Cephalon Beats & Guides Higher

Cephalon, Inc. (CEPH) exited 2009 on a strong note with both fourth quarter and full year earnings exceeding expectations. The company reported fourth quarter earnings of $1.66 per share, 6 cents above the Zacks Consensus Estimate, and 13.7% above the year-ago earnings. Full year earnings came in at $6.03, easily surpassing the Zacks Consensus Estimate of $5.96 and the year-ago earnings of $4.82.
 
Top-line performance also remained strong with fourth quarter revenues increasing 6.5% to $575.1 million, and full year revenues increasing 11% to $2.2 billion.
 
Fourth Quarter Performance
 
Fourth quarter revenues consisted of $562.9 million in product sales (up 5.2%) and $12.2 million in other revenues. Revenues were driven by contributions from the central nervous system (CNS) and oncology franchises, which posted sales of $302.4 million (up 1.6%) and $94.1 million (up 52.8%), respectively.
 
Oncology drug Treanda continued to perform well, with sales coming in at $61.6 million. Growing acceptance among hematologists should boost sales further in 2010. Moreover, expansion into the first-line treatment of non-Hodgkin's lymphoma should help boost long-term growth of the product.
 
Cephalon reported $35.6 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. Provigil sales declined 10.6% as patients continued to switch to Nuvigil. 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 has also launched a new marketing campaign that is focusing on shift work disorder, a market segment that offers significant opportunity for growth.
 
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 players Teva Pharmaceuticals (TEVA - Analyst Report), Watson Pharmaceuticals (WPI - Analyst Report) and Actavis are all looking to market generic versions of Nuvigil.
 
Pain franchise sales declined slightly with sales coming in at $123.1 million, down 0.4%. Lower than expected Amrix sales ($30.6 million, up 17%), continued generic erosion of Actiq ($53.9 million, down 8%), and flat Fentora sales ($38.6 million) contributed to the decline in pain franchise sales.
 
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 entry of new generic competition for Actiq.
 
2010 Guidance Exceeds Expectations
 
Cephalon provided stronger than expected new guidance for 2010. The company had withdrawn its previously issued guidance following its decision to acquire generic company Mepha.
 
Cephalon said that it expects total sales in the range of $2.610 - $2.690 billion, representing an increase of 19% - 23% on 2009 revenues. Revenues should be boosted by strong conversion of the CNS franchise and continued robust performance of the oncology franchise. However, we expect lighter sales from the pain franchise. Segment-wise, the company expects CNS franchise sales of $1.180 -$1.220 billion, pain franchise sales of $495-$530 million, oncology franchise sales of $440-$470 million, and other product sales of $470-$490 million.
 
Both R&D and SG&A spending should increase in 2010. While R&D expenditures are expected in the range of $480 - $500 million, SG&A spend is expected to increase to $960 - $980 million. Adjusted net income is expected in the range of $518 - $533 million.
 
The company also introduced guidance for the first quarter of 2010. Cephalon expects adjusted net income of $121 - $128 million on net sales of $575 - $595 million.
 
Our Expectations
 
We expect Cephalon to continue performing well in 2010. Both the oncology and the CNS franchise should help drive growth. Moreover, we are encouraged to see the company working on reducing its dependence on the CNS franchise by expanding into new therapeutic areas to drive long-term growth.
 
Cephalon has been very active on the in-licensing/acquisition front over the past few quarters. The Mepha acquisition, scheduled to close on Apr 1, will not only allow Cephalon to enter the generics drug market, it will also allow the company to expand its footprints in ex-US territories including emerging markets which represent significant opportunity for growth.
 
We believe Cephalon will continue to seek promising opportunities which should contribute to growth in the long-term. We currently have a Neutral recommendation on the company.

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