CEPH Cephalon (MM)

Cephalon Inc. (CEPH) delivered first quarter earnings of $1.98 per share, several cents below the Zacks Consensus Estimate of $2.04 but 12.5% above the year-ago earnings of $1.76.

First quarter revenues, which increased 24.9% to $745.1 million, missed the Zacks Consensus Estimate of $752 million by a wide margin. First quarter results were within the guidance range provided by the company. Cephalon had guided towards adjusted net income of $144 - $159 million on sales of $725 - $755 million.

The Quarter in Detail

First quarter revenues consisted of $736 million in product sales (up 27.6%) and $9.1 million in other revenues. All segments performed well during the quarter. The central nervous system (CNS) and oncology franchises posted sales of $334.7 million (up 7%) and $149.1 million (up 35%), respectively. Revenues were also boosted by other product sales of $121.6 million.

Oncology drug Treanda continued to perform well, with sales coming in at $117.7 million, up 45%. Growing acceptance among hematologists should boost sales further. Moreover, expansion into the first-line treatment of indolent non-Hodgkin's lymphoma should help boost long-term growth of the product.

Cephalon reported $52 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. Provigil sales declined 2% to $258.4 million.

Cephalon said that Nuvigil exited 2010 with a 40% share of the market. Cephalon continues to focus on shift-work disorder, a market segment that offers significant opportunity for growth. Cephalon recently released positive shift work disorder data that showed that patients treated with Nuvigil experienced a statistically significant difference in improvement in overall clinical condition related to late-shift sleepiness compared to placebo. The positive data should help Cephalon in its efforts to promote Nuvigil in the shift-work disorder segment.

Cephalon is also looking to drive Nuvigil sales by gaining approval for additional indications like bipolar depression.

First quarter pain franchise sales increased 13% to $130.5 million mainly due to the Mepha acquisition and Fentora sales. While Amrix sales declined 8% to $23 million, Fentora sales increased 10% to $46.4 million. Going forward, the implementation of a Risk Minimization Action Plan (RiskMAP) for Fentora could affect sales in the US.

Teva to Acquire Cephalon

On May 2, 2011, Teva Pharmaceutical Industries Ltd. (TEVA) announced that it has entered into a definitive agreement for the acquisition of Cephalon for $81.50 per share in cash or $6.8 billion.

Another company, Valeant Pharmaceuticals (VRX), had initially approached Cephalon in late March with a $73 bid. However, Cephalon rejected the offer. Teva’s offer price tops Valeant’s offer and represents a 39% premium to Cephalon’s stock price before Valeant’s unsolicited proposal was announced.

Given its pending merger with Teva, Cephalon said that it will not be providing guidance for 2011. The acquisition is scheduled to close in the third quarter of 2011. The Zacks Consensus Estimate for 2011 currently stands at $8.48.

We have a Neutral recommendation on Cephalon which carries a Zacks #3 Rank (short-term “Hold” rating). The Teva offer will most likely be viewed favorably by Cephalon’s shareholders. With Cephalon likely to face a challenging period from 2012 following the genericization of Provigil, an acquisition could be a way out for the shareholders of the company. Moreover, Treanda could start facing generics from 2015.

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