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Cephalon Still a Stressor

You have to wonder if Cephalon (CEPH) might act more shareholder-friendly by mailing motion-sickness medication to investors.

In recent years, Cephalon has produced a stream of upside surprises and downside shocks -- financial, regulatory, research-related -- which jolt the stock and keep stockholders queasy. Just in the past 15 months, shares bounced from the mid-$50s to the high $70s, then slipped to the mid-$60s, then rose to low $80s, then dropped to the high $60s.

Now, they're in the low $70s as Cephalon prepares to release third-quarter earnings on Nov. 8.

Forecasting the just-completed quarter and 2008 requires "sorting through many moving parts," said Gary Nachman of Leerink Swann, in a late-October research report to clients.

Despite the stock's bumpy ride and uncertainty over several issues, many analysts endorse Cephalon. Thomson First Call says buy ratings outnumber hold ratings by 17 to 10. Nachman is one of optimists, but he also injects some caution into his outperform rating.

His most immediate concern is an investigation by the U.S. Justice Department and another by Connecticut regulators of Cephalon's marketing practices for certain drugs. Cephalon has set aside $56 million in reserves to cover what is says is the minimum cost of a settlement.

Nachman says Cephalon might announce extra reserves on Nov. 8. In an August filing with the Securities and Exchange Commission, Cephalon said it was "reasonably likely" that any settlement or fines would "materially exceed" $56 million.

Nachman expects an agreement by year-end. Assuming the stock stays at its current level, Cephalon could absorb a settlement costing $300 million to $400 million "if it takes this major overhang away," he says. Nachman doesn't own shares. His firm is a market maker.

The analyst likes Cephalon for the new cancer-pain drug Fentora and the new sleep-disorders drug Nuvigil. "We believe Cephalon's oncology pipeline, especially the opportunity with Treanda, is very underappreciated," he says.

Treanda provided a boost on Oct. 23 when a late-stage clinical trial met its goal in treating a form of non-Hodgkins lymphoma, a cancer of the lymphatic system. Cephalon will seek approval from the Food and Drug Administration later this year. In September, Cephalon asked the FDA to approve Treanda for chronic lymphocytic leukemia.
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