Cephalon to acquire rights to spasm drug

Cephalon Inc. said it agreed to pay $100 million in cash to acquire North American rights to the recently approved muscle-spasm drug Amrix.

The Frazer company announced yesterday that it was buying the rights to the extended-release medication from privately held ECR Pharmaceuticals, of Richmond, Va.

In February, the Food and Drug Administration approved two dosage strengths of the drug for short-term use, accompanied by rest and physical therapy, to treat muscle spasms associated with acute musculoskeletal conditions.

Amrix is not yet commercially available in the United States, and Cephalon expects to begin selling it early in the fourth quarter.

Founded 20 years ago this month, Cephalon is an international company with 3,000 employees and six U.S. products, including the sleep-disorder drug Provigil and pain medications Actiq and Fentora.

Cephalon recently told investors in second-quarter financial statements and a Securities and Exchange Commission document that it had established a $56 million reserve as an "estimate of the minimum liability" to resolve investigations by the U.S. Attorney's Office in Philadelphia and the Connecticut attorney general.

In September 2004, the U.S. attorney in Philadelphia subpoenaed documents about Cephalon's sales and marketing of Actiq and two other products, Provigil and Gabitril for epilepsy.

The Connecticut attorney general began a probe after information about off-label use and problems with "diversion," or illegal use, of Actiq after the 2003 death of a Southington, Conn., woman who overdosed after buying the drug from a dealer.

Actiq, a berry-flavored narcotic painkiller on a stick, is approved only to treat "breakthrough" cancer pain - a severe spike in pain experienced by patients already being treated with regular pain medication. But doctors widely prescribe it "off label" to treat other types of pain such as migraines and backaches.

While doctors are free to prescribe medicines for any condition they think appropriate, drug manufacturers can promote products in the United States only for uses approved by the FDA.

"We recorded this reserve because we thought it's appropriate to do so," Cephalon founder and chief executive officer Frank Baldino Jr. said in a recent conference call. "You should look at this as nothing more than the reserve that we've put on the books, and the final outcome will likely be materially larger than this."

The U.S. Attorney's and Connecticut Attorney General's Offices declined yesterday to discuss the status of the investigations.

"As many of you know, the entire pharmaceutical industry has been under intense scrutiny in recent years from both federal and state regulators," Baldino told analysts. As a result, the industry is making "radical changes to ensure compliance," he said.

"We also have been engaged in an ongoing effort to evaluate and appropriately modify our commercial policies and practices," Baldino said. "Cephalon is determined to play a leadership role in this area, and is firmly committed to doing all we can do to meet the expectations of federal and state authorities."

Baldino said that he would like to resolve the Justice Department probe this year and "get us beyond it" to focus on the future. "We're pretty satisfied with our pipeline, but I still think we can acquire some products that fit our space" and treat the central nervous system, cancer and pain, he said.

Licensing the rights to Amrix, the muscle-spasm drug, is an example of Cephalon's "filling out the marketed portfolio" and "leveraging the products carried by their sales force," analyst David Windley of Jefferies & Co. Inc. said in an interview.

"We have not had an opportunity to run all the math," Windley said, noting that, if Cephalon sells Amrix "with sales and marketing resources that are largely in place," the incremental margins it can pick up, if it sells Amrix successfully, would be attractive.

Wall Street analyst Corey Davis at Natixis Bleichroeder Inc. has estimated that Cephalon will settle the Justice Department investigation into off-label promotion for $100 million to $200 million. "The sooner a settlement is reached, the better, as it would remove one of the few risks" to the company, he wrote in a research note.

Cephalon shares closed up 90 cents, or 1.26 percent, at $72.14 yesterday on the Nasdaq.