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SANOFI HAS FOUR POTENTIAL CANDIDATES FOR STERLING IN U.S., INCLUDING THREE IN LATE-STAGE CLINICALS; JOINT VENTURE WILL HAVE $ 500 MIL. R&D BUDGET, $ 2.3 BIL. SALES

Executive Summary

Sanofi has three products in "Phase IIb/III clinicals" plus a low molecular weight heparin that are candidates for U.S. marketing by Sterling once the two companies consummate their proposed strategic alliance announced Jan. 9. The low molecular weight heparin Fraxiparine, one of Sanofi's five major products, is not currently sold in the U.S. In late- stage development, Sanofi's pipeline contains: clopidrogel (SR 25990), a platelet aggregation inhibitor; fantofarone (SR 33557) for hypertension and angina; and tiludronate (SR 41319) for the prevention and treatment of osteoporosis. The strategic alliance with Sanofi offers Sterling no major new product opportunities in the near-term for the U.S. market due to the French firm's strategy in recent years of out-licensing commercially important prescription products. Products outlicensed by Sanofi for U.S. marketing include Syntex' Ticlid; the anti-epileptic Depakone and tranquilizer Tranxene, which are licensed to Abbott; the heparin product Calciparine, licensed to DuPont; and the antiarrhythmic Cordarone, licensed to Wyeth-Ayerst. The proposed strategic alliance will create three joint ventures between Sterling and Sanofi covering prescription and OTC pharmaceuticals. The two prescription drug joint ventures, called Sanofi Winthrop, will market Sanofi and Sterling products in their respective geographic areas. A third joint venture, Sterling Health (see following story), will market the two companies' OTC lines. The proposal does not constitute an acquisition of either company by the other. Rather, it allows each company to retain its separate corporate identity and headquarters while drawing on each other's sales force, marketing and distribution strengths. Sterling described the deal as "cash flow neutral" with each company taking a stake in the other and trading geographic assets. The alliance would provide Sanofi with access to Sterling's 800-rep sales force as well as the U.S. firm's physical plants and local research and product registration experience without the enormous cash expense of a major acquisition. The French firm has been seeking an entry into the U.S. pharmaceutical and OTC market since its acquisition bid for A.H. Robins was thwarted in 1988 when American Home Products outbid Sanofi and Rorer. The deal would provide Sterling access to a much richer pipeline and worldwide critical mass in sales and marketing. For Sterling's parent Kodak, the deal offers many of the same benefits as DuPont's joint venture agreement with Merck, not the least of which is a graceful way of dealing with a mid-size drug business in danger of being lost in the high stakes drug industry merger wave without bowing entirely out of the business. The combined Sterling and Sanofi operations would generate some $ 2.3 bil. in revenues in 1991, vaulting Sanofi Winthrop into the top 20 pharmaceutical companies in the world. Currently, Sanofi, with some $ 1.3 bil. in drug sales, ranks 35th globally and Sterling, with about $ 1 bil. in pharmaceutical sales, is 37th, according to IMS data provided by the companies. In addition, the Sterling-Sanofi strategic joint venture would have a worldwide R&D budget of more than $ 500 mil., putting the combined operation in the top 12 pharmaceutical companies in terms of R&D spending. Unlike the recent DuPont Pharmaceuticals joint venture with Merck, where Merck retains rights to its own R&D efforts, the Sterling-Sanofi venture would have exclusive marketing rights to products that emerge from both companies' respective discovery and R&D programs. The Sanofi-Winthrop venture will share "certain" development expenses not yet detailed. The companies stressed that the proposed scheme allows Sterling and Sanofi to "retain direct ownership and management of the discovery and development portion of their respective research operations. The alliance will have exclusive rights to the pipelines of the two companies in the territories, subject to existing rights of third parties and will share certain development costs." A transition team is working on the proposed alliance under the joint direction of Sterling CEO Louis Mattis, 49, and his counterpart at Sanofi, Jean-Francois Dehecq, 51. The deal is expected to be completed by mid-1991. At that time, Sanofi-Winthrop will unveil a rationalized and trimmed pipeline focusing on thrombotics, cardiovascular, oncology, diagnostics and neuropharmacologic drugs. Mattis and Dehecq will have a primary role, along with the heads of Sanofi R&D and the Sterling Research Group, in formulating the new, tightened pipeline and in deciding which Sanofi drug projects to bring to the U.S. An announcement of the proposed alliance notes that both Sanofi-Winthrop ventures will be managed by a joint strategic management committee. Further back in development, Sanofi predicted last year that it would bring 17 new drugs into clinicals during the 1990-1991 time period. These included four thrombosis products; three cardiovasculars (for hypertension, angina and heart failure); five neuropharmacologic compounds (for Alzheimer's, anxiety, depression and epilepsy); and five others, including compounds for asthma and immunotherapies. In addition, Sanofi's major thrombotic product, the platelet aggregation inhibitor Ticlid (ticlodipine), may be unavailable to the Sanofi-Winthrop joint venture in the second half of the decade. Syntex has exclusive rights to the product for three years after approval. After