Zacks_Analysts' Blog : Cephalon in Stem Cell Deal - Analyst Blog

Cephalon, Inc. (CEPH) continues to look towards in-licensing deals and acquisitions to boost its pipeline. The company recently entered into an agreement with Australia-based Mesoblast Limited for the development and commercialization of stem cell therapeutics.

The companies are looking to develop novel adult mesenchymal precursor stem cell (MPC) therapeutics for the treatment of degenerative conditions of the cardiovascular and central nervous systems.

While lead indications in the cardiovascular space include congestive heart failure and acute myocardial infarction, the central nervous system indications include neurodegenerative diseases like Parkinson's disease and Alzheimer's disease. In the oncology space, Cephalon will be looking to commercialize a product for the expansion of hematopoietic precursor cells and cord blood for bone marrow transplantation in patients with hematologic malignancies.

Terms of the Agreement

Per the terms of the deal, Cephalon will make an upfront payment of $130 million. Besides this, Cephalon could pay up to $1.7 billion on the achievement of regulatory milestones. Moreover, Cephalon intends to acquire a 19.99% stake in Mesoblast for about $220 million.

While Mesoblast will be responsible for conducting certain phase IIa clinical trials and for commercial supply of the products, Cephalon will be responsible for conducting all phase IIb and III studies and subsequent commercialization of the products.

With this deal, Cephalon is looking to establish a foothold in the stem cell therapeutics market. While we are pleased with the Mesoblast deal, we remain concerned about the early stage status of the products covered under the agreement.

Companies focusing on the development of stem cell based therapeutics include Geron Corp. (GERN) and StemCells Inc. (STEM) among others.

Neutral on Cephalon

We currently have a 'Neutral' recommendation on Cephalon, which is supported by a Zacks #3 Rank (short-term "Hold" recommendation). With Provigil sales remaining strong, we remain concerned about the slower-than-expected conversion of patients to Nuvigil. Both 2012 and 2013 should be challenging years for the company due to the genericization of Provigil. However, we are pleased with Cephalon's efforts to reduce its dependence on its central nervous system franchise. Cephalon is looking to expand into new therapeutic areas to drive long-term growth and has been very active on the in-licensing/acquisition front over the past few quarters.