He's Just Being Frank

BIG, BOLD, AND BRASH, Frank Baldino has built Cephalon into one of the nation's most dynamic biotechs. The company, based in suburban Philadelphia, is 20-years-old this year, and is already marking its birthday with a flurry of honors. In January, Cephalon was inducted into the World Economic Forum's Community of Global Growth Companies—a tribute to a 44 percent increase in annual revenue (to $1.67 billion in 2006) and its new footprints in Europe and Asia. The company also made Forbes' list of 25 Fastest-Growing Technology Companies in America, ranked above Amgen, Genentech, and Celgene, thank you very much. On the R&D front, its leukemia treatment, Trisenox (arsenic trioxide), won high praise from the National Cancer Institute as a treatment for newly diagnosed patients, a timely lift to Cephalon's grand scheme to leap from CNS, where it made its reputation, into oncology, where its late-stage pipeline promises lie.

Although Cephalon has yet to launch a single product out of its own discovery program, the company is much envied for its genius at spotting, developing, and promoting neglected drugs. Its first and now flagship drug, Provigil (modafinil), with a narrow sleep-disorder label, delivered more than $700 million last year, at least half of which was for off-label uses ranging from MS fatigue, depression, and ADHD to jet lag, campus cramming, and multipurpose "brain boosting." Actiq (oral mucosal fentanyl), a sluggish-selling painkiller popsicle for cancer patients until Cephalon snagged it from Anesta in 2000 and relaunched it, earned a cool $570 million last year, with more than 90 percent of sales serving off-label uses.

This strategy hasn't always scored, of course. The biotech bought Abbott's anti-seizure drug, Gabitril (tiagabine), in 2001 and sent it through the biotech's standard boot-camp efficiency tests for neuropathic pain and anxiety, among other conditions. But Gabitril has so far shown only middling benefits, while reports that it actually caused seizures in some non-epileptic patients have cramped its off-label style.

The credit for Cephalon's success belongs largely to Baldino, who has been at the helm from the beginning. "Frank has made Cephalon into one of the top-three CNS companies," said Harry Tracy, the publisher of the industry newsletter Neuroinvestment and an afficionado of the field's players. "He was bold. He took risks and saw potential in compounds that no one else did. He did a great job of growing the company."

Inside Cephalons medicine cabinet

But Baldino is known as much for what he has said as for what he has done—especially when he's angry at FDA. Tracy calls the Cephalon chief's tendency to shoot from the hip "refreshing," adding that, "It's very unusual among pharma CEOs, who generally present a bland, controlled public face and talk out of both sides of their mouth."

Despite being named Neuroinvestment's "CEO of the Year" numerous times, Baldino no longer speaks to Tracy—reportedly offended by unfavorable coverage. Baldino's apparent thin skin makes an odd combo with his raging-bull persona, and, according to Tracy, "in the CNS field, he is the one big CEO whose career stumbles would most likely inspire a feeling of schadenfreude." But Baldino's detractors may be eating their words, given Cephalon's banner year.

A Loud and Proud Outsider

Though Baldino is CEO and chairman—and pulled in $6.5 million in pay in 2005—he is kept on a short leash these days when meeting the press. When I sit down with him in his executive office, two suits from Corporate Communications are at his elbow, ready to spring. I put my tape recorder on the glass table; they produce their own digital model. Clearly, I will be served no vintage Baldino—no I-can't-believe-he-said-that! comments—like when he admitted to having his own prescription for Provigil to a New York Times reporter in 2002, who was doing a story about the stimulant's increasingly controversial off-label popularity.

Blame it on his Neapolitan blood. A second-generation Italian-American, Baldino has always been a Philly boy. He went to Muhlenberg College on scholarship, got his doctorate in pharmacology at Temple, and began screening neurobiology chemicals at Dupont—where he watched in wonder as Genentech cloned its first gene and gave birth to an industry. "DuPont taught me a lot about how to do things—and how not to do things," Baldino recalls. "As I was tracking Genentech, Amgen, and all the other examples, I finally said, 'I think I can do that. And I think science needs a new direction, instead of the same old strategy.'"

In 1987, Baldino and two other DuPont scientists, jumped ship to start a CNS venture with $3 million from investors. But between the challenge of raising money after the October stock-market crash and the lessons he had learned from industry watching, Baldino knew enough not to drink the biotech boom-or-bust Kool-Aid. "What happened in biotech is that we became a little full of ourselves with the 'If you can clone it, it should work' attitude," he says. "But the industry started doing things that weren't proven to work, trying to interfere with the course of a disease in ways that had never been done. By 1987 a lot of companies blew up. I said, 'We're not going to do that.' Even how we discovered drugs and screened compounds was one of mitigated risk."

