Here is the negative report from this issue of Barron's, it expected CEPH to drop more in coming weeks. "...Cephalon, after a pause, would resume its decline, winding up in single digits, while Chiron might ease down to the very low teens".
This is not, the hoary old saw runs, a stock market. It's a marketof stocks. That, of course, is a handy out for market strategistswho've missed a turn and a convenient talking point for earnestcustomer's men - forgive us the anachronism - account representativesbent on getting the widow on the other end of the phone to buya stock when the Dow's down 60 or 70 points. Truth is, these daysthere are times when this seems not so much a stock market as a market of shocks.
Certainly, it must have seemed like that on Friday for shareholders of Cephalon, a leading biotech company that we've talked about with a beasure of skepticism on a couple of occasions. News that an FDA panel had turned thumbs down on the company's request for approval of Myotrophin, a drug designed to treat amyotrophic lateral sclerosis (ALS), or Lou Gehrig's disease, dropped the shares by more than a third, to 7, in last week's final session.
Cephalon is not a recent arrival on the biotech scene; it has been around for 10 years, which in that field makes it positively venerable. Like so many of the genre, whatever their vintage, its most notable achievements include an ability to raise money in the public marketplace, to burn cash at an impressive rate and to attract a loyal (read: credulous) Street following. On the last score, in early '95, the stock topped 42.
Cephalon's petition was rejected by a 6-to-3 vote of the panel,
which ruled that a Phase III study of Myotrophin showed no significant
evidence that the drug was effective. The decision came after
nearly half a day's private deliberation, company presentations
and public hearing, at which both doctors and patients spoke their
piece. The pleas of the patients, observers tell us, were particularly
affecting and quite obviously touched the panel members. But pure
and simple, the FDA committee found no tangible grounds for endorsing
the efficacy of Cephalon's drug.
Several things exaggerated the fierce reaction to the bad news
on Friday. For one thing, Cephalon has been unremittingly upbeat
about its clinical trials of the drug, of which there have been
two, the first in the U.S., the second in Europe. And the bullishness
was dutifully transmitted by many - but not all - of the analysts
following the company, a number of whom had confidently predicted
approval by the FDA committee that rejected Cephalon's application
last week. In particular, the company's report, issued in the
fall of 1995, on the results of the European trial of Myotrophin,
contrasted with how the FDA panel came to view those results.
In a nutshell, Cephalon claimed at the end of October 1995 that
the European Phase III study of its drug demonstrated that those
patients to whom it was administered ``experienced less disease
severity and slower progression of disease'' than did patients
who were on a placebo. That happy conclusion, however, did not
stand up to FDA scrutiny. The trial itself, by the panel's lights,
didn't even vaguely pass muster. And one has to think that the
FDA advisers were not unmindful of the fact that there were substantially
more deaths among the group of patients being treated with Myotrophin
than those given placebos.
What the panel determined, in short, is that the U.S. study, to
dip into the lingo of the biotech trade, showed significance but
was ``not strong'' and the European study showed no significance
at all. In other words, findings of the first trial were positive
but minimally so and findings of the second trial weren't worth
talking about. That doesn't seem like a heck of a lot of return
for the $130 million investment made by Cephalon and its partner,
Chiron, in Myotrophin.
Moreover, last month Cephalon did a deal with SBC Warburg in which
it issued nearly 500,000 shares and ended up with calls on 2.5
million shares of its own stock. The unusual financing was seized
on by salivating bulls as clear indication that the company thought
that FDA approval was a lock. Alas, the rush the deal gave its
fans in April turned into another kind of rush in May, this one
a rush to sell. For Cephalon's calls on its own stock are far
under water (the options expire in October and the strike price
is $21.50) and the nearly 500,000 shares that Warburg owns represent
rather a formidable source of potential supply.
Cephalon's partner, Chiron, weathered the bad news in better form.
It fell not quite a point on Friday, to 19 1/8. Cynics might suggest
that Chiron held up comparatively well because its shareholders
have become accustomed to this sort of disappointment. But, of
course, it's a much bigger company, presumably with more strings
to its bow, and has a deep-pocketed parent to lean on in the corporate
person of Novartis, which used to be called Ciba-Geigy.
Chiron also has earnings. Although on closer look those are a
rather special variety of earnings, heavily dependent on the kindness
of kin. Specifically, it gets dough to fund research from parent
Novartis; those not-inconsiderable sums - $72 million last year,
up from $27 million in '95 - find their way into Chiron's income
statement and drop ponderably down to the bottom line. Far be
it from us to look askance at a company like Novartis with a feel
for family values. But we do wonder a bit if those ``earnings''
are the kind that can help support a market cap of $3.5 billion
or so, which Chiron sports.
Our own sense is that neither Cephalon nor Chiron have absorbed
the full fallout from the Myotrophin rejection. One research outfit,
based in California and evidently well-versed in the pros and
cons of the drug, suggested that Cephalon, after a pause, would
resume its decline, winding up in single digits, while Chiron
might ease down to the very low teens
Beyond the misfortune of the two companies and their stocks, we
suspect the episode speaks to the shakiness of much of the biotech
sector. Rejections of trials are becoming almost a commonplace.
And for many of the companies, like Cephalon, when a major product
in clinical testing blows up, there are essentially no other products
to fall back on.
Further, the enthusiasm for any number of biotechs had been fired
by some dubious premises. Among them: that the FDA is more lenient
in approving new drug applications. First, that's increasingly
problematic. But at the same time, in those areas in which the
FDA indeed seems to be more lenient, as in AIDS drugs, the leniency
is proving a two-edged sword. For no sooner does the hopeful biotech
outfit gain the nod for its drug than it discovers, thanks to
the very same leniency, it must compete with a passel of offerings,
including those of heavyweights like Merck.
Hype, hope and hoopla are nice. But they're just no substitutes
for effective drugs with a market that's bigger than a test-tube. |
