By Randall Osborne

West Coast Editor

In what analysts viewed as a figurative wake-up call for investors, Cephalon Inc. - with its narcolepsy drug Provigil (modafinil) driving the firm's push toward profitability - is opening wide to acquire the oral drug delivery firm Anesta Corp. in a stock-for-stock deal worth about $444 million.

The merger, accounted for as a pooling of interests and expected to be completed in the fourth quarter, gives Cephalon another product, Actiq (fentanyl), for breakthrough cancer pain, which Salt Lake City-based Anesta launched in March 1999.

"We believe this is the perfect match for us," said Frank Baldino, chairman and CEO of West Chester, Pa.-based Cephalon.

Thomas King, president and CEO of Anesta, said the company made a major push to sell Actiq when Anesta regained the rights to the drug from Abbott Laboratories Inc., of Abbott Park, Ill., in March, after Abbott's proposed merger with Alza fizzled because of antitrust concerns. (See BioWorld Today, June 23, 1999, p. 1.)

"In terms of prescription trends, quarter to quarter, we've been sustaining greater than 50 percent growth over the last two quarters," King told analyst Eric Schmidt, with New York-based SG Cowen Securities, during company officials' conference call with analysts. SG Cowen gave the stock a "buy" rating.

Sales of Actiq hit about $2.5 million last year. Analysts guessed sales of the opioid analgesic will reach about $16 million this year, and jump to as high as $55 million in 2001.

Anesta filed for Actiq marketing approval in the UK last August.

Under the terms of the merger agreement, which has been approved by the boards of both companies, Anesta shareholders will get 0.4765 shares of newly issued Cephalon common stock for each share of Anesta they own.

Anesta, which will become a wholly owned subsidiary of Cephalon, has agreed to a breakup fee of $15 million, payable if the deal doesn't go through, said Cephalon's chief financial officer, Kevin Buchi.

"It's a fixed exchange ratio," he said. "There are no earnings targets or other targets." Anesta shareholders still must ratify the deal.

The $444 million value of the merger - at $31.45 per Anesta share - is based on the closing price of Cephalon stock (NASDAQ:CEPH) on July 14, which was $66. Monday, the company's shares closed at $71.25, up $5.25. Anesta's stock (NASDAQ:NSTA) closed at $32.625, up $10.50, or 47 percent.

Cephalon, with Gabitril (tiagabine hydrochloride) marketed under an agreement with Abbott for the adjunctive treatment of partial seizures associated with epilepsy, also has CEP-701 in Phase II trials for prostate cancer.

The company is taking aboard a 60-person oncology sales team as part of the Anesta deal. Baldino said this is expected not only to give Cephalon a door into the oncology market, but also to boost Provigil, which - like Actiq - was launched during the first quarter of 1999.

"We've got a ready-made sales force to sell Provigil," he said.

Fatigue from chemotherapy is another potential application for the drug, which is widely used off-label. The drug also is in a Phase II trial for adult attention deficit disorder.

Sales of Provigil totaled $13.5 million in the first quarter of 2000. Revenues are expected to reach $59 million this year, $110 million in 2001 and $160 million in 2002.

Abbott was not part of the merger talks, company officials said.

"We've been in the [research and development] business for cancer since 1994," Baldino said, and the Anesta deal will help kick the program into a higher gear. Among the cancer products being investigated is an anti-angiogenesis molecule that Baldino said will be tested in human subjects "hopefully by the end of this year."

Another drug in Cephalon's pipeline, CEP-1347 for Parkinson's disease, is expected begin Phase II trials in the first half of 2001.

Anesta's oral transmucosal system (OTS) forms the drug into a hard matrix, as a lozenge or on the end of a stick in "lollipop" form, so that the biologically active substance travels through the lining of the mouth into the patient's bloodstream.

Using OTS, Anesta is developing fentanyl for acute pain management; nicotine for smoking cessation; etomidate for short-acting sedation; piroxicam for mild to moderate pain; droperidol and prochlorperazine for nausea and vomiting (which could complement Cephalon's CEP-701 in the cancer portfolio); and scopolamine for motion sickness. The nicotine and etomidate products are preparing to enter Phase III trials.

Analyst Peter Ginsberg, of U.S. Bancorp Piper Jaffray, asked during the conference call which of the Anesta products might gain top priority. Baldino said the pipeline is being evaluated.

"The knee-jerk response [to that question] would the use of Actiq in other forms of pain," he said. Ginsberg's firm rated Cephalon a "strong buy.

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