Cephalon began doing deals—another way of balancing risk—and has never looked back. After sinking $130 million into Myotrophin (mecasermin), a recombinant insulin-like growth factor product to treat amyotrophic lateral sclerosis (ALS), the young company was in a deep hole. So Baldino turned on the cash faucet by signing a co-development agreement for new Alzheimer's drugs with Schering-Plough. In 1991, Cephalon went public, raising another $55 million. A series of tactically brilliant deals followed, with Cephalon co-developing here and co-marketing there, licensing and acquiring, diversifying within and finally outside its specialty. What began as a way to stay afloat while its R&D eggs hatched quickly doubled as the point of the exercise.

"Wall Street likes to put companies in categories: Big Pharma, specialty pharma, biotech," Baldino says. "Well, we're about as biotech as it can be. But because we developed a strategy of mitigating risk and make a lot of money, we're more like specialty pharma. But because we're global, we're more like Big Pharma. But what we're not is any one of those things. We're different." Cephalon's outsider status is clearly a point of well-earned pride.

"It's very difficult—and expensive—for a small company to pursue multiple products at the same time, especially in such a high-risk field," says Harvard Business School professor Gary Pisano, the author of Science Business: The Promise, the Reality, and the Future of Biotech. "I give Cephalon a lot of credit for recognizing the need to do that, managing so many different partnerships, and executing it all so successfully."

Success, however, was slow in coming. By 1996, the still-struggling biotech was ready to submit its first drug for approval. The company had conducted two Phase III trials, one showing significant benefit, the other, mixed results. Despite a clamor for Myotrophin's approval from patients, advocates, and even Congress, FDA dragged out its decision, finally issuing only an ambiguous "potentially approvable" letter demanding further studies.

Baldino understandably went ballistic. But somewhat less understandable—for the head of a biotech with no winning track record—was when he proceeded not only to voice his displeasure with the agency ruling to the press, but to drop the semi-approved drug for a largely untreatable disease like a spurned suitor.

The drama left Cephalon looking more biowreck than biotech. Its stock tanked, and the New York Times called Baldino "a pariah among investors." "Baldino engaged in a staring contest with FDA," said Tracy. "And he lost." Another CEO would have been handed his walking papers. But Baldino had an ace up his risk-mitigating sleeve.

The Drug That Never Sleeps

Mention Cephalon to industry insiders, and their instant reply will likely be "Provigil." Cephalon lore has it that Baldino discovered the brand serendipitously at a small French drug firm called Lafon, where he noticed that lab rats dosed with modafinil—then being tested, without much success, for depression—were wide awake in daylight "despite being nocturnal creatures," Baldino says.

It is an anecdote ritually repeated to the press. Another, more ironic, version comes from Arena Pharmaceuticals president Jack Lief, formerly Cephalon's head of business development. According to Lief, he and a young Cephalon scientist tracked down the drug, but some company high-ups saw its potential market as too small, since narcolepsy afflicts only about one in 1,000 Americans "At the first executive committee meeting,'" Lief told the Wall Street Journal, "one of the executives said, 'Well, let's just give it back.'"

However it entered Cephalon's sights, the chemical was destined to become not only Cephalon's cash cow but one of the most pioneering and controversial drugs of the decade. After licensing modafinil in 1993 for $6 million over six years, Baldino and his team set about building it into a far-flung franchise, with sales expected to top $1 billion by 2010. Still, a so-called wakefulness-promoting agent—Provigil ("promotes" + "vigilance")—was no slam dunk. Even for those who could grasp Provigil's promise as a treatment for fatigue related to many kinds of medical conditions, certain doubts and downsides had to be addressed.

Ever since the rise and fall of amphetamines in the '60s, a stigma has been attached to "pep pills." Despite the possible payday, the proven dangers of addiction and abuse encouraged researchers to shift their focus from how to keep people awake to how to put them to sleep. But the "if we build it, they will come" confidence demanded by a curious compound in a static category was Frank Baldino's specialty.

