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Cephalon, Anesta stocks dive in wake of study

Results show drug ineffective on AHDH patients

SHARE Cephalon, Anesta stocks dive in wake of study

WEST CHESTER, Pa. — Cephalon Inc. shares fell by more than a third after a study showed the biotechnology company's narcolepsy drug, Provigil, didn't help people with attention deficit disorder.

The drop in Cephalon also sent shares in Salt Lake City-based Anesta Corp. plunging 36 percent. Cephalon agreed on July 17 to buy Anesta in a stock transaction valued then at $454.8 million. Tuesday's drop in Cephalon shares cuts the transaction value to about $244 million.

Investors had hoped that Provigil, which had 1999 sales of $25 million, might also prove effective in treating attention deficit disorder, a much larger market with potential sales estimated by analysts at $600 million a year. Still, investors expect Provigil to make Cephalon profitable next year and anticipate strong sales growth without the expanded use.

"We view today as a buying opportunity," said Kris Jenner, a fund manager at T. Rowe Price, which holds about 834,100 shares of Cephalon, according to the latest regulatory filings. "To take the attention deficit results today and get overly depressed about growth prospects would be a mistake."

Tuesday's plunge in Anesta shares is the biggest one-day percentage loss since the company went public in 1994 and reverses a 48 percent gain that followed Cephalon's agreement to buy the company. The merger agreement calls for Cephalon to pay Anesta holders a fixed number of shares, which means that the value of the transaction depends entirely on Cephalon's share price.

Shares in Cephalon fell 22 7/16, or 36 percent, to close at 40 5/16 in NASDAQ trading of more than 14 million — more than 19 times the three-month daily average — after the company released the data from a study of 113 adults with attention deficit hyperactivity disorder, or ADHD.

Tuesday's loss was also the largest single-day percentage drop for Cephalon since the Pennsylvania company's 1991 initial public offering. Cephalon was the fourth-biggest percentage loser on U.S. markets, while Salt Lake City-based Anesta, which fell 10 9/16 to 19, was No. 5.

"It's a pretty big overreaction," said Jon Hickman, a portfolio manager at Jurika & Voyles LP, which holds 230,000 Anesta shares. Hickman — who said he still favored the Cephalon transaction if it is restructured — said he bought shares in Anesta Tuesday.

However, Anesta should consider selling to another company if Cephalon shares don't recover from Tuesday's losses, Hickman said. "If the vote was held today, I wouldn't vote for it," he said.

Cephalon is still moving ahead in testing Provigil against sleepiness and fatigue, and the drug has shown promise in combating symptoms stemming from a variety of conditions, said Frank Baldino, Cephalon's chairman and chief executive officer.

The company plans to file for approval to market Provigil for a broader range of sleep-fighting uses by the end of next year.

"We think (Provigil) has a bright future," Baldino said. "It's going to carry us into profitability next year, and a strong profitability after that."

Cephalon's shares have nearly doubled in the past 12 months, largely because of better-than-expected Provigil sales. The drug was approved in 1998 for use in treating the sleepiness that afflicts people with narcolepsy. About 125,000 Americans have the condition.

Provigil has become the drug of choice to treat narcolepsy, in part because it carries fewer side effects than other medications. Sales in 1999 were more than double the $12 million analysts had estimated when the drug was approved.

"These guys have a very safe and well tolerated drug," said Eric Schmidt, an analyst with SG Cowen, who raised his rating on Cephalon Tuesday to a "strong buy" from a "buy" based on the stock's price. Based on prescription growth so far, "we think that more and more the writing is on the wall that this is going to be a sizable drug," he said.

The company decided to test Provigil in adults with ADHD after doctors reported good results using the drug on their own, and is continuing research into Provigil's effects in children with the attention disorder, Baldino said. Analysts said Tuesday that some doctors are likely to continue prescribing Provigil for use in treating ADHD along with other unapproved indications.

Still, the Cephalon's main thrust in continuing development of Provigil lies in the area of promoting "wakefulness," Baldino said.

Daytime Sleepiness

"Its not a drug developed for ADHD, it was developed for excessive daytime sleepiness — and it's doing really well there," Baldino said.

Excessive daytime sleepiness of some form affects as many as 35 million Americans — 10 times the estimated number of people with ADHD in the U.S.

Earlier this year, Cephalon released data from studies indicating Provigil may be able ease fatigue and sleepiness associated with conditions including multiple sclerosis, sleep apnea and night-shift work. The company is also testing it for use in treating fatigue or sleepiness related to cancer treatment and depression.

"I will be very surprised if this product over time doesn't become a $300 million to $400 million product," Jenner said. "There's lots of room for this drug to grow."