November 23, 2009 / 1:48 PM / 10 years ago

UPDATE 5-Cephalon stock drops after trial data disappoint

* Reports disappointing results of esophagus drug trial

* Cephalon shares drop as much as 10 pct

* Cephalon delays decision on Ception acquisition (Adds detail in paragraph 5, updates share price)

By Toni Clarke

BOSTON, Nov 23 (Reuters) - An experimental drug that Cephalon Inc CEPH.O had hoped to add to its product line-up proved disappointing in a trial of patients with a rare type of inflammation of the esophagus, sending the company’s shares down as much as 10 percent on Monday.

The drug, Cinquil, was developed by privately held Ception Therapeutics Inc, to treat pediatric eosinophilic esophagitis, or EoE. Cephalon paid $100 million to Ception in January for an option to acquire the company and Cinquil, known generically as reslizumab, for $250 million.

“This eliminates one of the only sources of near-to-intermediate-term upside,” said Thomas Russo, an analyst at Robert W. Baird, in a research note. “We recommend assuming that reslizumab will not be filed for approval in EE without another trial, if ever.”

The drug had been expected to generate peak annual sales of around $500 million.

Shares of Cephalon, a drug company built on the back of its top-selling sleep-disorder drug Provigil, have fallen 34 percent since reaching a 52-week high of $81.35 in February, as they have also been hurt by concern that Nuvigil, Provigil’s successor, will have trouble reaching Provigil’s revenue level. Provigil loses patent protection in 2012.

The disappointing Cinquil data come less than a week after a trial of a potential new drug for lupus also showed mixed results in a clinical trial.

The drug, Lupuzor, is being developed by British drugmaker ImmuPharma Plc (IMM.L). Cephalon agreed in February to pay ImmuPharma $15 million for an option to acquire an exclusive, worldwide license for Lupuzor.

“Lupuzor is a long shot,” said Avik Roy, an analyst at Monness Crespi Hardt & Co, in a research note. “The data were encouraging in parts, but early; and even if the drug were to succeed in larger trials, the earliest it could get on the market is 2015.”

Analysts expect Cephalon’s shares to remain under pressure until it announces a new partnership or acquisition or until more clinical data are released later this year and early next year.

Frazer, Pennsylvania-based Cephalon and Ception have agreed to extend Cephalon’s option exercise period until after results of a mid-stage trial of Cinquil in a different condition — eosinophilic asthma.

“We note that Cinquil was not included in our estimates and that due to the option structure of Cephalon and Ception’s agreement, Cephalon’s financial exposure to Cinquil is somewhat limited,” said Chris Schott, an analyst at J.P. Morgan, in a research note. “That said ... with Cinquil representing one of Cephalon’s visible late-stage pipeline assets, we would expect the news to clearly weigh on sentiment surrounding Cephalon’s shares.”

The trial of Cinquil in EoE was designed to evaluate improvement in two endpoints. The first measured changes in the blood level of a type of white blood cell associated with the disease. The second measured changes in symptoms of the disease.

While there was a statistically significant reduction in white blood cells known as eosinophils in patients taking Cinquil compared with those taking a placebo, there was not a significant improvement in clinical symptoms.

Cephalon said the lack of statistical significance in clinical symptoms was because there was also a strong improvement in symptoms in patients taking the placebo.

The study evaluated the drug in 226 children between the age of five and 18. About 80,000 children in the United States have EoE, according to the Journal of Clinical Investigation.

EoE decreases the ability of the esophagus to stretch, making it harder to swallow and absorb solid food.

Symptoms of the disease in children include abdominal pain, nausea, vomiting and a failure to thrive.

“We view the reslizumab failure as a significant setback,” William Tanner, an analyst at Lazard Capital Markets, said in a research note. “Cephalon may be compelled to pursue additional in-licensing/acquisition as a result.”

Still, some analysts believe Cephalon’s shares could bounce back soon.

“It seems that some investors are taking advantage of the early weakness to buy calls,” said option strategist Frederic Ruffy.

Overall options trading volume was double the norm, with about 26,000 calls traded versus 6,979 puts near midday, according to Trade Alert.

Cephalon’s shares were down $5.23, or 8.8 percent to $54.38 in afternoon trading on Nasdaq. Earlier they fell as low as $53.44. (Additional reporting by Doris Frankel) (Reporting by Toni Clarke, editing by Gerald E. McCormick and Gunna Dickson)

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