Cephalon Inc. (CEPH) delivered another strong quarter with earnings of $2.19 per share, easily beating the Zacks Consensus Estimate of $1.92 and well above the year-ago earnings of $1.66. Full year earnings came in at $8.14, well above the Zacks Consensus Estimate of $7.85 and the year-ago earnings of $6.03.
Strong revenues helped Cephalon post impressive results. Fourth quarter revenues increased 34% to $770.6 million, well above the Zacks Consensus Estimate of $733 million. Full year revenues increased 28.2% to $2.8 billion, slightly above the Zacks Consensus Estimate of $2.7 billion.
The Quarter in Detail
Fourth quarter revenues consisted of $764.8 million in product sales (up 35.8%) and $5.8 million in other revenues. All segments performed well during the quarter. The central nervous system (CNS) and oncology franchises posted sales of $378.5 million (up 23%) and $140.1 million (up 49%), respectively. Revenues were also boosted by other product sales of $101.6 million.
Oncology drug Treanda continued to perform well, with sales coming in at $108.6 million, up 76%. 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 and expects data by year-end. Meanwhile, the company is looking to file for US Food and Drug Administration (FDA) approval of Treanda for this indication in mid 2011 based on data from the Steel Group study.
Cephalon reported $58.9 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. Cephalon said that Nuvigil exited 2010 with a 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 18% to $296.2 million. Although Cephalon has undertaken several measures to ensure the smooth transition of patients from Provigil to Nuvigil, Provigil sales remain strong.
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. The company expects to complete two of three phase III studies by year end, with the third study scheduled to finish in the second quarter of 2012. The company could be in a position to launch Nuvigil for this indication in 2013.
Fourth quarter pain franchise sales increased 15% to $144.6 million mainly due to the Mepha acquisition and Fentora sales. While Amrix sales declined 6% to $28.8 million, Fentora sales increased 35% to $52 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 affect sales in the US.
2011 Guidance Increased
The company increased its guidance for 2011 due to improved expectations of performance of the CNS franchise. Cephalon expects adjusted income of $665-$688 million (old guidance: $652-$668 million) on total sales of $3.015 – $3.095 billion (old guidance: $2.96-$3.04 billion).
Segment-wise, the company expects CNS franchise sales of $1.45 -$1.49 billion (old guidance: $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.
Cephalon also provided guidance for the first quarter of 2011. The company expects adjusted net income of $144 – $159 million on sales of $725 – $755 million.
SG&A spend is expected in the range of $970 million-$1 billion. Meanwhile, with Cephalon focusing its development efforts on late-stage clinical candidates, R&D spend is expected to increase to $520 – $540 million (old guidance: $505-$525 million) in 2011. The company has five phase III programs planned or ongoing in 2011. Three phase III programs are scheduled to commence in 2012.
The company could be in a position to seek approval for Omapro, for which Cephalon has an agreement with ChemGenex Pharmaceuticals, later this year. Omapro is being developed for the treatment of chronic myelogenous leukemia. Another near-term pipeline opportunity for the company is its tamper-deterrent extended-release hydrocodone product for chronic pain. Phase III results on this candidate are expected by year end. Positive results could allow the company to file for US approval in early 2012.
Other late-stage candidates include Cinquil (eosinophilic asthma; potential launch in 2014), and Lupuzor (systemic lupus erythematosus; phase III scheduled to commence in the second half of 2011).
Neutral on Cephalon
We currently have a Neutral recommendation on Cephalon, which is supported by a Zacks #3 Rank (short-term “Hold” rating). Cephalon is currently working on protecting its CNS franchise by delaying the entry of generic versions of Provigil to 2012.
Both 2012 and 2013 should be challenging years for the company due to the genericization of Provigil. However, we are pleased with Cephalon’s efforts to reduce its dependence on the CNS franchise. Cephalon 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.
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