"This is a drug that has no warts on it," he predicted when Provigil won approval from FDA in 1998, three days before its NDA was to expire. In fact, at every stage of its development, Provigil has lived up to its hype. Unlike Ritalin (methylphenidate), Dexedrine (dextroamphetamine), and Adderall (mixed amphetamine salts), modafinil is largely free of the side effects and other complications associated with stimulants. It causes no caffeine jitters, no amphetamine peaks and crashes. Not a single death has been attributed to it.

"This is the first drug in history to selectively promote wakefulness in a way analogous to how the brain normally wakes up," said Dale Edgar, associate professor of psychiatry at Stanford University. In addition to preclinical trials of Provigil for Cephalon, Edgar has conducted studies financed by the Air Force Office of Research, which now lists Provigil as an official "go pill" for pilots whose missions stretch out more than 12 hours—on flights, say, to Iraq and Afghanistan.

But it wasn't until the company filed a supplementary new drug application (sNDA) for Provigil in 2002, aiming for a broad "excessive daytime sleepiness" (EDS) label, that mainstream coverage hit high gear, with epic headlines like the Wall Street Journal's "The Quest to Banish Fatigue." Sleep guru David Dinges weighed in, in The New Yorker, calling Provigil "the most tempting drug to come along in decades. It promises to satisfy our relentless desire to control time."

With sales soaring—and 90 percent of scripts off label—the drug attracted an inevitable performance-enhancement buzz. Reporters outdid one another with inflated rhetoric. Provigil was "the next Viagra in lifestyle drugs," a "brain steroid" and "smart pill," and would "free the mind from sleep" the same way that the Pill liberated sex from procreation. That six American track and field stars tested positive for Provigil, which led the US Olympic Committee to ban the drug, didn't help matters. Neither did Baldino's self-confessed preference for using it.

Provigil, as filtered through the media, looked both very good—and very bad. The New York Times finally exhausted the genre in 2004 with a lengthy piece implying that the drug might have prevented the nuclear meltdown at Chernobyl and the Exxon Valdez oil spill, but that it also seemed on the verge of creating a generation of sleepless, soulless, 24/7 workaholics.

Such is the price of being a true breakthrough drug. And price, ironically, may be what has prevented Provigil from becoming—gasp!—the Ultimate Lifestyle Drug: At $7 or $8 a dose and limited reimbursement, Provigil is too costly for most casually interested consumers.

As a consumer with a more than casual interest in any chemical that might pump up my mental muscle, I raised the lifestyle question with Baldino. He immediately put the kibosh on my fantasies of Provigil as a cognitive enhancer. "You're talking about misuse," he said sharply. "I think if you're tired, Provigil will keep you awake. If you're not tired, it's not going to do anything."

But what about the increasing demand by a society obsessed with "more, better, faster"? "I don't see the FDA ever approving a drug for a lifestyle improvement," he said. "And I don't know if I want to sell one. We entered this business to develop drugs for sick people."

I tried again. This time he said, "You know, eight years' experience, millions of patients who use this drug around the world, very few, if anybody, is using it for a lifestyle enhancement. People like to sleep." One look across the table at Corporate Communications, and I knew I could never ask Baldino whether he considered a pharma exec's jet lag a lifestyle enhancement.

A Problem With Authority

Baldino's scruples haven't stopped Cephalon from pursuing the signature strategy of milking its drugs for as many indications as possible. Provigil's 2002 sNDA for EDS would have allowed docs to prescribe liberally for fatigue, consumers to get claims paid, and Cephalon's then-300-strong sales force to pitch to primary-care physicians and internists. Although there was no lack of data backing the application, the FDA balked, okaying only the sleep apnea and shift-work indications. Its advisory panel had voiced concern about overprescribing, and the agency had recently slapped Cephalon with a warning letter for pushing the envelope with its sales detailing. "The labeling doesn't matter," the irrepressible Baldino shot back, telling reporters he planned to up his sales force to 450. "As long as we can legitimately call on GPs and access the population they treat, the sales of the drug will be larger."

FDA has a long memory, and the next time Provigil came knocking in 2006, seeking approval for ADHD in children, the agency slammed the door in its face. Two Phase III clinical trials showed the drug to be a kinder, gentler alternative to Ritalin. But Cephalon's insistence on rebranding the higher-dose ADHD version of modafinil as Sparlon—and touting it as an "important new drug" to investors—may have provoked the agency.

The advisory panel gave Sparlon, whose active ingredient had by then been in use for six years by more than three million patients, a thumbs-down because of a single report linking use of modafinil to a skin rash diagnosed as the exceedingly rare but life-threatening Stevens-Johnson Syndrome. That the panel's sole dermatologist not only doubted that the rash, if it was in fact SJS, was dose related, but also provided the sole "approval" vote didn't exactly inspire confidence in the agency's decision.

