Cephalon Learns That Risk Returns
Risk, like the poor, is always with us.
Founded in 1987 as a then typical large-molecule discovery company, one of a handful of start-ups focusing on CNS conditions, Cephalon Inc. has spent nearly a decade trying to reduce risks, especially R&D risk. Having failed dramatically with one product of its own research labs, the company isn’t keen to do it again—despite the fact that the failure cost the firm far less than it might have, thanks to a risk-reducing co-promotion strategy that management set up to pay for the nascent marketing effort. Ignoring development-stage compounds, the firm has gone after already-marketed products its executives believe have significantly undeveloped commercial potential, often repositioning them for new markets.
Cephalon began with modafinil (Provigil), a treatment for narcolepsy that no one thought much of when the biotech company first in-licensed it back in 1993, but which won Orphan drug status in the US and thus seven years’ marketing exclusivity. The biotech firm did extensive clinical studies to establish the drug’s safety and last year filed a petition with the FDA, asking that the drug’s label be expanded to cover general sleepiness from disorders or disruptions of sleep. the FDA is still mulling the request, but already Provigil has become a much bigger seller than anyone expected in the early days. Revenues from the drug and a stock price that rose on its promise have enabled Cephalon to acquire other products and infrastructure. Corporate revenues have approximately doubled three years running, topping $500 million in 2002.
But the strategy entails a trade-off. Cephalon’s risk-averse focus meant that little money could go towards research that might have yielded a novel drug with years of solid patent protection. Cephalon’s very success has created its most significant risk: by developing Provigil in ways that helped it move beyond its original small niche, the firm turned the drug into an important product and thus a target of at least four generic competitors, now aiming to introduce their copies in 2006. As a result, Cephalon and investors are uncertain whether the extensive clinical trials into which the firm has poured money will be worth the effort—even if the FDA does approve the new indications. Likewise, if the request for expansion is granted, the drug will arguably be positioned for marketing to general practitioners. But that would require Cephalon to do one of two things—spend money to build up its sales force, or cut its potential upside by co-promoting the product—a deal not likely to garner much money up front, given the generic risk the product is running.
Cephalon’s conundrum is not a new one for the biotech industry but it is increasingly pertinent. More and more biotech companies are eschewing research in favor of in-licensing. Most are pursuing development-stage programs. But Cephalon and a few others are going for marketed products, those with almost no approval risk left in them.
Not that these products don’t still contain development risk. They do. Cephalon must still find additional indications for them—indeed, its strategy depends on its researchers’ ability to identify and prove additional clinical value for the products. And these trials don’t always work—as witnessed by Cephalon’s failed trial of Provigil as a treatment for adults with attention deficit hyperactivity disorder (ADHD).
Moreover, marketed products attract more attention than those that are still unapproved. This fact poses two challenges to fast-growing Cephalon. First, can it find enough new, undervalued products capable of bringing in significant revenues to continue its sharp growth curve? The hunt will become harder: as chairman and CEO Frank Baldino, PhD notes: “By the time you’ve reached this size, you can no longer afford to consider $50 million markets.” Secondly, at a time when generic competition is becoming more aggressive and receiving increasing regulatory and judicial support, all the development, marketing and financial savvy that Cephalon exhibits in plenty, becomes only as valuable as the life-cycle management skills that can keep products proprietary.
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