(CEPH) Cephalon: After Hard Fall – This Stock Is Set for a Comeback

December 16th, 2009

by Sheena Martin, Contributing Editor
Wednesday, December 16, 2009

One company looking forward to the end of 2009 is Cephalon (Nasdaq: CEPH).

And that’s an understatement.

The biopharmaceutical company’s share price has tumbled by 23% this year, following a slide in sales. On top of that, clinical results for a drug that treats inflation of the esophagus in children were disappointing. And generic drugs threaten its other flagship products.

However, the growth potential is still significant, given promising trial results for its new cancer drug…

Cephalon’s $1 Billion Drug Blockbuster

In March 2008, Cephalon’s cancer treatment drug, Treanda, showed good results in patients with chronic lymphocytic leukemia – a cancer of the soft tissue inside bones where blood cells are made.

Right now, it’s awaiting word from the Food and Drug Administration (FDA) on whether the drug will be approved for the market.

Better yet, a new body of clinical data supports the use of Treanda as the standard care in first-line non-Hodgkin lymphoma. Previously, Treanda was only used as a backup therapy.

What’s the potential here?

In a word: Huge.

The drug has the potential to generate $1 billion in annual sales, more than 10 times its revenue last year. In 2008, Treanda made just 3.8% of Cephalon’s $1.97 billion in revenue, the drug’s first year on the market.

Let’s look closer at its potential to be the first-stringer for attacking non-Hodgkin lymphoma…

Thrashing the Competition’s Survival Rate by 20 Months

For three decades, a potent, four-drug chemotherapy cocktail called CHOP was the traditional way to treat non-Hodgkins lymphoma. This includes cyclophosphamide, Adriamycin, vincristine and the steroid prednisone. Rituxan is typically added to older medicines to improve survival.

Newly diagnosed non-Hodgkins lymphoma patients treated with a combination of Treanda and Rituxan showed superior progression-free survival of 55 months. By contrast, patients treated with CHOP saw progression-free survival of 35 months.

What’s more, the Rituxan-Treanda regimen was safer and better tolerated with lower rates of infection, nerve damage and hair loss.

If Cephalon can make Treanda the foremost treatment for non-Hodgkins lymphoma in 2010, it will re-accelerate sales of the drug.

At an annual cost of $36,000, Treanda could notch up sales of about $275 million if just one-quarter of the slow-progressing non-Hodgkins lymphoma patients in the U.S. use the drug.

Sleepy? Cephalon Has a Drug for You

Elsewhere in Cephalon’s pipeline, it boasts Provigil, which treats sleep disorders. The drug racked up sales $998.4 million in 2008.

The company is currently following that up by seeking FDA approval for its next-generation sleep disorder drug, Nuvigil.

However, it will have to reawaken doctors’ interest in Nuvigil with its improved formula, given that prescriptions for the drug have fallen by 3% this year in the wake of a 10% hike in prices. The improved version promises longer-lasting effects Incorporatedreased effectiveness in patient alertness and a daily dosing schedule.

Not only that, in just five months, Nuvigil has captured 19% of the market share and the FDA has fast-tracked the drug for approval to treat jet lag.

In addition, Cephalon is looking to broaden Nuvigil’s commercial appeal beyond narcolepsy. It’s aggressively using clinical trials to expand Nuvigil for bipolar depression, the negative symptoms of schizophrenia, cancer treatment-related fatigue, and excessive sleepiness associated with traumatic brain injury.

The Potential Stumbling Block

Like many drug companies, Cephalon has patent problems. Not in obtaining them, but in their expiration.

Pending litigation could see cheaper, generic copies of Provigil before its patent expires in 2012.

The FTC is seeking a permanent injunction that would allow generic competition before 2012, based on allegations that Cephalon paid several generic drug manufacturers to not compete for a “substantial period” prior to the patent expiring.

Cephalon’s isn’t certain if it can beat back this challenge by successfully switching its patients to Nuvigil in time. And that’s troubling, given that Provigil accounts for 54% of total U.S. sales.

However, Cephalon received good news this past summer when a new judge was assigned to the case. He wants to consolidate the cases and get up to speed with the information – a lengthy process that means we might not see a ruling for at least two years.

A Potential 35% Winner

As you can see, there’s a mix of both good news and bad. But Cephalon’s top dogs aren’t worried.

A scan of the management team shows that the five officers in Cephalon’s boardroom are also the five top owners of Cephalon shares. CEO Frank Baldino owns 550,000 Cephalon shares.

As the company continues to develop new drugs and look for more uses of those drugs, management obviously has confidence in its company’s potential for significant growth. So what does that mean for us?

Cephalon is a speculative buy. But as is often the case, a little extra risk yields bigger rewards. And after a significant drop in 2009, Cephalon is set for a big run. At just 13% of expected 2009 operating profits, the current share price is beyond cheap.

Over the next two to three years, I suspect the share price will surpass the $80 mark that Cephalon saw in September 2008. And with shares currently around $59, this would represent a significant profit for investors.

Sheena Martin

View original at: Investment U

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