UPDATE 3-Cephalon posts loss, agrees to settle probes

(Adds company comment from conference call, analyst comment, share price)

By Bill Berkrot

NEW YORK, Nov 8 (Reuters) - Cephalon Inc (CEPH.O) said on Thursday it expects to pay $425 million to settle federal and state Medicaid probes into its marketing practices.

Under the deal, the biotechnology company will agree to a single misdemeanor violation of the U.S. Food, Drug, and Cosmetic Act.

Cephalon, which said it had increased existing financial reserves accordingly, will also enter into a corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services as part of its agreement with the U.S. Attorney's Office in Philadelphia and the U.S. Department of Justice.

"We look forward to finalizing our settlement with the U.S. Attorney's Office," Chief Executive Frank Baldino said in a statement.

The company reported a third-quarter net loss due to the additional legal reserves and plunging sales of its cancer pain drug, Actiq, which were hit by generic competition.

Its shares fell 2 percent in extended trading.

Cephalon posted a net loss of $306.8 million, or $4.58 per share, compared with a profit of $95.7 million, or $1.43 per share, a year earlier.

Excluding the settlement reserve increase and other items, the company reported basic adjusted income of $1.08 per share, down from $1.71 in the year-earlier quarter.

Adjusted diluted earnings of 92 cents per share exceeded analysts' average expectation by 7 cents, according to Reuters Estimates.

"The quarter itself was quite good," Cowen & Co analyst Eric Schmidt said. "The top line in line with expectations was probably a minor victory as some folks had been expecting worse, given lackluster prescription trends.

He said cost controls helped the bottom line.

"The settlement is a pretty sizable chunk of money, but it's good to get it behind us," Schmidt added. "In the rear-view mirror it looks a lot better than in front of the headlights."

OFF LABEL

U.S. Justice Department spokesman Charles Miller declined to comment on the settlement agreement.