Cephalon: Damn the Torpedoes! We're Raising Prices!

A corporate strategy question for you about Cephalon: Your industry is unpopular because of its rising prices. Your company's marketing is under the control of the U.S. Department of Justice due to illegal off-label sales. One of your best-known brands is already facing generic competition, and one of your best-selling brands is about to get the same, which in turn threatens a new brand launch. What do you do?

If you answered "raise prices," then award yourself a gold star. Cephalon is currently trying to navigate a switch from its popular Provigil sleep drug to a new version, Nuvigil. Provigil is about to go generic -- which would lead you to think that cheap competition could threaten to destroy the chances of Nuvigil. So Cephalon is raising the price of Provigil in the hopes of making Nuvigil look cheap by comparison. The drug is now 28% more expensive than it was in March and 74% more expensive than four years ago, the Wall Street Journal reports. It now costs about $270 a scrip.

The move was flagged -- albeit in coded form -- in the company's last conference call:

Annabel Samimy - UBS Investment Research: In terms of the conversion strategy for PROVIGIL to NUVIGIL and now you can choose to answer or not, but I mean you've talked about pricing strategies to help with that conversion. Is there any plan to pull the drug at some point in the future and just have NUVIGIL out there and do you have any ultimate targets for conversion?

Frank Baldino, Jr. - Chief Executive Officer: think... Annabel, this is Frank. We are going to align the economics of the products with our goal of shifting our business to the NUVIGIL as well as growing NUVIGIL to much bigger larger market place. We will not pull [PROVIGIL] off the marketplace. A lot of patients depend on PROVIGIL and our first priority is to take care of our patients. And we think they are going to do well on their PROVIGIL until they switch over to NUVIGIL and hopefully do better on NUVIGIL at that point of time. And we think what we got a lot of competitive advantages here, there's real competition in this space. We got leverage with NUVIGIL going forward.

So far the gamble seems to be working. Provigil sales are up 19% to $241 million in Q3. The drug sold $801 million in total last year. The company's guidance for all its sleep brands through the end of 2008 is for $1.02 billion in sales (it was $852 million last year).

So Step 1 of the plan is working -- the increased price of Provigil is boosting sales. But Nuvigil isn't on the market yet. We don't know if people will switch to new-expensive-Nuvigil or cheap-old-generic-Provigil. Is there any way of guessing which way this will go?

Luckily, there's an example on Cephalon's own income statements, in fact. Its painkiller, Actiq, recently saw competition from cheap generics. Sales plummeted to $21 million this quarter, down from $45 million a year ago. Of course, Cephalon didn't have a brand new version of Actiq to force customers to switch to when the generics came along, so the scenario is a little different this time around.

All that's left is to see whether the public -- and reimbursers -- believe that the Nuvigil emperor is wearing any clothes.