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Cephalon scared straight? A stem cell deal suggests a future of good cheer

Cephalon's commitment to develop stem cell products for heart disease and cancer marks a positive redirection for the Philly-area pharma company. It may also suggest that vigorous civil and criminal prosecutions can scare a pharma company straight.

By guest blogger Daniel Hoffman:

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When small-pharma Cephalon of Frazer announced last week that it was acquiring rights to various stem cell therapies from the Australian company Mesoblast, it provided some good news, but not necessarily for the reasons discerned by most equity analysts.

As a first consideration, it remains to be seen what Cephalon will eventually gain for the money they paid Mesoblast.  While at least one of the licensed compounds is currently in mid-stage clinical trials, the fact remains that pharmaceutical product development, at any stage, is inherently risky.  As a general rule, only 10% of those compounds entering clinical studies ever gain approval.  But that's the business; people who demand shorter odds need to look elsewhere.

The good news starts with the fact that a commitment to develop stem cell products for possibly treating cardiovascular disease, Alzheimer's or cancer marks a positive redirection for Cephalon.  In the past, their product line was based on central nervous system compounds for treating conditions such as narcolepsy, breakthrough pain, and seizures.  Those are all legitimate conditions for therapy but, similar to several other pharmas, Cephalon was not content to limit their promotions to those approved indications.  Instead the company "flouted federal regulations on a grand scale for years by off-label marketing...far beyond the cancer pain, epilepsy and narcolepsy specialists."  Eventually that way of doing business resulted in the largest Medicaid fraud case against a biotech in US history.  Cephalon wound up paying $375 million in civil fines and another $50 million in criminal penalties.  So the fact that the Frazer biotech is now developing products for conditions with large populations, such as heart disease and/or cancer, makes such baldfaced, illegitimate efforts to expand the candidate base less likely.

Secondly, the recent CEO changes at Merck and Pfizer have prompted some discussion  about the role and responsibility of pharma management.  As noted here in last week's posting, some observers even claim that big pharma's problems are so intractable, that it makes no difference what management personnel or configuration runs things.  Cephalon's recent deal provides a clear rebuttal to this nihilist viewpoint.  As the titular CEO has been on an extended medical leave of absence, COO Kevin Buchi has been guiding the ship.  To that end he has kept them compliant with the Corporate Integrity Agreement imposed by federal prosecutors and, in the Mesoblast deal, he has engineered a bold co-development arrangement involving a leading-edge approach to therapy.  

If the Cephalon-Mesoblast deal is good news, part of it stems from recognition that vigorous civil and criminal prosecutions, resulting in stiff penalties, can scare a pharma company straight.  A fine of $425 million may represent no more than a week's worth of lunch money for a $131 billion company such as Pfizer, but it takes a big chunk of hide from a smaller outfit like Cephalon.  Expectations suddenly rise for the deterrent possibilities of proposals floated in recent weeks, including raising the fines for repeated pharma offenders, suspending patents and making the CEOs criminally liable.

Finally, it is good news to hear that private concerns are willing to commit up to $2 billion for practical applications of stem cell therapies.  One can only imagine how much farther this approach to treating cancer, heart disease and Alzheimer's would be today if a scientifically ignorant, self-righteous, religious certitude in Washington had not halted research funding in this area for 8 years.
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