West Coast Editor

The FDA's blessing of Cephalon Inc.'s sleepiness drug Nuvigil came right on time, but brought a demand for boldface label warnings about skin rash - and didn't do much to soothe investors chafing over a government investigation of the firm's marketing practices.

A single-isomer formulation of modafinil, Nuvigil improves wakefulness in particularly groggy narcoleptics, as well as those with shift-work sleep disorder and obstructive sleep apnea/hypopnea syndrome. The FDA got Cephalon' new drug application for Nuvigil in March 2005, and sent back the first approvable letter a year ago.

In the latest letter, the agency does not ask for new trials, but wants a standard safety update on Nuvigil from research conducted since June, and wants to see the introductory promotional materials. Earlier this year, Cephalon got a warning letter from the FDA about efforts to push Provigil (modafinil), the company's approved narcolepsy drug. Regulators said the one-shot marketing message created new intended uses and did not provided information about risks.

Another shadow on Nuvigil is the history of Sparlon, a different formulation of modafinil intended for attention-deficit/hyperactivity disorder, declared not approvable by the FDA and dropped by Cephalon last summer. Sparlon was associated with a single suspected case of a rare but serious skin rash called Stevens-Johnson syndrome, and the FDA's Psychopharmacologic Drugs Advisory Committee had voted unanimously that the drug is effective for its intended use but also recommended that the company put together more safety data in children and adolescents.

Some speculated that Sparlon, yet another potential ADHD drug, might have been turned down partly because the agency was fed up with the proliferation of therapies for the condition and the high rate of prescriptions written by doctors. Still, the rash possibility was enough to make the FDA insist that Cephalon smack the label warning not only on Nuvigil, but add it to the Provigil label as well.

Most suspicion of regulatory disfavor for ADHD drugs was dispelled by later FDA actions, such as the approval in February of Vyvanse from Shire plc and New River Pharmaceuticals Inc., who planned to push to switch prescribers from Adderall XR, Shire's ADHD capsule. Shire is buying New River for $2.6 billion in cash.

Separately for Cephalon, there's the probe demanded by Rep. Henry Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform (a panel that keeps tabs on pharmaceutical marketing practices) into the way Cephalon markets the narcotics Actiq and Fentora, which are approved for cancer breakthrough pain and often prescribed off label.

Another for Cephalon involves competitors with generic versions of Provigil. The firm's deals with generic drug makers caused Apotex Corp. to file a lawsuit against Cephalon last June, alleging that the settlements - which keep cheaper versions of Provigil off the market until 2012 - create a monopoly, in a situation that also drew the interest of the Federal Trade Commission. In the legal action, Apotex named Cephalon and the licensees involved: Barr Laboratories Inc., Mylan Laboratories Inc., Teva Pharmaceutical Industries Ltd., and Ranbaxy Laboratories Ltd. Cephalon's plan is to shift Provigil patients to Nuvigil in 2009, ahead of the launch of the generics.

Russell McAllister, analyst with Merriman Curhan Ford & Co., put the matter plainly in a research report: "Although full approval of Nuvigil would moderate Provigil risk exposure, we continue to see two distinct sources of risk for Cephalon - aggressive marketing and related off-label usage of both Actiq/Fentora and Provigil/Nuvigil," and Cephalon's settlements with the generic filers. McAllister maintained his "sell" rating on Cephalon shares this month. At the other end of the spectrum, though, analysts at Robert W. Baird & Co. stayed with an "outperform" rating and predicted approval of Nuvigil in late June, only three months later than previously expected. Analyst David Windley with Jefferies & Co. upgraded the stock from "hold" to "buy," and hiked his price target to $88 from $69.

Analysts at UBS, who had initiated coverage of Cephalon in late March with a "buy" rating (target price: $85), reiterated their opinion after the Nuvigil news. JMP Securities held to their "strong buy," with a target price of $80. Banc of America Securities, later in the week, started coverage of Cephalon with a "neutral" opinion and $75 price target.

Megan Murphy at Lazard Capital Markets deemed the stock worth holding. The situation could worsen if the boldface warning finds its way onto Nuvigil's promotional materials as well as the label, but if it were limited to the label, "we wouldn't expect anyone to know about it other than the FDA and Wall Street," Murphy wrote in a research report.

Clinical proof that Nuvigil boasts broader utility than Provigil would provide "higher confidence that this franchise can continue to grow and expand after eight years rather than merely be sustained," Murphy wrote, and another question is whether Nuvigil can hold ground against the generic Provigil, "be it two years after Nuvigil launches or perhaps much earlier."

She pointed to Nuvigil study data offered at a scientific meeting in 2006 that showed the secondary endpoints of attention and speed of memory were not better than placebo, and quality of episodic memory was met in the 150 mg study but not in the larger 150 mg and 250 mg study.

"They haven't expanded the [Provigil] label, and separate from that is whether the sales force expansion has played out in the scrip growth," Murphy told BioWorld Financial Watch. Cephalon added 500 reps to the sales force last June and, three months ago, another 250, but the prescriptions have not jumped appreciably, and growth is settling into the 10 percent to 12 percent range.

The question becomes whether Provigil users can be converted to Nuvigil - and, ultimately, how much the sleep franchise can grow, especially with the advent of Provigil generics, which might well reach the market sooner than 2012, Murphy believes.

She compared Cephalon's Provigil to the likes of Endo Pharmaceuticals Inc.'s Lidoderm, a 5 percent lidocaine topical patch for the treatment of post-herpetic neuralgia. Endo investors are nervous about a Lidoderm generic threat, and the stock is trading lower even before one has been disclosed - even though Endo has a more robust pipeline than Cephalon.

She also pointed to Forest Laboratories Inc., whose blockbuster antidepressant Lexopro (escitalopram oxalate) also faces trouble similar to Cephalon's, albeit not until around the time Cephalon expects Provigil's competition to arrive, if the settlements hold. Last summer, a court determined that Forest's patent covering escitalopram is valid and enforceable and is infringed by a proposed generic IVAX Pharmaceuticals Inc. and Teva Pharmaceuticals Industries Ltd. The judge found in favor of Forest and partner H. Lundbeck A/S.

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