Cephalon Inc. (CEPH) is scheduled to report second quarter results on July 27, 2010 after the market closes. The current Zacks Consensus Estimate for the second quarter is $1.99 per diluted share, representing year-over-year growth of 38%. Cephalon has consistently surpassed earnings estimates with a four-quarter average of 10.1%, and second quarter earnings are also expected to top expectations by 4.5%.

Last week, Cephalon revised its guidance for the quarter saying that it now expects basic adjusted income per common share in the range of $2.17-$2.22 on sales of $705million-$715 million. Earlier, Cephalon was expecting basic adjusted income of $1.65-$1.75 per share on net sales of $645 – $670 million. The Zacks Consensus Revenue Estimate is $708 million.

Based on the revised expectations for the second quarter, Cephalon will also provide new guidance for 2010.

First Quarter Recap

Cephalon started 2010 on a strong note with first quarter earnings beating expectations by a wide margin. The company reported first quarter earnings of $1.76 per share, 20 cents above the Zacks Consensus Estimate, and well above the year-ago earnings of $1.30. Top-line performance also remained strong with revenues increasing 14.7% to $596.6 million.

First quarter revenues were driven by contributions from the central nervous system (CNS) and oncology franchises, which posted sales of $307.1 million (up 14%) and $110 million (up 44%), respectively.

Oncology drug Treanda continued to perform well, with sales coming in at $81.3 million, up 62%. 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 reported $34.9 million in sales of its follow-on sleep franchise product, Nuvigil, which was launched on June 1, 2009. Provigil sales increased 4% to $262.5 million. Although Nuvigil sales were below expectations, the company reported that Nuvigil prescription growth increased 12% sequentially.

Meanwhile, lower than expected Amrix sales ($25 million, down 4%) and continued generic erosion of Actiq ($46.2 million, down 25.8%) contributed to a 7% decline in pain franchise sales which came in at $113.6 million. This was partially offset by a 25% increase in Fentora sales which came in at $42.2 million. The launch of Fentora across several countries in Europe helped boost sales.

Agreement of Revisions

Estimate revisions for Cephalon have shown an upward trend over the past 7 as well as 30 days. Over the past 30 days, 4 of 6 analysts covering the stock have raised their estimates for the second quarter with no movement in the opposite direction. Meanwhile, 8 of 20 analysts covering the stock have increased their estimates for 2010 with no movement in the opposite direction. For 2011, 8 of 20 analysts covering the stock have increased their estimates with only one analyst moving in the opposite direction.

A similar trend was observed over the last 7 days with 5 and 7 analysts increasing their estimates for the second quarter of 2010 and fiscal 2010, respectively.

Estimates have gone up based on the recent announcement by the company that it expects sales and basic adjusted net income per share to surpass its previously issued guidance for the second quarter. Moreover, Cephalon expects to update its guidance for the full year and we believe the company will raise its expectations for the year.

Several factors like stronger-than-expected Nuvigil/Provigil sales, continued out-performance of Treanda and contributions from the Mepha acquisition could be responsible for the improved outlook for the second quarter.

Magnitude of Revisions

While estimates for the second quarter of 2010 and fiscal 2010 are up 34 cents and 24 cents, respectively, over the last 7 days, estimates for 2011 are up 16 cents. The current Zacks Consensus Estimate for the second quarter and fiscal 2010 are $1.99 and $6.97, respectively.

Our Take

We currently have a Neutral recommendation and Zacks #2 Rank (Buy) on Cephalon. We expect the shares to outperform the broader US equity market in the next 1-3 months. We believe the company will raise its guidance for fiscal 2010 following the release of second quarter results.

Longer-term, we remain Neutral on Cephalon. Although we are confident of Cephalon’s ability to protect the CNS franchise by switching patients to Nuvigil, we are concerned that a generic company could seek to bring a generic version of Nuvigil to market. Generic players like Teva Pharmaceuticals (TEVA), Watson Pharma (WPI), Mylan (MYL), Sandoz, Lupin Pharma and Actavis are all seeking to launch generic versions of Nuvigil.
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