By Mary Welch

Considering its stock ¿seriously undervalued,¿ Cephalon Inc. opted to raise $30 million through the private sale of revenue-sharing notes in order to support further commercialization of Provigil (modafinil) tablets.

¿Our stock is around eight bucks and we¿re a good company with a really good drug,¿ said Frank Baldino, president and CEO of the West Chester, Pa.-based company. ¿We¿re not going to sell equity at that price and we don¿t need to. We¿ll service the notes without having to sell stock cheap.¿

The notes, repayable in cash in February 2002, have an annual interest rate of 11 percent and are secured by the U.S. rights to Provigil. Investors also will receive a royalty of 6 percent on U.S. sales of Provigil for up to five years. Cephalon has the right to redeem the notes at a premium prior to maturity, which would reduce the royalty period to four years. At no time are the notes convertible into common stock.

The offering was purchased by the Sprout Group, of San Francisco, and The Kaufmann Fund and Delta Opportunity Fund, both of New York. Diaz & Altschul Capital LLC, of New York, acted as placement agent.

¿About 80 percent of the biotechnology companies couldn¿t do this deal,¿ said Kevin Buchi, Cephalon¿s chief financial officer. ¿They don¿t have the revenue stream to support this type of placement. It gives us more of a diversity in ways of raising money and provides us with more balance in our capital structure.¿

The offering also included the issuance of 1.92 million five-year warrants to purchase shares of common stock with an exercise price of $10.08, a 25 percent premium to the average market price for the five trading days prior to Feb. 24. The investors will forfeit 480,000 of the warrants if specified Provigil sales levels are achieved.

¿The reason why most biotech companies don¿t go into debt like this is that the investors always ask, Where¿s the cash going to come from?¿¿ Buchi said. ¿And of course the biotech companies answer, Trust us.¿

¿Well, we¿re in a little better position than that,¿ he said. ¿This loan, along with sales of Provigil, will provide us the opportunity to bridge us to profitability.¿

Financing Mechanism Novel For Biotechs, Says CEO

Baldino believes Cephalon may be the first biotechnology firm to use revenue-sharing notes as a means of raising money. ¿This way has been used successfully by the larger pharmaceutical companies,¿ he said. ¿We just don¿t believe you sell your stock cheaply just before you launch a new drug. We¿re on the cusp of profitability and for us, it¿s a clever way.¿

Cephalon received FDA approval for Provigil in December to treat excessive daytime sleepiness associated with narcolepsy. The drug has been on the market a few weeks. Provigil is the first novel treatment for the neurological disease in 40 years. (See BioWorld Today, Dec. 29, 1998, p. 1.)

The synthetic compound was licensed in 1993 from Paris-based Laboratorie L. Lafon, which has been selling the drug in France since 1994. Cephalon has been selling it in the U.K. since March 1998. It also is available in Ireland.

Provigil apparently affects the alpha adrenergic receptors in the brain, prompting wakefulness and reducing the number of sleep attacks. An estimated 125,000 people in the U.S. suffer from narcolepsy, a chronic, lifelong disorder that causes people to fluctuate between sleeping and waking.

Analysts have projected that Provigil¿s sales for this year will be about $12 million to $13 million, but will soar to $50 million in 2000 and reach $90 million in 2001.

¿We don¿t want to estimate sales ourselves, but we believe those are correct,¿ Baldino said.

More Indications In The Works

Currently Cephalon has a sales force of about 45 in the U.S., which markets Provigil to sleep centers, sleep specialists, neurologists and managed care organizations. With this latest round of financing, Cephalon intends to step up marketing efforts as well as seek other label indications for the drug.

¿We want to develop the drug beyond the current indication. We believe the potential of this drug is great,¿ said Baldino. ¿There are a lot of tired people out there.¿

To further that aim, Cephalon has initiated pilot studies to determine Provigil¿s utility in conditions including Parkinson¿s disease, excessive daytime sleepiness in patients with obstructive sleep apnea, fatigue in patients with multiple sclerosis, and simulated shift work. Results are expected later this year or early next year.

Another application may be in children with attention deficit disorder (ADD), most of whom are treated with amphetamine-like products. Provigil could have some advantages over those products in areas of addiction and cardiac-related side effects. It also comes without the highs and lows associated with amphetamines.

¿There are longer and higher hurdles getting Provigil approved for ADD,¿ Baldino says. ¿We have no evidence that it may be effective but we¿re looking at that. However, we have the other indications that we¿re looking at first. If it does work (for ADD), that¿s like letting the genie out of the bottle.¿

Cephalon has about 28 million shares outstanding. Its stock (NASDAQ:CEPH) closed Thursday at $7.50, down $0.187. n