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Cephalon Bets On Cancer Drug March, 2008

Cephalon Inc. is hoping its move into the lucrative cancer market gets a boost this week with a key drug approval, as the biopharmaceutical company grapples with a slowdown in prescription growth of its narcolepsy drug, uncertainty about a muscle relaxant and a sagging stock price.

The Food and Drug Administration decision tomorrow on whether or not to approve Treanda for treating chronic lymphocytic leukemia, or CLL, is sure to affect Cephalon stock, and also mark a turning point for the company as it expands into the cancer market.

"We think given a positive decision [from the FDA] it will outperform the market," said Larry Neibor, an analyst with Robert Baird & Co. who expects a straight approval from the agency. Cephalon shares have fallen about 29% since June, nearly twice the drop seen in both the S&P 500 and Amex Pharmaceutical Index.

Yesterday, shares of Cephalon were up $2.79, or 4.7%, to $62.14 in 4 p.m. trading on the Nasdaq Stock Market. The company last month set a 52-week low of $56.20.

The FDA has granted Treanda priority review, which cuts the review time to six months rather than the usual 10 months. The program is usually reserved for drugs the agency deems an improvement to existing treatments or a condition with no treatment at all.

Analysts generally expect the drug to make it to the market, though the FDA could delay or reject the drug.

An approval of the cancer therapy would begin a journey into new territory for the Frazer, Pa., company that derived most of its $1.77 billion in 2007 sales from pain relievers and treatments for central-nervous-system disorders.

It also sells Trisenox, a treatment for a small subtype of acute myelogenous leukemia, and Vivitrol, used to treat alcohol dependence, though it doesn't break out the sales of those products.

"This is the first big step. It will be the foundation for our oncology business," said Liz Barrett, vice president of Cephalon's oncology unit.

Unlike its experience with top-selling Provigil, which treats certain sleep disorders including narcolepsy and has little competition, Cephalon's push into cancer will put it head-to-head with some of the biggest drug makers in the world.

In preparation for the cancer-drug launch, Ms. Barrett says that the division has expanded its sales force to 92 from 29, mostly with experienced cancer sales representatives. She expects the company to ship its product within a few weeks of approval.

Getting Treanda on the market may place a different valuation on Cephalon shares. "It is a key event that could really reframe how people look at this company," said Lehman Brothers analyst Jim Birchenough.

Merrill Lynch analyst Greg Gilbert recently estimated $250 million in yearly Treanda sales by 2012, a figure that he said could prove conservative if Treanda is used extensively off-label in later-stage CLL or earlier-stage persistent non-Hodgkin's lymphoma.

The drug may expand its label before the end of the year, because Cephalon already has filed with the FDA for use in persistent B-cell non-Hodgkin's lymphoma that progressed during or following treatment with Rituxan, co-marketed by Genentech Inc. and Biogen Idec Inc. A decision is expected from the agency by the end of October.

"As an add-on to Rituxan, it could be a billion-dollar drug," said Mr. Birchenough.

Beyond that, Ms. Barrett notes that Cephalon has other cancer products in the pipeline and is investigating Treanda's use against other lymphomas; as well as for multiple myeloma, a cancer that begins in blood cells; and in solid tumors, such as in lung and breast cancer.

Mr. Birchenough expects the possible approval next week to result in a higher multiple for Cephalon shares, as cancer-drug makers tend to warrant a premium from investors because of the high barriers to entry in the market.

Cephalon's shares have generally traded with a price-to-earnings ratio between 15 and 20 during the past three years, and some of the more bullish analysts contend the multiple should be in the high teens because of the company's growth prospects.

Last month, the company reiterated 2008 guidance for total sales of $1.8 billion to $1.85 billion with earnings of $5.10 to $5.20 a share, and projected annual earnings growth of 15% to 20% through 2010. A Thomson Financial analyst survey produced an average earnings estimate of $5.36 a share for 2009.

Cephalon is expecting that growth to come from more than Treanda. The company recently realigned its sales force for the fourth-quarter launch of muscle relaxant Amrix, to focus on primary-care physicians, and introduced samples of the drug in January. Though the drug only contributed $8 million in revenue in the past quarter, BWS Financial analyst Hamed Khorsand projects Amrix sales will exceed $50 million in 2008 and $110 million in 2009.

"Amrix could be a $300 million drug for [Cephalon] and should lead to investors noticing the drug when more sales data is available," he wrote recently.

The shift in the sales force toward primary-care physicians will also affect Provigil, the company said in its fourth-quarter earnings conference call last month.

Robert Roche, the company's head of world-wide pharmaceutical operations, said in the call that he expects "a bit of a revitalization" for Provigil in early 2008, and "significant growth" in the middle and later portions of the year.

Furthermore, Mr. Birchenough notes that the approval of Treanda, and acceleration of growth in Provigil and Amrix, may prompt the company to raise its guidance for 2008.

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