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Cephalon Beats; Updates Guidance
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ShareCephalon, Inc. (CEPH) started 2010 on a strong note with first quarter earnings beating expectations by a wide margin. The company reported first quarter earnings of $1.76 per share, 20 cents above the Zacks Consensus Estimate, and well above the year-ago earnings of $1.30. Top-line performance also remained strong with revenues increasing 14.7% to $596.6 million.
The Quarter in Detail
First quarter revenues consisted of $576.7 million in product sales (up 12%) and $19.9 million in other revenues. Revenues were driven by contributions from the central nervous system (CNS) and oncology franchises, which posted sales of $307.1 million (up 14%) and $110 million (up 44%), respectively.
Oncology drug Treanda continued to perform well, with sales coming in at $81.3 million, up 62%. 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 $34.9 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. Provigil sales increased 4% to $262.5 million.
Although Nuvigil sales were below expectations, the company reported that Nuvigil prescription growth increased 12% sequentially. 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 focusing on shift-work disorder, a market segment that offers significant opportunity for growth. According to the company, there are 15 million shift workers in the US of which about 1/3 suffer from excessive sleepiness associated with shift-work disorder.
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 7% to $113.6 million. Lower than expected Amrix sales ($25 million, down 4%) and continued generic erosion of Actiq ($46.2 million, down 25.8%) contributed to the decline in pain franchise sales. This was partially offset by a 25% increase in Fentora sales which came in at $42.2 million. The launch of Fentora across several countries in Europe helped boost 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, generic competition for Actiq, and weak Amrix sales.
2010 Guidance Up
Cephalon updated its guidance for 2010 to reflect the impact of US healthcare reform. While the company maintained its total sales guidance of $2.610 - $2.690 billion (representing an increase of 19% - 23% on 2009 revenues), adjusted net income is now expected in the range of $530-$545 million (earlier guidance: $518 - $533 million).
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 $1.22-$1.26 billion (earlier guidance: $1.180 -$1.220 billion), pain franchise sales of $455-$490 million (earlier guidance: $495-$530 million), oncology franchise sales of $460-$490 million ($440-$470 million), and other product sales of $450-$470 million (earlier guidance: $470-$490 million).
While R&D expenditures are still expected in the range of $480 - $500 million, SG&A spend is now expected in the range of $910 - $930 million (earlier guidance: $960 - $980 million).
The company also introduced guidance for the second quarter of 2010. Cephalon expects adjusted net income of $124.6 - $132.1 million on net sales of $645 - $670 million.
Healthcare Reform
Cephalon announced that the healthcare reform will result in additional expenses in the range of $7-$11 million in 2010. About $2.2 million of the additional expenses were recognized in the first quarter of 2010. From 2011, Cephalon expects to incur $11 - $19 million in additional expenses.
Our Take
We currently have a Neutral recommendation on Cephalon. We expect the company to continue performing well in 2010. Both the oncology and the CNS franchise should help drive growth. However, we expect Cephalon’s pain management franchise to remain under pressure. We are also concerned about the patent challenge being faced by Nuvigil.
Read the full analyst report on CEPH
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Read the full analyst report on WPI
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