News that Cephalon (CEPH) beat the third quarter consensus estimates by a more than robust $0.34 might have given the impression that analysts were asleep at the wheel. It's not every day that a company produces a 567% upside surprise.

Most of the upside came from wholesaler stockpiling of CEPH's Provigil modafinil narcolepsy drug in advance of an expected price increase. This left analysts in the unenviable position of ferreting out the true sales run rate for Provigil, a dubious task given that market watchers estimate that the product gets nearly three-quarters of its sales from off-label use in depression, schizophrenia and effective disorders.

After the market close on Monday, CEPH reported third quarter EPS of $0.40 versus the Street consensus of $0.06. Sales of Provigil came in at $53.7 million, up from $19.2 million in the third quarter last year (see BioCentury Extra, Monday Nov. 5).

The response of investors was muted - not surprising, given that most of the upside was stocking. "That's why you don't see the stock up $10 points," said SG Cowen analyst Eric Schmidt. "Investors are trying to determine the appropriate baseline for sales growth going forward." CEPH closed Friday at $60.46, down $1.99 on the week, after trading up $1.01 to $65.55 on 4.7 million shares on Tuesday.

The earnings surprise also pointed up the conundrum companies face under the disclosure requirements of the SEC's Regulation FD (see "After FD comes CD", A16).

Following its earnings release, CEPH bumped up its 2001 total product sales guidance to $220 million from $200 million and increased its EPS guidance to $0.21 from $0.10. CEPH also provided its first guidance for 2002, aiming for sales of $320-$330 million, leading to EPS of $1, in line with prior Street consensus of $328 million in sales and EPS of $1.01.

Schmidt suggested that the Provigil numbers may have overshadowed strong sales of Actiq transmucosal fentanyl, which at $14 million were up 42% quarter-over-quarter and significantly above most analyst estimates of $10-$11 million. CEPH relaunched the pain drug, which it acquired last October in its $336 million stock acquisition of Anesta (see BioCentury, Oct. 16, 2000). While Actiq won't be a blockbuster, Schmidt said it eventually could be a $150-$200 million product. CEPH also markets Gabitril tiagabine for epilepsy.

Schmidt speculated that CEPH could become a takeout target now that it has turned the corner and would be accretive to a P&L. Not that Schmidt thinks anything is in the works, but he noted that "anyone with a product like Provigil that represents 50-100% year-over-year growth is probably a candidate, because there's a dearth of those types of products out there."

CEO Frank Baldino is committed to keeping CEPH as a standalone company, according to spokesperson Robert Grupp. "Frank's been upfront about his strategy to grow this company to $1 billion in product sales, and we've got the people and the resources now to do that on our own."

Warming trends

The follow-on market continues to show signs of life. Bankers last week priced $335.5 million of paper in two bumped up deals, bringing the trailing three-week total to $448.6 million.