By Frances Bishopp

Cephalon Inc., based on optimistic prospects for a 1997 FDA approval of Myotrophin, has set in motion a highly innovative financing vehicle which, if successful, will allow the company to fill financing needs without diluting the value of the company's common stock.

Cephalon has issued up to 500,000 new shares to international financing institution SBC Warburg, of Switzerland, in an agreement under which Cephalon intends to purchase call options representing the right to acquire up to 2.5 million shares of its own common stock.

Any call options to be purchased by the company would be acquired from the institution in one or more transactions, with the number of options and their purchase price, strike price, appreciation cap and other specific terms to be agreed upon at the time of each purchase.

The options are expected to have a term of six months.

By purchasing call options, Cephalon, of West Chester, Pa., could benefit, subject to the terms of the call options, from any appreciation in the market value of its common stock by receiving in cash any excess of the fair market value of the stock over the strike price of the call options.

Cephalon's stock (NASDAQ:CEPH) closed Wednesday at $20.875, up $1.625.

Myotrophin, designed to treat amyotrophic lateral sclerosis (ALS), is slated to go before an FDA advisory panel to be considered for a marketing application on May 8, 1997.

Kevin Buchi, chief financial officer at Cephalon, told BioWorld Today the financing seemed to be a way to raise significant amounts of money with minimal dilution to existing shareholders.

Buchi said the warrants would become valuable presumably if the FDA panel gives the drug a positive review. "We hope if the panel meeting goes well, it will indicate the FDA may look favorably towards approving the drug," Buchi said.

If that happens, he said, the company has a number of uses for the funds; including commercialization of Myotrophin and another Cephalon product, Provigil (modafinil), for narcolepsy, which the company submitted to the FDA for marketing clearance in January.

Buchi said funds also will be directed toward payments to Cephalon Clinical Partners, a research and development limited partnership, which was formed to fund the development of Myotrophin. Buchi said a cap had been set to limit the cost of the individual warrants. The terms of the cap and the exercise price for the calls will not be set until Cephalon's Securities and Exchange Commission (SEC) registration statement becomes effective, a date that is unknown at this time, he said.

"The cap should be in the range of $15 to $20 a share," Buchi said.

"The strike or exercise price will be presumably a 5 percent to 10 percent premium over the price of the stock at the time you do the transactions," Buchi said. To offset its risk related to the options, the institution selling call options may engage in transactions, including market purchases and sales of Cephalon common stock.

SBC Warburg is a very sophisticated trading and arbitrage operation. They will hedge their position, Buchi explained. "They will go short on the warrant and go long on the common stock," he said. "They will purchase common stock to create an offsetting position."

"This is the first time I know of that this [type of financing] has been done," Peter Ginsberg, an analyst with Vector Securities International, of Deerfield, Ill., told BioWorld Today, "and I don't think it will be the last. This is a very innovative and positive thing for shareholders. I think we will see a lot more of these."

If, for example, Ginsberg said, the exercise price is set at $20 and Cephalon's stock price runs to $30 following the Myotrophin panel meeting, Cephalon will have issued 500,000 shares (at a value today of $9.6 million) and would receive $25 million (2.5 million shares multiplied by $10 per share) in cash, he said.

"Of course, the downside would be that the options would likely expire worthless should the panel meeting go poorly for Cephalon," Ginsberg said.

Ginsberg said the financing demonstrates Cephalon's confidence regarding Myotrophin approvability based on its two completed pivotal trials.

Myotrophin is a recombinant insulin-like growth factor for the treatment of ALS and a variety of peripheral neuropathies and is reportedly the only drug developed in the 127 years since ALS was recognized that has shown even minimal therapeutic effect.

Myotrophin appears to slow the progression of ALS, which affects 70,000 people worldwide.

In an unrelated event on Monday, Cephalon reported completing its $30 million private placement of senior convertible notes. The company said the SEC approved the company's registration of 1.43 million common shares. The filing covers the resale by investors of the common shares issuable upon conversion of the notes. *