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Cephalon Puts Worries to Rest

The company has worked hard to protect Provigil and will update its guidance after the close.

Aside from



, 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



that Cephalon will help market. The agency also announced

a second delay on Sparlon.

However, over the same span, Cephalon signed four

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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


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.

Murphy initiated coverage Oct. 21 with a buy rating. Since then, five analysts have raised their ratings, and another firm initiated coverage with a buy recommendation. One firm downgraded the stock, but that was to buy from strong buy. The strong buy rating was reinstated four weeks later.

All of those changes played a role in Cephalon's recent decision to withdraw its fiscal 2006 earnings prediction. The company, which will provide new guidance Tuesday, previously predicted 2006 earnings of $2.90 to $3 a share, excluding one-time items, and revenue of $1.35 billion to $1.40 billion. Analysts polled by Thomson First Call are looking for a profit of $3.12 and a top line of $1.51 billion.

For the fourth quarter, Wall Street is predicting earnings of 74 cents and revenue of $330 million. For all of 2005, the consensus estimates are for earnings of $2.78 and revenue of $1.21 billion.

Cephalon is still counting on selling five new drugs in 15 months, including second-quarter launches for Sparlon, Vivitrol and Nuvigil.

The most complicated marketing effort involves Nuvigil. Until they signed the four deals protecting Provigil's patent, Cephalon executives assumed the drug would lose patent protection in mid-2006 and that Nuvigil would be sold as a replacement.

In that scenario, Cephalon wanted to get FDA approval for Nuvigil as fast as possible so that sales representatives could promote the product and educate doctors about switching patients before the generics arrived.

"Now, we don't have to make a quick transition from Provigil to Nuvigil," said Steve Holzman, a Cephalon spokesman. "The pressure is not what it was."

Cepahlon's marketers now have a different challenge. Instead of worrying about Nuvigil replacing Provigil, Cephalon must assess if one will cannibalize sales of the other. Both drugs "will be promoted to coexist in the market, at least initially," said CFO Kevin Buchi at a Feb. 9 Merrill Lynch conference.

The FDA is taking another 90 days to review Nuvigil, which the company says provides a longer-lasting effect at a lower dose than does its chemical cousin. Buchi told the Merrill Lynch conference that Nuvigil lasts eight to 10 hours, while Provigil is effective for six to eight hours for most patients.

One big question is whether both drugs could expand the market for treating sleep disorders. Manoj Garg, of American Technology Research, doubts Nuvigil will bring in more patients. "I'm not expecting market expansion," he says. "I think they'll reduce the marketing of Provigil."

Garg, who has a buy rating on Cephalon, says the company has made "aggressive price increases" for Provigil several times, assuming that Nuvigil would be a replacement. Garg theorizes that these increases were designed to "incentivize" managed-care firms to pay for Nuvigil.

He speculates that Cephalon will charge less for Nuvigil than for the older drug, making Nuvigil more attractive among managed care organizations. Cephalon hasn't announced a Nuvigil price.

Garg also says the FDA's delay on Cephalon gives the company "breathing room" for developing a marketing strategy and negotiating drug-label terms with the FDA. Labels are crucial elements of marketing campaigns.

Lazard's Murphy says the presence of similar drugs could bring in more patients. The Nuvigil delay "will likely allow Cepahlon to seek to expand its wakefulness franchise, where before Nuvigil was viewed merely as a conversion opportunity ... that would be under pressure to establish itself early," she says.

The pacts with the various generic companies -- Barr,

Ranbaxy Laboratories


Teva Pharmaceutical Industries



Mylan Laboratories


-- are essentially the same.

Provigil's U.S. patent remains safe until the fall of 2011, and perhaps until the spring of 2012. In return, the generic companies get 180-day rights to market generic Provigil when the patents expire, and the litigation between Cephalon and the generic companies was withdrawn.

The Nuvigil patent expires in 2014, and Cephalon is seeking FDA approval for the same diseases and conditions now treated by Provigil. One is narcolepsy, or excessive daytime sleepiness. Another is obstructive sleep apnea, in which a person periodically stops breathing during sleep. Then there's shift-work sleep disorder, which affects people who work at night or whose jobs require them to rotate shifts.