Cephalon Wheels and Deals

Whenever a drugmaker posts lower sales, lower earnings, and a multimillion-dollar settlement charge, and it still sees shares rise 5%, it's definitely having a good day. I'm not talking about Merck (NYSE: MRK) and the Vioxx settlement it announced today. Instead, I speak of Cephalon (Nasdaq: CEPH).

Last night, Cephalon released its third-quarter financial results, in which sales fell 9% year over year. Adjusted net income declined 30% because of increasing competition from Barr Pharmaceuticals (NYSE: BRL) and its generic version of Cephalon's ACTIQ pain-drug lollipop. Adjusted earnings were $0.92 per share for the quarter.

Cephalon also announced yesterday that it had signed a preliminary deal with the U.S. Attorney's office to pay $425 million to settle the majority of the past false-marketing claims filed against it. With more than $730 million in cash and investments on its balance sheet, Cephalon can easily afford to pay this settlement without having to dilute shareholders or take on more debt.

Cephalon inked a more shareholder-friendly deal in August, when it acquired the rights to market a once-a-day muscle relaxant from privately held ECR Pharmaceuticals. Cephalon has always had an acquisitive history, and for $100 million in up-front cash, this deal makes sense, even in the genericized muscle relaxant market. It adds another asset to Cephalon's pain franchise, and it allows the company to leverage its moderately large pain sales force.

But 2008 guidance was the true driver behind Cephalon's rising shares today. Cephalon's revenue forecast for 2008 is 16% higher than its full-year 2007 sales expectation. Its 2008 adjusted earnings-per-share range of $5.10 to $5.20 gives it a forward P/E multiple of only 15, despite several possible sales catalysts next year. These could include include upcoming leukemia treatment Treanda and continued sales growth for lead drug Provigil.

2007 has been a tough year for two out of the three leading pain-treating specialty pharmas--- King (NYSE: KG) and Endo Pharmaceuticals (Nasdaq: ENDP). With its growing product portfolio (and no hiccups with its sleep disorder compounds), Cephalon seems to have successfully navigated past the generic-competition woes that hurt the company for much of the year.

Further painless Foolishness:

• A Date With Pain
• King's Abuse-Resistant Bet
• Pain in Mylan's Future
• "Dear Doctor" Letter Spells Trouble for Cephalon