Editor

Cephalon Inc.'s decision earlier this month - after a not-approvable letter from the FDA - to drop Sparlon (modafinil), the oral therapy for attention-deficit/hyperactivity disorder, put a 12-percent dent in the company's share value.

Some might have seen it coming. The agency's Psychopharmacologic Drugs Advisory Committee in March voted unanimously against recommending the drug, calling Sparlon effective for its intended use but wanted more safety data in children and adolescents with ADHD. After the vote, Cephalon reduced its total sales guidance by $100 million for this year, setting the new range between $1.45 billion and $1.50 billion.

The problem was a suspected case of the rare but serious skin rash known as Stevens-Johnson syndrome in one patient given Sparlon during Phase III trials. Cephalon disputed the diagnosis and noted that the boy's treating physicians classified the rash as erythema multiforme. Other dermatologists who looked at photos believed the same.

Regulators were not convinced, wanted more trials and would not guarantee that additional studies would quell the Stevens-Johnson fears about Sparlon, a new formulation of Cephalon's top-selling Provigil for narcolepsy. Provigil pulled in $512.8 million in sales last year. Though formulated in a 200-mg dose (compared to Sparlon's 340 mg and 425 mg), Provigil also is associated with Stevens-Johnson syndrome, and the drug's post-approval safety database and prescribing label include suspected cases.

The rash potential could haunt modafinil for a while - and Cephalon already has enough trouble. Canadian generic drug maker Apotex Inc. in June filed a lawsuit against the firm and licensees Barr Laboratories Inc., Mylan Laboratories Inc., Teva Pharmaceutical Industries Ltd., and Ranbaxy Laboratories Ltd. accusing them of trying to create a monopoly. Agreements made by Cephalon with the companies keep them from selling generic Provigil before spring 2012, and the Federal Trade Commission is looking into the case.

Apotex has been making news more recently by way of its legal war with Bristol-Myers Squibb Co. and Sanofi-Aventis over the anticoagulant Plavix (clopidogrel), which Apotex started selling a generic version of this month. The court battle is expected to resume this week.

Back to Cephalon. The company has its hands full with the Stevens-Johnson rash threat and the generics case, while it continues to market four major products in the U.S. - Provigil, Actiq (fentanyl citrate) for cancer pain, Gabitril (tiagabine) for epileptic seizures, and Vivitrol (naltrexone) - and more than 20 products around the world.

Now hardly seems like the time for Cephalon to be thinking about another acquisition, you might say, but Russell McAllister, analyst with Merriman Curhan Ford & Co., begs to differ.

McAllister pointed to last year's buys of Trisenox (arsenic trioxide) for up to $170 million from Cell Therapeutics Inc. and Treanda (bendamustine) for about $160 million from Salmedix Inc. Trisenox was approved in the U.S. in 2000 and in Europe in 2002 as a second-line treatment for relapsed or refractory acute promyelocytic leukemia. Treanda is a nucleoside analogue with alkylating properties that could work as a single agent in patients with non-Hodgkin's lymphoma who are refractory to Genentech Inc.'s Rituxan (rituximab).

With about $500 million in cash and a tough 2007 ahead, McAllister believes the moment is ripe for Cephalon to step into the $2 billion anti-emetic market as a way of boosting the cancer franchise, which includes Fentora (fentanyl) a therapy for breakthrough pain in opioid-tolerant patients with cancer. Cephalon is awaiting a decision from the FDA on Fentora, as well as Nuvigil, a single-isomer formulation of modafinil to improve wakefulness.

As logical candidates for a Cephalon buyout, McAllister named three firms.

One is the specialty pharma A.P. Pharma Inc., which in April finalized the protocol for a Phase III trial of APF530 with the FDA. The compound contains the 5-HT3 antagonist anti-nausea drug granisetron formulated with A.P.'s Biochronomer bioerodible drug delivery system and is designed to prevent acute and delayed chemotherapy-induced nausea and vomiting. With an affordable market cap of less than $35 million, A.P. Pharma would "barely move the needle" for Cephalon, McAllister wrote.

Another is Hana Biosciences Inc., which in July submitted a new drug application - the company's first - for Zensana (ondansetron) to prevent postoperative and chemotherapy-related nausea and vomiting, with a launch targeted for early next year. Zensana is the first oral spray 5-HT3 antagonist to deliver ondansetron, a standard anti-emetic therapy, in a micromist that provides drug benefits apparently equivalent to tablets. Hana's market cap sits at a more-daunting $170 million, but the firm "has a broad portfolio of early and late-stage cancer care products that could be potentially attractive to Cephalon," in McAllister's view.

The third possibility is MGI Pharma Inc., which has Aloxi (palonosetron), yet another 5-HT3 antagonist for chemo-induced nausea and vomiting, sales of which jumped 56 percent last year over 2004's sales of $159 million. Doctors polled by Robert Baird & Co. said Aloxi is a better drug than GlaxoSmithKline plc's market leader Zofran (ondansetron), although the latter became vulnerable to generic versions at the end of 2005. (See BioWorld Financial Watch, Dec. 12, 2005.)

GSK is expected to launch its own generic version of Zofran in the fourth quarter, with others likely to follow - "headwind [that] has put substantial pressure" on Aloxi, the best-in-class product, McAllister pointed out. "At a market cap of $1.2 billion, we believe MGI Pharma is the least likely acquisition target, despite a recent and significant decline in the share price," he wrote.

Barr will be selling a generic version of Actiq by the end of this year, but Cephalon hopes the approval of Fentora will let the compound scoop up cancer-pain patients, though McAllister does not believe Fentora by itself will be able to fill the gap left by Actiq, at least not for several years.

Robert Grupp, the company's vice president of public affairs, did not rule any of the prospective firms named by McAllister out - or in. He pointed out that Cephalon has "not gone into any specifics publicly" about takeover plans.

"We're an acquisitive company, for years we've been making successful acquisitions and I think people should look for that to continue in the future," he told BioWorld Financial Watch. "But in terms of identifying specific areas or compounds, we just haven't done that."