2006 in Review: Cephalon

Drug developer Cephalon (NASDAQ:CEPH) had a busy year in 2006. The diversified mid-cap pharmaceutical company has had multiple successes and failures with its drugs on the regulatory and financial side of things. Let's take a look back at how Cephalon fared with all its dealings this year.

The company started the first quarter of 2006 in excellent fashion by ending all its patent litigation cases over its excessive-daytime-sleepiness product Provigil, allowing it to market the more-than-$500 million-a-year drug without facing generic competition until 2012.

Things turned a little worse in March, though, when an FDA advisory panel voted against recommending the approval of Sparlon to treat attention-deficit/hyperactivity disorder. Regardless of this setback with Sparlon, Cephalon reported a 30% year-over-year increase in sales and 37% growth in adjusted earnings per share for the first quarter.

In the second quarter, Cephalon and partner Alkermes (NASDAQ:ALKS) received marketing approval in the U.S. for their alcohol-dependence drug, Vivitrol. The FDA also issued an approvable letter for Cephalon's follow-on drug to Provigil, named Nuvigil.

To grow Provigil sales at an even faster rate, a co-promotion agreement was signed with Takeda Pharmaceuticals that doubled the number of sales reps detailing the drug. Sales for the second quarter were up nearly 60% compared to last year on the strength of Provigil.

The third quarter was another banner one for Cephalon, as sales expanded 56% to $480 million and adjusted earnings grew 125%. The company experienced one last quarter of exceptional sales growth before generic competition hit its $400-million-a-year pain drug, Actiq.

As expected, the FDA issued a non-approvable letter for Sparlon this quarter, but it did grant marketing approval for the pain drug Fentora. Fentora is crucial to Cephalon, as it is expected to replace the lost sales from Actiq, which just began facing generic competition from Barr Pharmaceuticals (NYSE:BRL) in the third quarter.

The fourth quarter has been quiet for Cephalon thus far. It did announce that the PDUFA date for Nuvigil, which is expected to replace the lost sales from Provigil once it goes off patent, is most likely going to be extended from its Dec. 31 action date due to new data being submitted for the drug candidate. However, even a delay in Nuvigil approval shouldn't hurt Cephalon much, as Provigil still has more than five years of marketing exclusivity left.

Overall, 2006 was a great year for Cephalon. Sales for the year are expected to be more than 30% higher than 2005, and adjusted earnings should nearly double to at least $5.10 a share due to the magic of scale, as sales growth outpaces R&D and SG&A spending.

Here's how our Motley Fool CAPS community rates Cephalon as a potential investment:

Despite a huge disparity between the CAPS bulls and bears, Cephalon only received a CAPS rating of three stars out of five, due to the disparity between the scores of those who rated it an "outperform" and those who picked "underperform." Our CAPS tracking of Wall Street shows those folks to be similarly mixed on Cephalon's outlook, with four out of seven Wall Street analysts giving Cephalon a thumbs-up.

CAPS member docoran1 was maybe a little too prescient (considering the November disclosure that Cephalon was being investigated for its marketing practices) when he gave this reasoning for his outperform rating on Cephalon in October: "Innovative new drugs. Aggressive marketing. Good sales force." If you'd like to make your thoughts on Cephalon heard, come join the Fool's free CAPS community.

Shares of Cephalon are up nearly 7% year to date, and 2007 holds the potential to be another solid year if Fentora sales ramp up enough to cover the lost sales from Actiq. Cephalon has guided for 2007 sales to be roughly flat compared to 2006, but after it recovers from the lost Actiq sales, 2008 should bring back sales growth. Cephalon will be raking in tons of cash again next year, and with its acquisitive history, it will be interesting to see how it chooses to use that cash. Hopefully a dividend will be in order, in addition to any smart acquisitions that it decides to make.

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Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Fool contributor Brian Lawler owns shares of Barr, but no other company mentioned in this article. The Fool has a disclosure policy.