Generics Threaten Drugmaker Cephalon's Success

Last Updated Sep 21, 2009 11:38 AM EDT

Biotechnology watchers are measuring success at Cephalon on how quickly the drugmaker can convert patients on its soon-to-go generic blockbuster Provigil to regular users of its narcoleptic successor Nuvigil. As Jim Edwards at BNET Pharma astutely pointed out exactly one year ago, however, competition also threatens to derail big bets made on its oncology franchise. Not withstanding the obvious adverse affect on sales, what risks does the company potentially face from generic and branded challengers?

Provigil tablets, indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea, and shift work sleep disorder, accounted for 54 percent, or $485 million of consolidated six-months sales. Nuvigil, launched on June 1, kicked in another $16.8 million (net of promotional discounts/rebates) for its first month of sales. Management admits that its "wakefulness" franchise will remain the workhorse near-term. Chief financial officer Kevin Buchi guided analysts on the second-quarter earnings call to expect aggregate Provigil-Nuvigil sales in the range of $1.16 to $1.19 billion, more than 50 percent of anticipated company sales of $2.18 to $2.23 billion for 2009. Provigil goes off-patent sometime between now and April 2012, the timing of which could kill or thrill the aggressive switchover campaign.

The company is also looking to drive growth in its flagship brand(s) by expanding FDA-approved indications, said chief executive Frank Baldino on the call. He commented, too, that the company's objective was to file four supplemental new drug applications (sNDAs) for Nuvigil in the next five years -- the first of which, for the treatment of excessive sleepiness associated with Jet Lag Disorder, was filed on June 30.

Growth in Cephalon's pain franchise, with expected sales of $530 million to $555 million, remains subordinate to script sales of Fentora (fentanyl buccal) tablets and Actiq (oral transmucosal fentanyl citrate), used to treat "breakthough" cancer pain not controlled by other medications. Combined, both drugs comprised 18 percent of net sales for the first six months of 2009. However, in coming months it is likely that both drugs could run into generic interference and new competition from Onsolis (fentanyl buccal soluble film), a new dosage form of fentanyl, which was approved by the FDA in July.

The chemotherapeutic agent Treanda (bendamustine hydrochloride) contributed 10 percent to aggregate sales for the first six months of 2009. Now indicated for treatment of indolent B-cell non-Hodgkin's lymphoma, Treanda is expected to guide Cephalon's oncology franchise to total sales of $315 million to $335 this year. Although Treanda's total sales are set to increase following its approval in this more significant commercial market, the drug is likely to face competition from pipeline drugs currently in late-stage development, such as galiximab (Anti-CD80 MAb; Biogen Idec) and ofatumumab (HuMax-CD20; Genmab/GlaxoSmithKline), according to market analyst Datamonitor.

Should the switchover campaign from Provigil to Nuvigil stall, and competitors tump-over Cephalon's prized test tubes, the health of its balance sheet could suffer materially. A working capital surplus of $1.07 billion and cash flow from operations of $313.5 million for the first six-months will not throw off enough cash sufficient to repay $750 million of convertible notes (if presented) and other cash obligations coming due in the next 12-18 months, according to the recent regulatory 10-Q filing:


  1. The acquisition of Arana Therapeutics, an Australian company developing treatments for inflammatory diseases, which closed on June 29, will require a cash outlay of approximately $232 million in the third quarter of 2009.
  2. If study results for Ception Therapeutics' ongoing late-stage clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis, an allergic inflammatory disease characterized by elevated white blood cells in the esophagus, are positive, Cephalon plans to file a Biological License application for the humanized monoclonal antibody and exercise an oustanding option to purchase Ception for $250 million.
  3. A potential repayment of approximately $200 million in 0% convertible coupon bonds, redeemable anytime prior to June 2010 at a conversion price of $56.50 a share. In addition, under terms of indentures governing $500 million in 2.5% convertible senior notes, the company is obligated to pay in cash the aggregate principal balance of any of these notes presented for conversion, should the common stock settle at or above $69.00 a share on or before November 1, 2013. Cephalon closed at $56.05 a share on September 2, 2009.
  4. As of June 30, potential milestone and other contingency payments due under contractual agreements total $1.8 billion, of which $500 million in cash outlays are tied to clinical successes of the investigational immune modulating drug Lupuzor, which is currently in mid-stage clinical trials for the treatment of systemic lupus erythematosus, an autoimmune disease where the body's tissues are attacked by its own immune system.

An estimated $400 million is also slotted for the funding of opportunistic acquisitions and clinical trials for pipeline assets.

Although the company does have an impressive developmental pipeline, with innovative treatments for pain, cancer, and inflammatory diseases, none will likely reach commercial readiness until mid-decade. Given likely approval delays and an expected bumpy ride from generic and branded competitors, jet-lagged stakeholders might need to pop a Nuvigil pill-or two-themselves to stay awake after such an exhausting flight.

  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.