When Cephalon got word that FDA wanted an additional trial, it was déjà vu all over again for Baldino, who once again dropped the drug. Harry Tracy, who blasted FDA in Neuroinvestment for refusing to approve Sparlon with a black-box warning, said, "It was another case of Cephalon being a little less diplomatic than was wise. The FDA responded by putting up the SJS roadblock, Frank basically called them on it, the FDA did not bend, and Frank"—here he laughs fondly—"reverted to his old style."

Taking Care of Business

A product like Provigil is likely to come around only once in any CEO's lifetime. "We keep chasing Provigil's use. But the truth is, we go to major meetings with one abstract only to find 10. Last year, I found a guy in Colombia using it to wake people up out of comas," Baldino says, adding with a laugh, "But when I write my book, it'll all have been my idea." And except for the Sparlon misstep and other foot-in-mouth errors, Baldino has showered his prize brand with TLC—and prime protection.

In December 2002, Teva, Ranbaxy, Mylan, and Barr flooded FDA with ANDAs for generic versions of modafinil, threatening to shred Provigil's patent, set to expire in 2015. Cephalon filed suit the following March. The case, which turned on esoteric issues like particle size, cast a sudden cloud over the pill's brilliant career, and Cephalon's stock dropped 25 percent.

As a fallback, the company invested millions in a race to develop a new version of Provigil by reformulating it as a single isomer. While this tweak resulted in a longer-acting—and, Cephalon claims, cleaner, more potent—compound, its true value was less in extending the drug's release than in extending its franchise. By producing Nuvigil, with its once-daily dosing and 12-hour effect, Cephalon hoped to do an end run around the generic offensive, grabbing as many Provigil users before they hit. And it's worth noting that the company's big plans for Nuvigil include seeking approval as a cognitive enhancer for patients suffering from Alzheimer's, Parkinson's, MS, and other conditions.

In the event, Cephalon settled all four patent challenges, expertly defusing the generics with deals allowing them to market their knockoffs in 2012, plus agreements involving licensing, co-developments, and other enticements, totaling payments of $138 million. Cephalon stock jumped 50 percent, and Baldino boasted that "we were able to get six more years of patent protection—that's $4 billion in sales that no one expected."

While Baldino deserves to laugh all the way to the bank, he may not have the last laugh. In the year since Cephalon's triumph, reverse-payment deals have come under increasing scrutiny from the FTC, which is seeking a test case, while Congress is eyeing a bill to ban generic payoffs. Meantime, Bernard Sherman, the 64-year-old Canadian owner of Apotex who made his $4 billion fortune challenging US drug patents, has filed suit alleging that Cephalon "paid the generic defendants to maintain its monopoly on Provigil."

Cephalon's general counsel, John Osborn, emphasizes that the company's agreements don't qualify as reverse payments because they involve partnerships of one kind or another. As entertaining as it might be to witness a showdown between two tough-talking scientist-entrepreneurs like Baldino and Sherman—whose legal machinations over Plavix resulted in the ouster of BMS CEO Peter Dolan last year—most legal experts agree that Cephalon's deals were so creative (it even gave rights to Actiq, its narcotic lozenge on a stick, to Barr) as to be sue-proof.

Off Label and in the Hot Seat

A second legal entanglement, long in the making, may rain on Cephalon's parade. Off-label prescriptions for Provigil and Actiq have always been essential to the company, in some years accounting for 80 percent of annual revenues. As analysts like Tracy have marveled, one reason Cephalon's deals can look so unexpected at first but so inevitable—not to mention lucrative—in retrospect is that they manage to maximize market penetration of its entire portfolio.

This volume of off-label uptake was bound to attract suspicion. In 2004, the US attorney general in Philadelphia began looking into Cephalon's marketing of Provigil. More recently, sales practices of Actiq also came under scrutiny. The state of Connecticut is conducting an investigation triggered by the fatal overdose of a 20-year-old Connecticut woman who got the "perc-a-pop" from a local drug dealer, and including data showing that less than 3 percent of all prescriptions for this cancer-pain treatment are written by oncologists and pain specialists.

When asked about the investigations, Bob Roche, Cephalon's executive vice president of worldwide pharmaceutical operations, said, "This will ultimately be resolved in our favor. I am 100 percent comfortable with our sales practices and in full agreement with the attorney general that our sales reps cannot discuss off-label use of Actiq."

