Cephalon, Inc. (CEPH) delivered another strong quarter with earnings coming at $2.14 per share, easily beating the Zacks Consensus Estimate of $1.79 and well above the year-ago earnings of $1.62.
Strong revenues, a favorable product mix and the company’s continuing efforts to improve operating leverage helped Cephalon post impressive results. Revenues increased 30.5% to $716.9 million. However, revenues fell short of the Zacks Consensus Estimate of $719 million.
The Quarter in Detail
Third quarter revenues consisted of $707.1 million in product sales (up 32%) and $9.9 million in other revenues. Revenues were driven by contributions from the central nervous system (CNS) and oncology franchises, which posted sales of $354.3 million (up 19%) and $132.9 million (up 60%), respectively.
Revenues were also boosted by other product sales of $88.8 million, which increased due to the company’s expansion of its European business through the acquisition of Mepha. The Mepha acquisition contributed $80.5 million to third quarter revenues.
Oncology drug Treanda continued to perform well, with sales coming in at $103.9 million, up 91%. 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 is currently enrolling patients for this indication. The company is looking to file for US Food and Drug Administration (FDA) approval of Treanda for this indication in the first half of 2011.
Cephalon reported $51.4 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. Nuvigil total prescriptions increased 13% sequentially, with market share increasing 5% sequentially to 35%. Cephalon expects to exit 2010 with Nuvigil holding a low-40% share of the market. By year-end 2011, the company expects Nuvigil to hold a 50-60% share of the market.
Provigil sales increased 9% to $281.0 million. Although Cephalon has undertaken several measures to ensure the smooth transition of patients from Provigil to Nuvigil, Provigil sales remain strong.
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 working on improving Nuvigil’s formulary status which should help drive uptake.
Cephalon continues to focus 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 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 FDA’s complete response letter for the jet lag disorder indication in June and a final response should be out by Dec 30.
Meanwhile, positive results for the bipolar depression indication could allow the company to file for approval in early 2012. Meanwhile, Cephalon discontinued the development of Nuvigil for excessive sleepiness associated with traumatic brain injury due to poor enrolment.
Third quarter pain franchise sales increased 10% to $131.2 million mainly due to the Mepha acquisition and Fentora sales. Although Amrix sales remained flat at $26.8 million, Fentora sales increased 16% to $42.9 million. The launch of Fentora across several countries in Europe helped boost sales. Going forward, the implementation of a Risk Minimization Action Plan (RiskMAP) for Fentora could also affect sales in the US.
2010 Guidance Increased Again
Cephalon once again raised its guidance for 2010. While the company raised its sales guidance to $2.69 – $2.73 billion (earlier guidance: $2.63 – $2.71 billion), adjusted net income is now expected in the range of $617-$632 million (earlier guidance: 562-$577 million). US healthcare reform is expected to impact 2010 revenues by $16 – $18 million.
Revenues should be boosted by continued robust performance of the oncology franchise. Segment-wise, the company expects CNS franchise sales of $1.34-$1.37 billion (earlier guidance: $1.25-$1.29 billion), pain franchise sales of $510-$530 million (earlier guidance: $440-$475 million), oncology franchise sales of $500-$520 million (earlier guidance: $485-$515 million), and other product sales of $352-$345 million (earlier guidance: $440-$470 million).
Mepha franchise sales, which were earlier reported as a part of other product sales, will now be reported according to the applicable product segment. We note that the pain franchise, which has been struggling due to increased competition, generic competition for Actiq and weak Amrix sales, should benefit from this reclassification.
While SG&A spend is still expected in the range of $910-$930 million, R&D expenditures are now expected in the range of $430-$450 million (earlier guidance: $450-$470 million).
The company also introduced guidance for 2011. Cephalon expects adjusted earnings of $8.20-$8.40 per share, on net sales of $2.96-$3.04 billion. This is well above the current Zacks Consensus Estimate of $7.66.
Segment-wise, the company expects CNS franchise sales of $1.39-$1.43 billion, pain franchise sales of $540-$570 million, oncology franchise sales of $570-$600 million, and other product sales of $420-$450 million.
With Cephalon focusing its development efforts on late-stage clinical candidates, R&D spend is expected to increase to $505-$525 million in 2011. The company has five phase III programs planned or ongoing in 2011 including the label expansion for Treanda. Meanwhile, SG&A spend is expected in the range of $970 million-$1 billion.
Our Take
We currently have a Zacks #2 Rank on Cephalon (short-term Buy rating). With the company having put in a solid performance in the third quarter and increasing its guidance for 2010, we expect upward estimate revisions. Strong oncology and CNS franchise sales should continue driving performance in the near-term.
Longer-term, we remain Neutral on Cephalon. With Provigil sales remaining strong, we remain concerned about the slower-than-expected conversion of patients to Nuvigil. The company will most likely see an earnings dip in 2012 with the entry of generic versions of Provigil. Moreover, generic players like Teva Pharmaceuticals (TEVA), Watson Pharmaceuticals (WPI), Mylan (MYL), Sandoz, Lupin Pharma and Actavis are all looking to market generic versions of Nuvigil.
In this regard, we are pleased to see that Cephalon is working on reducing its dependence on the CNS franchise. The company is looking to expand into new therapeutic areas to drive long-term growth and has been very active on the in-licensing/acquisition front over the past few quarters. Cephalon is also looking to expand its presence in emerging markets like China.
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