In a filing with the U.S. Securities and Exchange Commission (SEC), Cephalon, Inc. (CEPH) announced that it has filed a lawsuit in the US District Court in Delaware against Actavis Group, Actavis Pharma Manufacturing Pvt. Ltd. and Actavis Inc. Actavis is seeking to launch a generic version of Cephalon’s sleep franchise product, Nuvigil.

The lawsuit was filed in response to a Paragraph IV Certification Notice Letter received by Cephalon in November regarding an Abbreviated New Drug Application (ANDA) filed with the US Food and Drug Administration (FDA) by Actavis.

Nuvigil (armodafinil) is the follow-on version of Provigil (modafinil), which contributed about 50% to revenues in 2008. With Provigil slated to face generics from 2012, Cephalon is looking to protect its sleep franchise sales by switching patients to Nuvigil.

Cephalon is aggressively promoting Nuvigil, which was launched in June 2009. The company has taken several initiatives to ensure the smooth transition of users to Nuvigil, which has been priced at a significant discount to Provigil. Besides, Cephalon is working on gaining approval for additional indications for Nuvigil, which should help expand the market for the product and drive sales for the franchise. We expect the Provigil/Nuvigil franchise to cross $1 billion in sales in 2009.

Given the importance of the sleep franchise, the filing of a patent infringement lawsuit by Cephalon was in-line with expectations. We expect the company to vigorously defend its patent. Cephalon has a three-year period of marketing exclusivity for Nuvigil that extends until June 15, 2010. The entry of generic versions of Nuvigil would have a devastating impact on sales.

In addition to Actavis, Cephalon has filed a patent infringement lawsuit against generic player, Teva Pharmaceuticals (TEVA) as well which is seeking approval for its generic version of the 50 mg, 100 mg, 150 mg, 200 mg and 250 mg dosage strengths of Nuvigil. We currently have a Neutral recommendation on the stock. We expect investor focus to remain on Cephalon’s emerging oncology pipeline, Amrix, and the conversion of patients to Nuvigil.

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