Earnings estimates for Cephalon, Inc. (CEPH) have gone up significantly following the issuance of a better-than-expected guidance by the company. Cephalon exited 2009 on a strong note with both fourth-quarter and full-year earnings exceeding expectations. Cephalon reported fourth-quarter earnings of $1.66 per share, up 13.7%, and full-year earnings of $6.03, up 25%. 

Top-line performance also remained strong with fourth quarter revenues increasing 6.5% to $575.1 million, and full year revenues increasing 11% to $2.2 billion. Revenues were primarily driven by contributions from the central nervous system (CNS) and oncology franchises. 

Guidance and Earnings Estimate Revisions
Cephalon’s guidance for 2010, which was re-issued following the company’s decision to acquire generic company Mepha, was well above expectations and resulted in several analysts raising their earnings estimates for the stock

Earnings estimates for 2010 have gone up by 27 cents over the past 30 days to $6.51 with 19 of 21 analysts following the stock raising their estimates. Only 2 analysts moved in the opposite direction during this period. 

The Mepha acquisition, which is scheduled to close on Apr 1, is expected to be accretive to earnings immediately. This acquisition will not only allow Cephalon to enter the generics drug market, it will also allow the company to expand its footprints in ex-US territories including emerging markets which represent significant opportunity for growth. 

Cephalon expects total sales to increase 19% – 23% to $2.61 – $2.69 billion in 2010. Revenues should be boosted by strong conversion of the CNS franchise and continued robust performance of the oncology franchise. 

CNS franchise sales are expected in the range of $1.18 -$1.22 billion in 2010. Cephalon has undertaken several measures to ensure the smooth transition of patients from Provigil to Nuvigil. In addition to being priced at a significant discount to Provigil, 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 that is focusing on shift work disorder, a market segment that offers significant opportunity for growth. An expanded label for additional indications like excessive sleepiness associated with traumatic brain injury, bipolar depression, schizophrenia, and excessive sleepiness associated with jet lag disorder should help boost sales further. 

Unfortunately, generic players Teva Pharmaceuticals (TEVA), Watson Pharmaceuticals (WPI) and Actavis are all looking to market generic versions of Nuvigil. 

Meanwhile, oncology drug Treanda continues to perform well, with sales coming in at $222 million in 2009. 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 is guiding towards oncology franchise sales of $440 – $470 million in 2010.
Pain franchise sales declined to $485.1 million in 2009, down 3.3%. We expect the pain franchise to remain under pressure thanks to additional competition for Fentora in the form of BioDelivery Sciences’ (BDSI) Onsolis and generic competition for Actiq. Pain franchise sales are expected in the range of $495 – $530 million.
Earnings estimates for 2011 are also up significantly (33 cents) with 12 of 21 analysts following the stock raising their estimates. Only 2 analysts moved in the opposite direction during this period. The current Zacks Consensus Estimate for 2011 is $7.26.
Earnings estimates for the first quarter of 2010 are up by 2 cents over the past 30 days with 5 of 20 analysts following the stock raising their estimates. An equal number of analysts moved in the opposite direction during the same period. Analysts currently expect the company to deliver first quarter earnings of $1.56, with no upside potential. 

In terms of earnings surprises, earnings exceeded the Zacks Consensus Estimate in each of the last four quarters, with a four-quarter average of 7.53%. This means that on average, earnings topped the Zacks Consensus Estimate by 2.12%. 

There have been no earnings estimate revisions during the past 7 days. 

Our Recommendation 

We currently have a Neutral recommendation on Cephalon which is supported by the Zacks #3 Rank (“Hold”). We expect Cephalon to continue performing well in 2010. Strong performance from the oncology and CNS franchises and contributions from the Mepha acquisition should help drive growth. 

We are also encouraged to see the company working on reducing its dependence on the CNS franchise by expanding into new therapeutic areas to drive long-term growth. Cephalon has been very active on the in-licensing/acquisition front over the past few quarters and we believe the company will continue to seek promising opportunities which should contribute to growth in the long-term.
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 “BDSI”
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