Behind Cephalon's Numbers: a Big Cancer Bet and Signs of Skepticism

The FDA delivered to Cephalon a letter yesterday saying it would not approve expanded indications for its pain drug Fentora until the company gave it more information on how it would prevent the drug from being abused. Even though the Fentora situation is fixable, it's just the sort of headache that Cephalon doesn't need right now.

On paper, the company is doing great. Revenues were up from $447 million to $493 million last quarter. But the company is about to take a flying leap on an upcoming set of drug launches, and it doesn't yet know whether it will land on solid ground or fall into a yawning chasm.

The revenue picture is actually misleading as to the company's health. About half its sales come from Provigil, its narcolepsy drug. The company was recently sued by the FTC, which claims that Cephalon's agreement with a bunch of manufacturers to keep generic versions of Provigil off the market until 2012 is illegal. Whoever prevails, it would appear that Provigil's days are numbered. The agreement is costing Cephalon $200 million in go-away payments.

It's a similar picture with Actiq and its replacement, Fentora. About $52 million of Cephalon's revenues -- about 20 percent -- come from Actiq, which went generic a couple of years ago and is experiencing the usual decline that that implies.

So, with up to 70% of its future revenues threatened, what does Cephalon have up its sleeve? The company is enthusiastic about upcoming launches for Nuvigil, the successor to Provigil, and Amrix, a muscle relaxant. Nuvigil will clearly suffer from competition from generic Provigil. As I pointed out in an earlier post, the chances of new branded products prevailing against similar older competitors are generally not good. Amrix extends the pain franchise a little bit but ... there are already loads of muscle relaxants on the market.

The company appears, then, to have high hopes for Treanda, a treatment for chronic lymphocytic leukemia, which Cephalon believes kills cancer cells in two different ways. But Treanda will have to be a massive success to offset the revenues the company is about to lose, and in the meantime Cephalon is displaying some signs of money-saving panic.

For instance, it closed its Patient Assistance Program for Provigil, a cheap-drugs effort that a lot of companies provide for patients who have no insurance. That looks like a cost-cutting measure. The fact that Cephalon is cutting off poor patients at a time when its CEO, Frank Baldino, is taking home $13.5 million in compensation should be placed in the "Things Good Drug Companies Don't Do" file.

It also spent about $500,000 lobbying the federal government to tighten patent laws in its favor, according to the AP. Heavy lobbying is generally the sign of a company whose products cannot make it on their own in the marketplace.

Lastly, the company offered a marketing anecdote in its last conference call in lieu of dollar sales information about Treanda's launch. Here's Robert P. Roche, Jr., evp worldwide pharmaceutical operations:

Let me share with you a quick story from a Philadelphia area oncologist who has just begun using Treanda. This physician had a CLL patients who he had been managing for over 10 years. The patient had received numerous chemotherapy regimens as well as transplant therapy and was no longer responding ... the physician started Treanda therapy just over month ago. ... the patient's ... abdominal pain subsided and he was able to resume many activities of the daily routine. He just received the second cycle of therapy and its tolerating Treanda very well.

I'm not the only one entertaining this skepticism. Here's Jim Birchenough of the late Lehman Brothers, who kicked off the Q&A session with Cephalon's management by asking the $64,000 question: where's the growth going to come?

Birchenough: Hi, guys. Congratulations on the quarter. I want to start-off with a big picture question and that is as you invest in Amrix and Treanda and in the launch [of] Nuvigil, how you balance that with longer-term commitments to maintaining earrings growth. I think it in the past you suggested at least the 20% earnings casual [sic] with a longer term with these investments do you still think you can maintain that type of earnings growth?

Unidentified company representative: Jim, thanks for the kind words. I appreciate it. I think we are blessed with this wonderful opportunity of having three drugs really at launch mode and launching Nuvigil next year. And although it's a great opportunity, it's also a challenge to maintain our earnings profile going forward. I think we can do that. We were able to invest in Amrix and pre-launch activities for Nuvigil this year. We are changing guidance. We are pretty happy that how we manage through that process and where we are. We haven't guidance for '09 yet. We will in the next conference call, at the end of our third quarter. And we expect '09 to be a great year. ... to us [it] means continued growth in both sales and earnings. So I think we can do it. Only I can be more specific than that at this time for that.