Cephalon Reduces Debt Levels

In December, biopharmaceutical company Cephalon Inc. (CEPH) made the announcement that it has reduced its debt levels by exchanging a combination of cash and stock for $337 million in convertible notes. Cephalon exchanged $161.6 million of its zero coupon convertible subordinated notes due June 2008 and $175.4 million of similar notes due June 2010 for $101.6 million in cash payments and 4.3 million common shares.

The company expects to book a related $20.8 million charge in its fourth quarter. As a results of the transactions, Cephalon reduced its 2007 outlook for basic adjusted income to $4.15 - $4.25 per share.

The company said its 2006 earnings and sales outlook remain unchanged, as does its 2007 sales forecast. In November, Cephalon projected 2006 sales of $1.66 billion to $1.68 billion and basic adjusted income of $5.10 to $5.20 per share. Sales in 2007 should range from $1.68 billion to $1.73 billion.

Also, Cephalon announced in December that the FDA would likely delay a final approval decision on its drug Nuvigil for excessive sleepiness, while the agency continues to investigate a case of a potentially serious skin rash seen with a related medicine. The company, however, reiterated its sales forecast for 2007 and does not expect a significant effect from this delay. They had expected to have a "modest" launch of Nuvigil, which is expected to replace Provigil once its patent expires.

Cephalon has done a great job of managing its product life cycle by developing Nuvigil and launching it before the Provigil patent expires.

CEPH stock is currently at $69.75 and trading at about 15X 2007 expected earnings and well off of its 52 week high of $82.92. I consider this level a great value for opening a position. The chart below shows a down side risk to $55 where the stock would be trading at Dirt Cheap prices. I think, given the relatively safe earnings prediction, as well as the new capital structure, that the stock has little risk of down side move, as long as the overall sector does not take a major hit.