Cephalon Inc. (CEPH) delivered another strong quarter with second quarter earnings coming in at $2.05 per share, six cents above the Zacks Consensus Estimate and well above the year-ago earnings of $1.44 per share. We note that the Zacks Consensus Estimate had been revised recently following Cephalon’s announcement that it expects to deliver second quarter earnings above its previously issued guidance.
Strong revenues helped the company post impressive results. Revenue increased 32.7% to $726.9 million, exceeding the Zacks Consensus Estimate by almost $19 million. The Mepha acquisition contributed $90 million to second-quarter revenue.
The Quarter in Detail
Second-quarter revenue consisted of $712.4 million in product sales (up 32.2%) and $14.5 million in other revenue. Revenue was driven by contributions from the central nervous system (CNS) and oncology franchises, which posted sales of $337.9 million (up 16%) and $129.9 million (up 58%), respectively. Revenue was also boosted by other product sales of $131.4 million, which increased due to the company’s expansion of its European business.
Oncology drug, Treanda, continued to perform well, with sales coming in at $99.7 million, up 79%. Growing acceptance among hematologists should boost sales further in 2010. Moreover, expansion into the first-line treatment of indolent non-Hodgkin's lymphoma should help boost long-term growth of the product. Cephalon is currently enrolling patients for this indication.
Cephalon reported $41 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. Provigil sales increased 9% to $284.8 million. 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 also reported an improvement in Nuvigil’s formulary status – the company entered into agreements for Nuvigil with three of the largest commercial payors in the US. This should help drive uptake.
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.
The earliest approval could come for the jet lag disorder indication. Cephalon submitted a response to the US Food and Drug Administration’s (FDA) complete response letter for the jet lag disorder indication in June and a final response should be out by December 30.
Meanwhile, Cephalon is enrolling patients for a phase III study for the bipolar depression indication. Positive results could lead to approval for this indication in late 2012. Cephalon is also enrolling patients for its pivotal clinical trial for the traumatic brain injury indication – results should be out in the first half of 2012.
Unfortunately, generic players Teva Pharmaceuticals (TEVA), Watson Pharmaceuticals (WPI), Mylan (MYL), Sandoz, Lupin Pharma and Actavis are all looking to market generic versions of Nuvigil.
Meanwhile, pain franchise sales declined 8% to $113.1 million. Lower-than-expected Amrix sales ($28.5 million, down 8%) and continued generic erosion of Actiq ($40 million, down 53.5%) contributed to the decline in pain franchise sales. This was partially offset by a 42% increase in Fentora sales, which came in at $44.5 million. The launch of Fentora across several countries in Europe helped boost sales.
We expect the pain franchise to remain under pressure because of additional competition for Fentora in the form of BioDelivery Sciences’ (BDSI) Onsolis, generic competition for Actiq, and weak Amrix sales. The implementation of a Risk Minimization Action Plan (RiskMAP) for Fentora could also affect sales in the US.
2010 Guidance Increased
Cephalon once again raised its guidance for 2010. While the company raised its sales guidance by $20 million to $2.630–$2.710 billion (earlier guidance: $2.610–$2.690 billion), adjusted net income is now expected in the range of $562–$577 million (earlier guidance: $530–$545 million).
Revenues should be boosted by 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 $1.25–$1.29 billion (earlier guidance: $1.22–$1.26 billion), pain franchise sales of $440–$475 million (earlier guidance: $455–$490 million), oncology franchise sales of $485–$515 million (earlier guidance: $460–$490 million), and other product sales of $440–$470 million (earlier guidance: $450–$470 million).
While SG&A spend is still expected in the range of $910–$930 million, R&D expenditures are now expected in the range of $450–$470 million (earlier guidance: $480–$500 million).
Cephalon is currently conducting or is looking to initiate late-stage studies for several pipeline candidates. Cephalon is looking to file for approval of CP37247 (radicular pain) and Cinquil (eosinophilic asthma) in 2013. Meanwhile, systemic lupus erythematosus candidate Lupuzor is currently in a six-month phase IIb study.
The company also introduced guidance for the third quarter of 2010. Cephalon expects adjusted net income of $135.9–$143.5 million on net sales of $670–$700 million.
Neutral on Cephalon
We currently have a Neutral recommendation on Cephalon. We believe the company has done a good job protecting its CNS franchise by delaying the entry of generic versions of Provigil to 2012. This should give the company enough time to switch users to its follow-on sleep franchise product, Nuvigil, which was launched in June 2009. We expect investor focus to remain on the successful launch of Nuvigil and the company’s ability to expand Nuvigil’s label. In addition to the Nuvigil launch, we expect investors to focus on the performance of Cephalon’s emerging oncology pipeline.
Read the full analyst report on "CEPH"
Read the full analyst report on "TEVA"
Read the full analyst report on "WPI"
Read the full analyst report on "MYL"
Read the full analyst report on "BDSI"
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