeutic areas to drive long-term growth. The company has been very active on the in-licensing/acquisition front over the past few quarters and we believe Cephalon will continue to seek promising opportunities which should contribute to growth in the long-term.