Cephalon's Smart-Pill Sale Tactic

Biopharmaceutical company Cephalon (NASDAQ:CEPH) announced last week that the FDA will review its sleep disorder drug, Nuvigil, for treatment of jet lag. If it is approved (the decision is expected by December 29 this year), Nuvigil will be the only FDA-approved treatment for jet lag. However, Nuvigil is just a improved version of Cephalon's flagship alertness drug, Provigil (in the same "brain pill" class as Ritalin and Adderall), which was introduced in 1998. There are actually no head-to-head clinical efficacy trials comparing the two drugs, but Cephalon claims Nuvigil lasts longer in a 24-hour period.

Launched in the US markets in just June this year, Nuvigil is really Cephalon's answer to Provigil's potential generic drug competitors. And Provigil is worth protecting for the company, accounting for 54.9 percent of Cephalon's revenues in the US and 48.9 percent internationally in the first half of 2009. This is a 16 percent increase from the same period last year. However the increase was more due to a 10 percent price hike, offset by a 3 percent decline in prescription growth.

And let's look at this price hike, because you can be sure the company's focused on squeezing as much money out of this as quickly possible. But the tactic Cephalon has been using to protect sales quite clever...although described as shameful by some.

The company increased the price of Provigil by 28 percent last year in March according to WSJ, a 74 percent total increase from four years before that (this year, Provigil's about 10 bucks a pill), and has been offering Nuvigil at a 11 percent discount. And it's been working: in July Nuvigil had around 6,000 prescriptions a week, in a 50-50 split between new users and Provigil-to-Nuvigil users. 40 percent of new prescriptions were also supported largely by coupons, as CFO Kevin Buchi said in the 2Q earnings call in August.

Cephalon has also had run-ins with the Federal Trade Commission on antitrust and misleading marketing issues. In a case that is yet to be settled, the FTC alleges that the company broke antitrust laws by paying generic drug manufacturers $200 million not to flood the market with generics before 2011 or 2012. Then last year, Cephalon plead guilty to a criminal misdemeanor, paying at least $440 million for promoting three of its drugs, including Provigil for uses other than its FDA-approved treatment of sleep disorders.

This also comes at a time when, according to The Christian Science Monitor this May, 10 percent of American college students use prescription mind-enhancement drugs as study aids. The British science journal Nature also ran a survey in April 2008 of 1,400 people in 60 countries, finding that 20 percent had used such drugs for nonmedical reasons (only half had prescriptions for the drugs they were using), and even though half reported unpleasant side effects, 4 out of 5 "thought that healthy adults should be able to take the drugs if they want to." This view is shared by the editor of Nature as well.

The only largely publicized danger so far that the drugs may be habit-forming. Cephalon doesn't deny it, pointing out that Provigil has disclaimers warning exactly this. But this "danger" isn't saying much considering how everyone knows cigarettes are addictive but smokers love their cancer sticks regardless. Now imagine cigarettes that give you the effect of coffee on steroids. I doubt there will be much resistance to that, even if they are addictive. But given our inability to see long-term consequences, I wouldn't be surprised if we find 50 years from now that those who do use such drugs are more likely to suffer from brain disorders. After all, these users are trying fix what ain't broke.