Off-label criminal investigations are almost routine in the industry, but something more than a business-as-usual response may be required from the biotech. "This is serious stuff—a powerful narcotic that is very addicting with a narrow application and very wide use," says Ross Pearlson, a former prosecutor now at Cummis Epstein & Gross. "It could lead to criminal charges, a false-claims case, a corporate integrity agreement, substantial fines, even exclusion from Medicare programs." Prosecutors appear to be probing patterns of prescribing and sales calls rather than direct evidence like marketing materials, he says. "Given that the company's products have such a high level of off-label prescribing, I would recommend that Cephalon respond preemptively, with a compliance program that has teeth in it," Pearlson says.

At press time, trashy TV newsmags dishing up round-the-clock coverage of Anna Nicole Smith's death were reporting "breaking news": Two of the drugs found by the cops in the virtual pharmacy that was the celeb's hotel room were identified as Actiq and Provigil. While this has no substantive bearing on the case, such name-in-the-mud headlines can make a prosecutor's week.

The Boss in Mid-Career

After 20 years, the young scientist who left the lab to chase the biotech wave ranks as one of the longest-serving CEOs in the industry. But elder statesman is clearly not a role that Baldino is auditioning for. Instead, he is out doing deals. Among the latest: Cephalon's purchase of Zeneus, a British specialty pharma with a strong oncology portfolio, and a co-promotion with Takeda that adds 750 reps to the Provigil account. Meanwhile, Cephalon is also looking to China, where it plans to roll out its top drugs.

Cephalon's biggest move, however, is its shift in emphasis from CNS to oncology. The biotech has two cancer drugs in Phase III: Treanda (bendamustine), for chronic lymphocytic leukemia and non-Hodgkin's lymphoma, and CEP-701 (lestaurtinib), also for AML—may be as soon as 2008. If CEP-701 gets the FDA nod, it will mark the first drug Cephalon has developed from discovery—and a welcome validation of R&D head Jeffrey Vaught's longstanding belief in tyrosine kinase inhibitors. "We hoped these compounds would turn on neurons and regenerate cognitive functions," Vaught says. "Instead we learned, after many failures, they are much better at turning off cell growth in tumors."

Still, the leap from CNS, where Cephalon is a big fish in a small pond, to the crowded oncology ocean may prove dicey. Going head to head with the Pfizers of the industry, especially in the race to license and develop new drugs, will test Cephalon's famously sharp eye for finding the prize. Of course, not being a Pfizer also has its upside. "When you have a billion and a half in revenue, and you are looking to grow 20 percent a year, you can accomplish that nicely with niche drugs," Harvard's Pisano said. "I see no reason that Cephalon can't continue to grow in the oncology market, especially given its track record for knowing the nuances of a market and a field."

Neuroinvestment's Tracy, while acknowledging Cephalon's business smarts, views the leap into oncology as a "second-best choice" and a "sign that the company has chosen to follow, rather than blaze, paths." He also pays the biotech and its boss the honor of a nostalgic what-if. "With its money and development expertise, Cephalon could have made itself the world leader in CNS," he said. "Imagine what the company might have done if it had gotten in on the ground floor with a schizophrenia drug or Alzheimer's drug." He laments that Baldino seems to have exchanged the bold risk for the main chance, refusing these days to license preclinical drugs—as he did with Provigil—in favor of Phase IIs and IIIs. "He's fallen in with the Street."

That's not a bad place to be. Still, to hear Baldino tell it—once our conversation has been safely rerouted from the performance-enhancement track to the pipeline-promises one—the company is just hitting its stride. The expected triple-play in oncology is only the beginning for Cephalon's R&D. "Treanda is important because it's going to be sort of a paradigm shift in cancer, especially for non-Hodgkin's lymphoma," he says. As for the other Phase III oncology possibility, CEP-701, he explains, Vaught and his team have ID'd biomarkers that could be developed as "a blood test and tell with 100 percent accuracy whether you're going to respond to the drug or not." Baldino smiles. "So it's nice to be on the cutting edge of this evolution in personalized medicine."

The practiced modesty may be new—and not his native style—but the substance is old-school Baldino. Although predictions in pharma are folly, with Cephalon stock and strategy stronger than ever, no one should be surprised to see its boss still playing at the big table—placing bets and winning—in another 20 years.

This online version incorporates corrections made in the printed version.