Provigil Drives Cephalon's Results

First-quarter earnings are better than expected.
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Updated from 6:43 p.m. EDT

Cephalon

(CEPH)

turned in first-quarter results Tuesday in which earnings beat Wall Street's predictions, while sales were a bit below expectations.

Excluding charges, the Frazer, Pa., drug company posted earnings of 70 cents a share for the three months ended March 31, topping the consensus estimate of 62 cents. The company had sales of $356.9 million, and the consensus prediction was $359.8 million.

After accounting for all items, the company earned $3.57 million, or 5 cents a share. For the same period last year, Cephalon earned $26.7 million, or 44 cents a share, on revenue of $280 million.

The most recent quarter's results featured several one-time items, including charges of $30 million for upfront payments to several partners and $3.4 million for stock-based compensation.

The quarter was paced by the sleep-disorders drug Provigil, whose sales of $148.6 million exceeded the year-ago quarter's sales of $100.1 million.

Cephalon is predicting total second-quarter sales of $380 million to $390 million, slightly above the Thomson Financial consensus of $372.5 million. For the full year, Cephalon predicts full-year sales of $1.48 billion to $1.53 billion. The consensus estimate is $1.52 billion.

The company also raised its earnings estimates. Excluding one-time items, Cephalon expects full-year earnings to be $240 million to $250 million, up from a previous range of $220 million to $230 million. The Thomson First Call consensus is $221 million.

For the second quarter, Cephalon forecast earnings of $59 million to $65 million, excluding items, above the average estimate of $52.7 million.

Cephalon released its results after the markets had closed. In regular trading, the stock closed down $1.14, or 1.7%, to $64.54. The stock fell another $1.79 to $62.75 in late trading.

"We expect this to be another higher performance year," said Frank Baldino, Cephalon's chairman and CEO.

Cephalon's dance card for the year could become quite crowded. By the end of the quarter, the company will begin marketing Vivitrol, an alcoholism treatment developed by

Alkermes

(ALKS) - Get Report

.

The Food and Drug Administration approved the drug in April, providing what the companies say is a way to

improve alcoholics' compliance with a treatment that a doctor injects once a month rather than a pill that patients take once a day.

Also by the end of the quarter, Cephalon expects to hear from the FDA on its application for a cancer-pain drug nicknamed FEBT. Baldino told analysts he expects the drug to get conditional approval from the FDA, adding that it would probably take Cephalon two to six months to answer the agency's questions.

In addition, the company expects to announce during this quarter the results of a late-stage clinical trial for the epilepsy drug Gabitril, which is being tested as a treatment for generalized anxiety disorder.

But the biggest issues on the calendar involve two experimental drugs -- Nuvigil for sleep disorders and Sparlon for attention deficit hyperactivity disorder. On Monday, the FDA

delayed making a final decision on Nuvigil.

This isn't the first delay for Nuvigil. Cephalon filed an application with the FDA 13 months ago, and the original decision date was scheduled for Jan. 31. But in October 2005 the company submitted more data at the agency's request, pushing the action date to April 30.

However, on Monday, Cephalon said the FDA had granted conditional approval for Nuvigil. Final approval was withheld because of continuing negotiations on what the drug's label would state.

The label's wording will depend on the FDA's review of another experimental drug, Sparlon, for attention deficit hyperactivity disorder. The FDA had been expected to act on Sparlon by May 22, but it pushed back the decision to Aug. 22 to review clinical-trial data.

In March, an FDA advisory committee recommended that the agency reject Sparlon, saying Cephalon needed to conduct additional safety tests. The committee, in a 12-1 vote, said it was concerned about a clinical trial in which a child seemed to contract a rare and sometimes dangerous skin disease called Stevens-Johnson syndrome.

The child was never hospitalized and didn't miss school. After the panel's vote, Cephalon sent additional material to the FDA, maintaining that the child didn't suffer from Stevens-Johnson syndrome.

Cephalon said Monday that its Nuvigil label will reflect the FDA's deliberation on Sparlon, indicating that at best Nuvigil wouldn't reach the market until the third quarter. Some analysts had predicted a second-quarter launch. Each drug is being reviewed by a different unit within the FDA.

Company executives didn't add anything to their previous comments about Nuvigil or Sparlon, noting that they only received the FDA's statements about Nuvigil on Friday.

Sparlon is a high-dose version of Provigil, and Provigil is a chemical relative of Nuvigil. None of the participants in clinical trials for Nuvigil or Provigil suffered from Stevens-Johnson syndrome. The Provigil label notes that post-marketing information includes "rare reports of serious skin reactions," including suspected cases of Stevens-Johnson syndrome and another rare side effect.

Because post-marketing information about side effects are "reported voluntarily from a population of uncertain size," the label says, it's not always possible to reliably estimate their frequency or determine if a drug caused the side effect.

If the FDA backs Cephalon and overrules its advisory panel, Nuvigil's label would contain a modest warning about potential skin reactions. The cautionary comments would be similar to those on the Provigil label, says David Windley of Jeffries & Co., in a research note to clients before Cephalon talked to analysts on Tuesday. "Otherwise, the warning will be more prominent." Windley has a hold rating on the stock.

The Provigil label, which says the drug's safety and efficacy wasn't established for people under 16 years old, tells patients to notify their doctors if they develop a rash, hives or a "related allergic phenomenon."

Windley says that "management emphasized that if the FDA demands another safety trial of Sparlon, it would not delay Nuvigil's approval." In fact, the delay in launching Nuvigil won't be very painful, Windley says, because the new drug will cut into the sales of the older drug. He doesn't own shares, and his firm doesn't have an investment-banking relationship.

"We agree with management's position that neither Nuvigil's approval nor its commercial success will be affected by Stevens-Johnson syndrome," adds Megan Murphy of Lazard Capital Markets, in a report to clients prior to Cephalon's issuing its first-quarter data. She maintains a buy rating. She doesn't own shares, and her firm doesn't have an investment-banking relationship.