J.P. Morgan Upgrades Cephalon to 'Overweight'

Analyst Corey Davis says he already expected generic drug makers to seek to copy the company's top-selling sleepiness treatment

J.P. Morgan upgraded Cephalon (CEPH ) to overweight.

On Wednesday the maker and marketer of neurology drugs said it would defend its patent on its No. 1 drug, Provigil, a treatment for excessive daytime sleepiness, after the FDA accepted an application from a generic drug maker for the generic form of Provigil.

Analyst Corey Davis says he normally wouldn't upgrade a stock the day after bad news. However, he says he already expected generic drug companies to file abbreviated new drug applications for this top-selling drug. With shares trading from $53 to $46 over the past few weeks, he thinks the stock has bottomed.

Moreover, Davis says he's always assumed generics would arrive in mid-2006. The basic patent on modafinil, an active element in Provigil, expired in 2001. Cephalon has a patent on the particular formulation it uses, and that patent lasts until 2014. But generic modafinil could reach the market as early as 2006 if a generic maker can challenge the patent.

Davis raised his 35 cents fourth quarter earnings per share estimate to 40 cents, and upped the $1.20 2002 estimate to $1.26 on strength of Cephalon's Actiq drug for cancer pain. He also sees $1.60 2003 earnings per share.

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