Washington Editor

Cephalon Inc.'s stock tumbled 12.6 percent Thursday after its decision to dump Sparlon (modafinil) because of a not-approvable letter from the FDA.

A single suspected case of a rare but serious skin rash called Stevens-Johnson syndrome led the agency to reject the attention-deficit/hyperactivity disorder tablets, despite the company's assertions and diagnostic evidence to the contrary.

Nevertheless, investors felt the regulatory decision spoke poorly for another tablet formulation of modafinil, the popular sleep drug Provigil, causing shares of Cephalon (NASDAQ:CEPH) to drop $8.05 to $55.90.

"Obviously, we are very disappointed in this result," Chairman and CEO Frank Baldino said in a conference call. "We're rather surprised that the agency chose to go this path, especially in light of the information that we sent down there."

Its rebuke follows a March vote against Sparlon by the FDA's Psychopharmacologic Drugs Advisory Committee, which voted unanimously that the drug is effective for its intended use but also recommended that the company collect additional data to support its safety in children and adolescents with ADHD. At the time, the committee rejection prompted Frazier, Pa.-based Cephalon to reduce its sales guidance by $100 million for this year.

"The FDA got a signal here," said Megan Murphy, an analyst with Lazard Capital Markets, and with five ADHD drugs already on the U.S. market, there isn't necessarily a need for another entry. Her New York-based firm removed Sparlon from its models after the committee meeting.

A month later, the company submitted new information to the FDA related to the suspected Stevens-Johnson syndrome case in a Phase III study participant. The material disputed that diagnosis and reflected discussions with the boy's treating physicians who classified the rash as erythema multiforme, consultation with other dermatologists who came to the same conclusion based on photographic evidence and informal discussions with the FDA.

Although Baldino said his firm "really thought we put it to bed," it apparently was not enough in these days of heightened safety concerns. The agency suggested further trials in thousands of children, but Baldino said "there'd be no guarantees" the trials would allay the Stevens-Johnson syndrome fears, much less ensure approval. "It's amazing to all of us that a single case of bad rash that the experts have said is not Stevens-Johnson syndrome" would yield the decision, he added.

Less than a year ago, the FDA issued an approvable letter for Sparlon. Cephalon submitted a supplemental new drug application for the product in December 2004, following studies that included more than 600 children and adolescents between 6 and 17 with ADHD.

The company noted that the FDA's decision wouldn't impact its most recently issued sales and earnings guidance for the rest of this year, or its earnings expectations for next year.

Provigil is the company's top-selling drug - the narcolepsy product generated $512.8 million last year, formulated in a 200-mg dose compared to 340 mg and 425 mg for Sparlon - but it also is associated with Stevens-Johnson syndrome, and its post-approval safety database and prescribing label include suspected cases of the condition.

Murphy said "this lingering issue" associated with the underlying compound, modafinil, and uncertainty around a government investigation into recent settlement agreements with potential generic competitors "could result in added pressure" on Provigil and Cephalon's entire central nervous system franchise. "Uncertainty and volatility is a real risk to the shares," she said.

With the FDA prowling through post-approval surveillance data at the same time Provigil expands into the broader general practice market because of a recent commercialization deal with Lincolnshire, Ill.-based Takeda Pharmaceuticals North America Inc., there is a greater risk that a commercially limiting warning could be added to the label.

The agency could have concerns about increasing incidences of Stevens-Johnson syndrome as the drug moves into a broader population, and Murphy explained that a more prominent warning or black box "is really a problem" for non-specialists who will be targeted to prescribe the drug.

Cephalon previously studied Provigil in children, said Robert Grupp, the company's vice president of public affairs, and "it was found to be safe and effective." Cephalon conducted the study to gain an "enormously valuable" six-month patent extension on the product, Grupp told BioWorld Today, but never had any designs on expanding its label for children.

Coming FDA decisions relate to pending applications for two other investigational products that have received approvable letters: Nuvigil (armodafinil), a single-isomer formulation of modafinil to improve wakefulness in "particularly difficult" patients suffering from excessive sleepiness associated with narcolepsy, shift-work sleep disorder and obstructive sleep apnea/hypopnea syndrome, Grupp said, and Fentora (fentanyl buccal tablet) for breakthrough pain in opioid-tolerant patients with cancer.

Grupp said Fentora is expected to get the FDA's green light at the end of next month, and Cephalon plans to launch it soon after.

Baldino said Cephalon "fully expects" Nuvigil's approval, and the FDA is scheduled to act at the end of this year.

But Murphy said she feels "uncertain" about the product's outlook because the company recently submitted additional post-approval safety data on Provigil in response to a request by the FDA related to its Nuvigil review, even though the material does not relate to Stevens-Johnson syndrome.

"The additional delay heightens the risk to approvability, in our view," Murphy said, "particularly in light of management's prior comments that labeling was the only outstanding issue for Nuvigil."

The company is reserving the $8.6 million of net Sparlon inventory on its balance sheet as of June 30, while its previously reported adjusted income per common share of $1.61 in the preceding three months does not change.

A further SEC filing on Form 10-Q for the latest quarter will be filed no later than Monday to reflect the not-approvable letter's impact on the financial statements and related disclosures.