Cephalon Puts Worries to Rest

Aside from Cephalon (CEPH), try to identify another company that had three experimental drugs delayed by federal regulators within a 14-week period -- and still saw its stock rise by more than 70%.

This isn't a quiz. We can't think of one either.

Cephalon's stock is way up because investors examined the bad news vs. the good news -- the product delays vs. a series of agreements that protect its bestselling drug -- and concluded the good easily outweighs the bad.

After the markets close Tuesday, company executives will be asked how they plan to manage both sets of news when Cephalon unveils this year's financial guidance and its fourth-quarter and full-year 2005 results.

The stock closed at $44.28 on Oct. 20, the day before Cephalon said the Food and Drug Administration would delay its review of Sparlon for attention deficit hyperactivity disorder. The stock closed at $76 on Feb. 2, the day after Cepahlon said the FDA would delay its decision on Nuvigil, a sleep disorders drug. The stock closed Monday at $70.57.

During that 14-week stretch, the FDA also put off taking action on Vivitrol, an alcoholism treatment made by Alkermes (ALKS) that Cephalon will help market. The agency also announced a second delay on Sparlon.

However, over the same span, Cephalon signed four separate deals with generic drug companies ensuring that they won't make copies of Provigil, the sleep-disorders drug that accounted for 43% of its third-quarter sales, for several years.

The last of those agreements, with Barr Pharmaceuticals (BRL) on Feb. 1, "effectively ends the threat of generic entry over the next six years," says Megan E. Murphy of Lazard Capital Markets in a recent research report. Murphy raised her 2006 earnings estimate to $3.66 a share from $2.94 and raised her revenue forecast to $1.61 billion from $1.48 billion. She doesn't own shares of Cephalon.