More Worries For Jet-Lagged Cephalon Shareholders

The health of Cephalon (CEPH-$58.49) going forward could be influenced by more than just the drugmaker’s initial success in switching sleep-disorder patients from its blockbuster Provigil (modafinil) to long-term Nuvigil (armodafinil) users prior to the patent clock running down on its flagship drug. Adding to an already restless sleep for stockholders, the 10-Q Detective has identified potential intangible assets sitting on the balance sheet whose value is questionable.

At June 30, goodwill and intangible assets, totaling $1.14 billion, accounted for 25.4 percent of total assets. In my opinion, Cephalon has been ‘less-than’ transparent in adjusting the carrying amounts of certain assets, including the anticipated useful lives of certain products:

1. Cephalon is carrying $26.0 million in Actiq marketing rights, which is a fentanyl lollipop used to treat “breakthrough” pain in opioid-tolerant cancer patients. The company has estimated the drug has a useful life in the range of 10 – 12 years—even though generic alternatives have been available since June 2006. A price increase of 15 percent did little to offset a year-on-year 32 percent decline in sales.
2. Net carrying amount of the anticonvulsant Gabitril is $41.6 million in product rights. In the second-quarter ended June 30, sales of Gabitril in the U.S. decreased 25 percent from the prior year period, as prescriptions declined 19 percent. A late-stage clinical trial failure in patients with generalized anxiety disorder lessens the likelihood that the drug will find greater acceptance among primary care physicians who treat anxiety. Throw in the fact that two key patents expire in 2011 and 2012, and estimated useful life of between 9 – 15 years is obsolete.
3. $374.4 million in Ception Therapeutics product rights—but should its most promising drug candidate, a humanized monoclonal antibody (mAb) against interleukin-5 (IL-5), reslizumab, disappoint in clinical trials as an effective treatment for eosinophilic esophagitis in pediatric patients, expect asset impairment charges to follow.
4. The company is amortizing the $46.2 million intangible assets of its Durasolv orally disintegrating tablet (ODT) technology, a delivery system that permits the medicine to dissolve quickly in the mouth without chewing or the need for water, over an estimated economic life of 14 years. SPI Pharma’s Pharmafreeze ODT, Catalent Pharma Solutions’ Zydis ODT, and FlashDose (Fuisz Technologies) —a multitude of competing mouth dissolving options are flooding the market. That fact, combined with ongoing litigation against KV Pharma’s OraQuick tablet formulation [not going in Cephalon’s favor], suggest Cephalon might not be successful in protecting its intellectual drug delivery property—raising the risk a test of the useful life of this asset is coming (read charge-off).
   

Although impairment charges of such intangibles are non-cash in nature, such write-downs do affect stockholder equity and possible debt covenants—and could signal deteriorating fundamentals lay ahead. As if jet-lagged Cephalon stockholders donot have enough worries to keep them up at night.

Web Buzz: A working capital surplus of $1.07 billion and cash flow from operations of $313.5 million for the first six-months will not throw off enough cash sufficient to repay $750 million of convertible notes (if presented) and other cash obligations coming due in the next 12-18 months. Read More at BNET Pharma….

Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.