Color on Sparlon non-approvable letter

Several firms are commenting on Cephalon (NASDAQ:CEPH) after the FDA issued a non-approvable letter on Sparlon last night:

*Robert W. Baird & Co notes they would use any such short-term decline to add to positions, as Sparlon was never to be the most important product introduction in 2006-2007, in their view. Firm notes they had viewed Sparlon, if approved, as second-line ADHD therapy due to its modest efficacy and questionable positioning based on safety. Sparlon offered only modest profit margins due to the planned use of the JNJ Concerta salesforce to detail the product to primary care physicians.

Notes their Outperform rating is based on our belief that the new product introductions of Vivitrol (already launched), Fentora and Nuvigil, along with the prescription growth of Provigil, will drive above- average EPS growth. It is possible that the launch of Vivitrol is ahead of plan, as evidenced by the recruitment of over 2,000 physicians to the "VIP-3" program in just seven weeks and ALKS's statement that production is running all-out at capacity of $150+ million.

Maintains Outperform and $80 tgt.

*Merrill Lynch notes that while the timing was unexpected (FDA action date had been 8/22), they do not believe investors will be very surprised by this news in light of the recent negative FDA Advisory Committee meeting on the product (March). Firm's model did not include sales or expenses associated with Sparlon.

CEPH expects approval of Fentora on 9/25 and launch in early 4Q, which will trigger launch of BRL's generic Actiq. Firm believes the success of Fentora in the face of generic Actiq will be a crucial driver for the stock. On Nuvigil, the company has been in active discussions with the FDA (different division than Sparlon) and remains confident in the product's approvability (action date is 12/29).

Maintains Neutral.

* CIBC notes CEPH submitted hi-res photos and expert opinion suggesting the purported SJS case was likely a post-viral rash. However, the FDA did not agree, and suggested that CEPH conduct large safety (15K+ pts) trials for Sparlon, but did not indicate additional safety data would lead to approval.

Firm believes there is now additional risk that the FDA will require stronger wording regarding SJS risk on the label for Nuvigil, and, perhaps, Provigil. However, based on extensive physician experience with Provigil, they do not anticipate a significant impact on use or sales of either Provigil or Nuvigil.

Although they believe the loss of Sparlon will reduce CEPH's CNS franchise growth in '08, reduced Sparlon spend raises their EPS est in '07. CEPH should be down on the news, and they expect it to settle into range-bound trade with enthusiasm over Fentora balanced by concerns over long-term growth.

Maintains Sector Performer rating.

Notablecalls: CEPH took a 10% hit in after hrs trading. I suspect we may see a downgrade today or in the coming days that will take the shares down as much as 15%. Must admit I don't see a shorting oppy here nor do I have a feel where/when to buy this one.