three years, Syntex still retains the right to continue exclusive marketing or to sell Ticlid through a 50%- owned subsidiary or joint venture. The product is currently at FDA where it may get a narrower-than-hoped-for indication due to advisory committee concerns with the incidence of neutropenia in clinical trials ("The Pink Sheet" Dec. 17, T&G-1). Sterling's R&D pipeline, likewise, appears to contain few, if any, near-term opportunities for Sanofi. Sterling's biggest selling product in the U.S., Omnipaque (iohexol), and two other in vivo imaging agents pending at FDA -- iopentol and gadodiamide (S- 041) -- are licensed from the Norwegian firm, Nycomed, and their availability to the joint venture is unclear. A follow-up radiopaque compound to iopentol and an MRI agent are in Phase II clinical studies, Sterling reported, and two additional MRI agents are "nearing" clinicals. In the cardiovascular area, Sterling has two agents in Phase II study: the antiarrhythmic ipazalide (WIN-154177) and PEG-SOD for the prevention of reperfusion. A second antiarrhythmic is slated to enter clinicals early this year. WIN-54954, an oral product for the prevention of enterovirus and rhinovirus is also in Phase II. Two radioimmunoconjugates and a lymphokine are in clinicals for cancer. The start-up of clinicals for a radiosensitizer is "anticipated in mid-1991," Sterling said. Also for cancer, Sterling has a "novel antiandrogen" for prostate cancer and benign prostatic hypertrophy that is currently in Phase I. Sterling also highlighted four compounds in late discovery: an orally active compound for emphysema; "structurally novel" cytotoxics for cancer; a series of phosphodiesterase inhibitors for the prevention of heart failure; and new molecules for MRI enhancing agents. Under the strategic alliance, each company is expected to retain its R&D centers. Sterling conducts discovery and development activities through 1,600 personnel at five centers in Rensselaer, N.Y.; Alnwick, England; Dijon, France; and Great Valley and Chesterbrook, Pa. The planned 1993 opening of Sterling's $300 mil., 900,000 square foot U.S. central R&D facility in Upper Providence, Pa. is unaffected by the announcement of the alliance. Sanofi employs 1,600 R&D researchers and staff worldwide at seven centers in: Montpellier, Toulouse, Labege and Gentilly, France; Brussels; Milan; and Manchester, U.K. Sanofi and Sterling noted that 1,100 of the combined companies' 3,200 R&D personnel are devoted to drug discovery efforts. The agreement divides the world in two according to the existing strengths of each company: like the 15th century Treaty of Tordesillas, which split the New World between Spain and Portugal, Sanofi Winthrop will exist in two distinct spheres. Sanofi would be the majority partner (51%) in the eastern Sanofi Winthrop territory -- Europe, Africa, the Middle East, Asia and the subcontinent -- managing the drug venture and receiving the greater share of assets and future profits. In the western hemisphere, the Sanofi Winthrop operation would be managed by Sterling, which will control 51% of the venture for North America, Latin America, the Caribbean and Australasia. In Japan, where both companies have existing partnership agreements, a "joint policy will be discussed," the companies said. Sanofi has an existing agreement with Daiichi Pharmaceuticals that covers thromboembolics (ticlodipine) in Japan, and which provides a partnership for Daiichi to develop its products in Europe. Sanofi drug products have been in Japan since 1983 via joint ventures with Taisho and Meiji Seika. More than 60% of Sanofi drug sales are generated outside of France; the company has a pharmaceutical market in more than 100 countries. Sanofi also has staked a claim to the new Eastern European market with its recent acquisition of 40% of the number two Hungarian pharmaceutical firm, Chinoin ("The Pink Sheet" Nov. 19, T&G-4). Sterling pharmaceuticals also are sold in more than 100 countries, with 43% of sales coming from outside the U.S. Overseas, Sterling says its ciprofibrate Lipanor is the "major" lipid lowering drug in France. U.S. clinicals for the product have been on hold. Other international pharmaceutical products include Trancopal, a muscle relaxant; Plaquenil (hydroxychloroquine) for malaria, lupus and rheumatoid arthritis; Negram, an antibiotic for urinary tract infections and the breast cancer product danazol. Sterling parent Kodak has been exploring options such as a strategic alliance for the last 12 to 18 months, Kodak Chairman Kay Whitmore said in an interview. He explained that Kodak considered three options: attaining critical mass through another Kodak-funded acquisition, maintaining the status quo, or selling Sterling. Another health care purchase was ruled out, Whitmore said, in part, because of the increasing premium needed to buy into a successful acquisition. The status quo was rejected in the face of the rapid consolidation in the pharmaceutical industry in 1989-90, he noted. Whitmore acknowledged that Kodak had underestimated the speed with which the industry consolidated after 1988. Kodak, which paid $ 5.1 bil. for Sterling in 1988, reiterated its satisfaction with Sterling's performance in the three years since its acquisition, saying the drug operations are "meeting or exceeding expectations of Kodak management." Sales from continuing operations have grown at a compound annual rate of more than 7% and gross margins have increased "more rapidly," Kodak said. Operating earnings before R&D are up "more than 40%" since the acquisition and R&D investment has more than doubled since 1988 to $ 250 mil.
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