Cephalon Hopes Provigil Will Become Its Magic Pill [WSJ]
By AARON ELSTEIN
THE WALL STREET JOURNAL ONLINE
After some years of trials and tribulations, analysts believe Cephalon Inc. has finally found the potential blockbuster drug that shareholders have been waiting for. But some investors, mindful that the company's past optimism about other potential big sellers proved unfounded, are wondering if it's really a new day.
Cephalon, based in West Chester, Pa., went public in 1991 on hopes that it would develop treatments for brain disorders, such as Lou Gehrig's disease and Alzheimer's. But federal health regulators refused to approve its proposed treatment for Lou Gehrig's disease, also known as amyotrophic lateral sclerosis, in 1997. Angry shareholders sued, saying management made misleading statements about trial results of the drug, Myotrophin, and the company settled in 1999 for $17 million.
Now, the company believes it has put that painful chapter behind it, thanks to growing sales and rising prospects for a couple of drugs it has on the market. But even as it sees success with some of its drugs, Cephalon remains a large target of short-sellers, or investors who bet a stock price will fall. In the most recent month, the Nasdaq Stock Market reported that Cephalon had short interest of 21%, compared with 19% from the previous month. The shorts believe Cephalon is once again too upbeat about its prospects, but they've had a tough time making their case.
The drug that has Cephalon investors most optimistic is called Provigil, a treatment for the excessive daytime sleepiness associated with narcolepsy that has been approved by the Food and Drug Administration. However, doctors often prescribe the drug for other ailments that leave people feeling sleepy, such as depression, and some Wall Street professionals say they take it to stay alert after long business trips.
Provigil sales rose 58% in the second quarter, to $47.1 million, contributing heavily to Cephalon's overall results of $120.7 million in revenue and net income of $14.4 million, or 25 cents a share, a sharp contrast to last year's same-period results of $56.2 million in revenue and losses of $6.3 million, or 19 cents a share.
David Buck, an analyst at Buckingham Research Group, a New York securities firm, said in a July 24 report when he started covering Cephalon that Provigil's potential to, as the company puts it, "promote wakefulness," could make the drug a $1 billion seller annually, though he doesn't say when that could happen. The FDA has granted Cephalon exclusive rights to sell Provigil through 2005. Mr. Buck declined to comment for this article, citing his firm's policy of not speaking with the media. Mr. Buck, whose firm hasn't done any investment-banking work for Cephalon, rates its stock "neutral," saying that at about $43 a share, there may be limited upside. The stock currently trades well below its 52-week high of $78.88, thanks in part to a broad selling wave in pharmaceutical and biotechnology shares.
Another fast-selling drug for Cephalon, Actiq, is a powerful oral narcotic shaped like a small lollipop. The drug is marketed to treat the intense pain suffered by cancer patients, and because it is administered orally, it is much easier to use than intravenous medications. The company starting selling Actiq last year. Second-quarter sales soared 192% this year, to $28.5 million, about $5 million higher than analysts had forecast.
Thanks mainly to anticipated strong sales growth, the company upped its 2002 product sales forecast to a range of $430 million to $435 million, up from $415 million to $420 million, and increased its earnings-per-share forecast to a range of $1.08 to $1.10 a share, up from $1.05 to $1.08. This robust forecast for the rest of 2002, combined with the long-term possibilities for Provigil, sounds sweet to investors who haven't heard much encouraging earnings news from the pharmaceuticals sector lately. Cephalon's stock now trades at 42 times expected earnings.
But short-sellers say the forecasts are overly optimistic and add that they are based on Cephalon establishing new uses for Provigil, something it hasn't done successfully yet. Narcolepsy, the one indication for which the FDA has approved Provigil, is a relatively small market, afflicting 200,000 U.S. residents, according to the National Sleep Foundation, a Washington not-for-profit group. In 2000 the company explored whether Provigil could help patients with attention-deficit-hyperactivity disorder. When the company reported disappointing results on that front in July 2000, its stock fell 36% in a single day.
But lately, Provigil sales have gotten a big boost from doctors who prescribe it "off-label" -- for uses not approved by the FDA. Cephalon says that 81% of all Provigil prescriptions were off-label last year, compared with 53% in 2000. The drug appears helpful for patients with depression, who often experience fatigue as a result of the disease and the medications they take to treat it. Cephalon officials point to a study presented at last May's annual meeting of the American Psychiatric Association which they say show the drug has benefits for people with depression.
But the shorts came to a different conclusion. They cite a report written in May by Credit Suisse First Boston analyst David Maris, who told clients that while the study showed Provigil helped reduce fatigue in people taking antidepressants, by the sixth week the difference wasn't statistically significant compared with patients taking a placebo. "The outcome of the 136-patient, six-week trial was mixed," wrote Mr. Maris.
Mr. Maris, who rates Cephalon stock a "strong buy," in a telephone interview said that he remains optimistic about Provigil's prospects. At a meeting last month with investors and analysts, Cephalon showed that the drug is being widely used by people with depression and so far users have shown no signs of addiction or developing a tolerance to the drug, though the company didn't present any new data on the drug's effectiveness. CSFB has done investment-banking work for Cephalon, including advising it on acquisitions and raising capital.
It isn't unusual for a drug to be used off-label. New cancer drugs are often used for reasons not specifically approved by the FDA, because patients are desperate to try anything that could help. A spokeswoman for Allergan Inc., maker of the Botox wrinkle-reducer, says one-third of the company's sales last year were for cosmetic purposes, though the FDA didn't approve such use until this past April.
Cephalon's chief executive and founder, Frank Baldino, says his company is looking to get FDA approval for more uses for Provigil. He says the company is conducting studies right now, including one to see if the drug helps workers tired after they finish the late shift. Mr. Baldino also says his company plans to submit an application to the FDA by year's end. Should the FDA expand approval, the company could then broaden its marketing for Provigil, Mr. Baldino says. An expanded label could also help sales because patients could get their prescription costs covered by insurers. In the meantime, doctors can legally prescribe Provigil off-label, but Cephalon's sales force can market the drug, which it says costs $5.25 per day wholesale, only for FDA-approved uses.
Earlier this year, the company got into hot water with the FDA for marketing the drug inappropriately. The agency sent Cephalon a letter in January saying the company was promoting the drug for unapproved uses, minimizing its potential psychoactive and euphoric effects, and making misleading claims of superiority to other drugs. An FDA spokeswoman says the matter has been resolved.
Meanwhile, the company continues to make frequent sales calls to the psychiatric community, according to data provided by Scott-Levin, a unit of Verispan LLC, a Newtown, Pa., research firm. Of the 25,000 total sales calls made by Cephalon's marketing team through June 30, 62% went to psychiatrists, while the company made 36,000 total sales calls in all of 2001, and 66% went to psychiatrists. A Cephalon spokesman said the company has ramped up its sales efforts to psychiatrists and other specialists, but emphasizes that the company markets Provigil only for uses defined by the FDA.
Ultimately, Mr. Baldino says, Cephalon hopes the FDA agrees that Provigil is useful in "promoting wakefulness" in people who feel fatigued for a variety of reasons. But even if it can't get expanded FDA approval, he believes the company will prosper. "We would like to promote the drug for more indications because that could drive sales," he says. "But even if we don't, we will do fine. We don't just depend on Provigil."
Write to Aaron Elstein at aaron.elstein@wsj.com
Updated September 4, 2002 7:10 p.m. EDT |
