Mixed opinions from a Food and Drug Administration advisory committee on a stay-awake pill made by Cephalon ( CEPH) are provoking a lot of tossing and turning on Wall Street. The company's stock has been bouncing around ever since the panel's opinions were released Thursday just before markets closed. Analysts have been bouncing around, too, with many injecting uncertainty into their optimism. One indicator of how the FDA panel caused sleeplessness on Wall Street: Seven analysts filed Cephalon research notes between midnight and 6:30 a.m. Friday. The subject of the swirling sentiment is Provigil, a Cephalon drug that is approved by the FDA for treating sleepiness associated with narcolepsy, a disease in which people can fall asleep in the daytime, any time. West Chester, Pa.-based Cephalon had asked the FDA to approve an expanded use of the drug. Federal law allows doctors to prescribe a drug for anything as long as the FDA approves it for a single use. In the case of Provigil, Cephalon says only 11% of its sales come from treating narcolepsy. Off-label uses include treating fatigue in depressed patients (38%) and in multiple sclerosis patients (12%). Provigil had sales of $196.3 million last year. Federal law also prohibits companies from marketing drugs for any disease that isn't listed on the drug's label. That means Cephalon can only market Provigil to a small group of specialists -- neurologists, psychiatrists, sleep disorder experts -- who treat narcoleptics. There are 50,000 narcoleptics in the U.S. But if Cephalon could convince the FDA to expand the number of diseases and conditions for Provigil, then Cephalon could reach the marketing goldmine -- general practitioners. Based on the FDA advisory committee's decision, Cephalon came away with some gold nuggets as well as some iron pyrite.
The advisory panel voted 8 to 0 to accept Provigil as a treatment for sleep apnea, a breathing disorder in which a person periodically stops breathing while asleep. The condition is potentially fatal. Sleep apnea affects an estimated 18 million Americans. The advisory panel also voted 6 to 2 to allow Provigil as a treatment for shift-work sleep disorder, which produces insomnia or excessive sleepiness in people due to their work schedules. Most of the problems occur among night shift workers, but it also affects people with irregular working hours. But the panel divided 4 to 4 on Cephalon's request for the broadest drug label, one that would have endorsed Provigil for "the treatment of excessive sleepiness associated with disorders of sleep and wakefulness." The FDA, which isn't bound by advisory panel recommendations, is expected to contact Cephalon by Oct. 20 with label proposals. Company executives say a final decision is most likely by year end due to the expected negotiations between Cephalon and the FDA on specific language. Adhering to that timetable, Cephalon said Thursday that the marketing of Provigil's extra uses could begin in February or March, with an extra 120 sales representatives who will be hired and trained to augment the existing staff of 330. Frank Baldino Jr., chairman and CEO of Cephalon, told analysts Thursday that if the FDA adopts Provigil label wording based on even a narrow reading of the advisory committee's comments then Cephalon can market Provigil to "a larger universe of general practitioners" as well as to specialists. The FDA governs not how a product is used by doctors but how the product is sold, he added. Investors, however, didn't share Baldino's degree of enthusiasm. On Thursday, after the advisory panel's decision was announced, Cephalon's stock jumped to $48.70 from Wednesday's closing price of $45.67. By the end of Thursday's trading, however, the stock had drifted down to a closing price of $46.90. The stock was halted most of the day while the advisory committee met.
But on Friday, the stock closed at $45.79, down 2.4%, or $1.11. It fell as low as $45.31. Also on Friday, Thomas Weisel Partners raised its rating on the stock to outperform from peer perform. Cephalon has six buy ratings and six hold ratings, according to data compiled by Thomson First Call. Timothy D. Coan, of U.S. Bancorp Piper Jaffray, said Friday in a research report that he believed the advisory panel's comments -- if incorporated by the FDA into a new Provigil label -- would enable Cephalon to market the drug to general practitioners. "We expect the company's marketing message to be aggressive regardless of the scope of the label," he said. But Coan is keeping a market perform rating on the stock. "We recommend that investors stay on the sidelines with Cephalon's stock given our concern that generic competition for key drugs is likely to result in a sharp decline in earnings beginning in 2006," he said. Coan doesn't own the stock; his firm has an investment banking relationship with the company. What troubles Coan and some other analysts is the four generic companies attacking Provigil -- two arguing that their products are not covered by the Provigil patent and two claiming that Provigil's patent is invalid. Cephalon believes its Provigil patent is good until 2014; if the company loses, generic competition could start in mid-2006. "Our strategy is to prepare for the worst," said Chief Financial Officer Kevin Buchi, at a UBS health care conference in New York on Wednesday. That preparation includes research on a cousin of Provigil, which, Buchi said, remains in the body longer than does Provigil. "If all goes well, we could be in the market by early 2006," said Buchi. But research and development spending is expensive, and that's the main reason why Morgan Stanley analyst Marc Goodman cut his 2004 prediction on earnings per share to $2.15 from $2.21 after the FDA advisory panel met. Goodman, who has an equal-weight rating on the stock, said in a note to clients that he believed that the FDA could grant broader label language for Provigil than was recommended by the advisory committee.
Although Cephalon said the advisory panel's decision doesn't change its financial guidance for 2003, Jim Birchenough, of Lehman Brothers, said Friday in a research report that he doubts Provigil will reach the estimated $300 million in sales this year that the company had predicted. He believes revenue will be closer to $267 million. He said the extra sales stemming from a broader Provigil label will take longer to achieve, given the extra costs of hiring and training sales representatives. The advisory panel's comments didn't encourage him to change his rating of equal weight. He doesn't own shares, but his firm has an investment banking relationship with Cephalon. Birchenough added that Cephalon's plans to create a Provigil cousin are "aggressive," providing "insufficient time" to convince doctors and patients to switch from Provigil before the generic drugs reach the market. The stock market's reaction to the expanded label for Provigil also could have an effect on Cephalon's effort to acquire Cima Labs ( CIMA)of Eden Prairie, Minn. In early August, Cima announced it would merge with aaiPharma ( AAII)of Wilmington, N.C. in a stock swap deal that would give Cima shareholders 1.3657 shares in the new company for each Cima share. In early September, Cephalon made a $26-a-share cash bid for Cima, whose board rejected the proposal as inadequate. Judging the Cima board's interest in a stock deal, Cephalon came back with a letter saying it would be flexible in discussing a pay package that could include stock. Cima's board agreed to talk. A run-up in Cephalon's stock -- based on projected booming sales of Provigil -- would certainly enhance the company's bargaining position. Kevin Buchi, Cephalon's chief financial officer, repeated on Wednesday his company's assertion that Cima would be a good strategic fit for Cephalon, which makes a cancer pain treatment, Actiq, whose active ingredient is the narcotic analgesic fentanyl. Cima is developing a fentanyl product, too. Buchi, who said Wednesday that Cephalon had "low-level discussions" with Cima before the aaiPharma-Cima merger was announced, explained that his company would need to look at Cima's fentanyl research before deciding on a deal. "We'll know in less than a couple of months," he said.