Entrepreneur Frank Baldino Jr. can still picture the mice that sparked the idea for his blockbuster drug back in 1992. Baldino, CEO of Cephalon Inc. (CEPH), was touring the animal lab at Lafon, a Paris drugmaker that was testing a new antidepressant. Rodents are nocturnal, so Baldino was stunned to see Lafon's mice wide awake in the middle of the day. He decided to license the compound and test it against drowsiness. "No one had developed a drug for wakefulness," he says. "We would have to create the market."
With the resulting drug, called Provigil, Cephalon has done more than create a market. Baldino's management strategy at each point in the drug's life cycle could serve as a manual for other biotechs seeking to turn radical ideas into hit products. Provigil, approved to treat narcolepsy and other causes of drowsiness, enhances alertness with little of the heart racing or hand shaking associated with caffeine. It has turned Cephalon into a shooting star: Revenues in 2005 hit $1.2 billion, up 19% from 2004, and Provigil accounted for about half of the haul. Profits jumped 14%, to $167 million, excluding one-time costs.
At the same time, Baldino has had to steer Cephalon through a minefield, petitioning the Food & Drug Administration to expand the list of legitimate uses for Provigil, while managing regulators' fears that the drug could become a lifestyle elixir for sleep-deprived people. In late March, the Frazer (Pa.) company hit a land mine. An FDA advisory panel declined to recommend a version of Provigil to treat children with attention deficit hyperactivity disorder, causing the stock to plunge.
It's always risky to tinker with the brain, the most complex organ in the body. Our states of mind are swayed by a million factors, past and present, biological and social. That makes it tough to predict the impact chemicals will have on each individual. History is littered with examples of mind-altering drugs -- antidepressants, antipsychotics, and sleep aids -- that failed to win the FDA's blessing or showed worrisome side effects later. Yet Cephalon has maintained its equilibrium. In the next few weeks, the FDA should rule on two Cephalon drugs: one to treat addiction, and the other a long-acting version of Provigil. A green light could push revenues up 25% this year, to $1.5 billion, and profits up 38% to $229 million.
When Cephalon first licensed Provigil for an undisclosed sum in 1992, its survival was anything but guaranteed. The board worried that Cephalon would burn right through the $108 million it had raised. Board member and investor William P. Egan, a founding investor in FedEx (FDX) Corp., scolded Baldino during a meeting. "He said: 'I don't know how to spell DNA, but I know how to make money, and you're not doing it,"' recalls Baldino, a PhD pharmacologist who started his career at DuPont (DD).
Scrambling for ways to get cash -- and sales experience -- Baldino persuaded Bristol-Myers Squibb Co. (BMY) to let it co-market a migraine medication. This arrangement was netting Cephalon $4.7 million a year when it ended in 1998. By the time Provigil was approved in December of that year, Cephalon's salespeople had formed close ties with neurologists who would be the drug's early adopters. Cephalon sold $25.4 million worth of Provigil in its first year. "At a time when no one believed in Cephalon," Egan recalls, "we proved that we could build a focused sales force."
Baldino's business model has evolved as its workforce has grown from an initial four employees to 3,000. To stay entrepreneurial, Baldino granted full management power to the heads of each unit. Some of them then made drastic changes: The sales and marketing management team gave field reps the freedom to call on all the physicians in their geographic territories and to sell them all of Cephalon's drugs, including treatments for pain and epileptic seizures. It was a complete switch from the early days, when each rep sold one drug to certain specialists. Revenues grew tenfold in the five years following the restructuring.
Even as Baldino's strategy started to pay off, however, risks were becoming evident. In a 24/7 world, alertness is a precious commodity, and Provigil seemed to invite abuse. The compound is not addictive, does not give users an amphetamine-like buzz, and isn't classified as a controlled substance. So thousands sought it out as a "safe" stimulant. The FDA seemed to feel that Cephalon was encouraging them. In 2002 its promotional brochures drew a rebuke from regulators, and in late 2004 the U.S. Attorney's office in Philadelphia initiated a probe of Cephalon's sales practices.
Yet Baldino and his staff understood there was nothing wrong with doctors prescribing drugs for different ailments. The FDA bars companies from promoting drugs for any condition other than those approved on the label, but it doesn't object to doctors experimenting on their own. With Provigil, physicians were eager to do so. They may not know exactly how the drug works, but it clearly affects the regions of the brain responsible for wakeful states. In trials, pilots who took Provigil stayed awake for three days. Doctors have thus prescribed it for everything from chronic fatigue syndrome, to heart failure symptoms, to sleepiness with no apparent cause. Some 50% of sales now come from such legal, "off-label" use.
Baldino is learning how to steward this immensely popular drug without incensing the FDA. Company policy dictates that when doctors come to sales reps with glowing reports on how the drug performs in one or another treatment area, reps are forbidden to use the information to fan sales. Instead, doctors are instructed to call the company's scientists. This often leads to research collaborations and new trials, which have helped win the FDA's blessing to market Provigil to people who work night shifts, for example, and to patients with sleep apnea, a condition that disrupts sleep. "We're following the regulations, and as they evolve, we will evolve," Baldino explains.
Because brain science is still young, snafus happen. Witness the travails of Sanofi-Aventis (SNY), maker of Ambien, a popular sleep aid. In March, bizarre reports emerged of people taking the drug and then driving or eating in their sleep. In one case, a woman sleepwalked to the kitchen and scarfed down an entire bag of hamburger buns slathered with butter.
In light of such incidents, the FDA could require other companies to disclose more details about side effects on drug labels, and dictate how they should track adverse events after approval. That could complicate Cephalon's efforts to get Provigil approved in new areas such as Parkinson's disease and cancer. "These concerns have to be watched," says Dr. Karen R. Ballaban-Gil, associate director of the Montefiore Medical Center Sleep-Wake Disorders Center in New York.
As for Cephalon's March stumble in ADHD, Baldino refuses to give up on what could be a $3 billion opportunity. The FDA's advisory panel feared the drug called Sparlon -- a version of Provigil -- was responsible for dire skin rashes. But Baldino doesn't believe Provigil is to blame for the severity of the rashes, and hopes to press his case with the FDA. "The ball's in our court," he says.
By Arlene Weintraub