Waking Cephalon Up

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On Tuesday, specialty pharma Cephalon (Nasdaq: CEPH) announced its year-end 2007 financial results. Fortunately for Cephalon, the best investors are usually forward-looking and don't judge a company's prospects just by its past performance.

2007 wasn't a particularly exciting year, judging by Cephalon's income statement. Sales were flat compared to 2006, thanks to a top drug facing generic competition. Adjusted earnings were down 11% to $4.64 per share, and Cephalon ended up having to fork over $425 million to settle a government lawsuit over its sales and marketing practices.

Cephalon's guidance in 2008 is for 4% to 7% revenue growth vs. 2007 as a result of increasing generic competition against its fentanyl pain drugs. Earnings per share are still expected to be below 2006's levels, coming in at $5.10 to $5.20 for the year.

This kind of top- and bottom-line growth is nothing to get particularly excited about, but Cephalon is positioning itself for a better next couple of years with a potential 2008 marketing launch of hematology drug Treanda, an improved label for pain drug Fentora, and more vigorous marketing of the recently acquired muscle relaxant Amrix.

The FDA will be ruling on two marketing applications for Treanda this year, with the first occurring March 20 as a treatment for a portion of leukemia patients. Besides its flagship wakefulness drug Provigil, most of Cephalon's compounds aren't first movers in the diseases they treat. That's OK, because Cephalon's drugs do have differentiated product profiles, like Amrix's somewhat more convenient dosing and side effect profile vs. competitors like King Pharmaceuticals' (NYSE: KG) Skelaxin, for example.   

Cephalon's biggest strengths -- its ability to successfully commercialize its products and aggressive marketing of its compounds -- are also sometimes its biggest weaknesses. Just yesterday, the Federal Trade Commission sued Cephalon, claiming that its 2005 and 2006 deals with generic drugmakers to stave off patent litigation on Provigil were anti-competitive and "unlawfully blocked" sales of lower-cost generic versions of the drug.

The FTC suit against Cephalon might invoke worries that the drugmaker will face the same sort of issues that Bristol-Myers Squibb's (NYSE: BMY) Plavix faced in 2006 and 2007 after its deal with generic drugmakers was taken apart by the FTC. But I think long-term investors need not worry about any temporary downfall that occurs.