The Food and Drug Administration is scheduled to decide Thursday whether Cephalon ( CEPH) can enter a new market as part of the company's ambitious product expansion. Regulators are reviewing Attenace for treating attention deficit hyperactivity disorder in children aged 6 to 17. Attenace is a version of Provigil, Cephalon's best-selling drug prescribed for several sleep disorders, including narcolepsy. Although a favorable FDA ruling won't help Cephalon until early next year, it should provide support for a stock that has
had spurts of volatility . The FDA review comes as Cephalon makes a bid to introduce five products within a year and a half. "The company is nearing a crossroads in its 18-year history," as it bets on new drugs to more than offset lost revenue caused by upcoming generic competition for two major products, says Adam Greene of First Albany Capital in a recent research report. At the same time, the U.S. market for ADHD drugs is in flux, giving Attenace an attractive opportunity, says Ken Kulju of Credit Suisse First Boston in a recent report to clients. "We believe Attenace possesses attractive commercial potential," thanks in part to "commendable efficacy and a relatively clean side effect profile," says Kulju, who is neutral on the stock. of ups and downs in the U.S. during the last 18 months. Lately, they're on the upswing, with Adderall XR holding a slight lead, according to the health-care data firm IMS Health. In a distant third place is Strattera from Eli Lilly ( LLY), which has experienced a gradual slide in prescriptions. Analysts say a stricter warning label about possible liver problems could be one cause for Strattera's slump , while a new warning about suicidal thinking among young users could hurt sales, too.
Kulju says the Strattera label changes could benefit Cephalon, whose Attenace prospects also have improved thanks to a marketing agreement signed last month with J&J. A cheerier outlook for Attenace prompted Kulju to raise his 12-month target price for Cephalon to $47 from $43. He doesn't own shares, but his firm has had an investment banking relationship with Cephalon. Cephalon's stock was up 9 cents to $45.40 Tuesday. Analysts will be paying special attention to Cephalon's third-quarter results for Provigil, a drug for which the U.S. patent will expire between late 2005 and mid-2006. For the six months ended June 30, Provigil produced sales of $230 million, or 43% of corporate revenue. Provigil's sales grew 17% vs. the same period last year. Third-quarter results will be posted Nov. 1, and the Wall Street consensus expects a profit of $43.9 million, or 70 cents a share, on revenue of $318.4 million, excluding one-time items, Thomson First Call says. For the same period last year, Cephalon earned $46.2 million, or 75 cents a share, on sales of $262 million, excluding one-time items. On a GAAP basis, Cephalon lost $165.2 million, or $2.94 a share, for 2004's third quarter. The consensus earnings estimate is $2.79 a share for 2005 and $3.12 for 2006. First Albany's Greene predicts $3.30 for next year. He assumes that in the first quarter Cepahlon will introduce Attenace, Nuvigil, the sleep-disorders successor to Provigil, and Vivitrex, an alcoholism treatment developed by Alkermes ( ALKS). Cephalon and Alkermes signed a marketing agreement in June.
Greene says Cephalon's current stock price reflects a worst-case scenario for Provigil and fails to account for the marketing clout that J&J brings to Attenace. Cephalon suffers from "low expectations," says Greene, who has a strong buy recommendation. His 2006 year-end price target is $56. He doesn't own shares, and his firm doesn't have an investment banking relationship. Other analysts are more cautious, and that's why there are eight buy ratings, seven neutral ratings and two sell ratings, according to Thomson First Call. Manoj Garg, of American Technology Research, maintains a hold rating on Cephalon. He says Vivitrex could be subject to a longer-than-90-day delay. Garg cites a consultant, whom he says participated in Vivitrex clinical trials, as believing there's a 50% chance of a quick FDA approval, down from an earlier forecast of a 90% chance. This consultant "believed it to be reasonable for the FDA to seek additional data," which could mean more clinical trials, Garg says in a late-September report. Garg quotes the consultant as saying Vivitrex will require "a significant marketing push" to educate doctors and "overcome some inherent hurdles of the drug." That could take three to four years. "The net effect to Cephalon of Vivtrex will be neutral until about 2008," says Garg, who doesn't own shares and whose firm doesn't have an investment banking relationship. For Garg, near-term success depends on Attenace, Nuvigil and the cancer-pain medication, Accelanyl, for which Cephalon sought FDA approval last month. Accelanyl would replace Actiq, which will lose patent protection no later than February 2007. "Our concerns ... are not near-term in nature," Garg tells clients. The big test for Cephalon will be in 2006 and 2007 because "the erosion to the core business will occur quicker than the uptake of new products."