Schering Acquires Levitra Rights From Bayer; Vytorin Launch Is Still Priority

Schering-Plough's acquisition of Bayer's primary care products in the U.S. will not distract the company from the launch of Vytorin, Schering CEO Fred Hassan told investors Sept. 13 at a Bear Stearns conference in New York.

"I want to assure you that our focus on Vytorin and its proper launch will remain very clear," Hassan said. He spoke the same day that an extensive partnership agreement was announced between Schering and Bayer.

Under the agreement, Schering will take over marketing of all Bayer's primary care products in the U.S. and Puerto Rico, including the U.S. co-promotion agreement with GlaxoSmithKline for the erectile dysfunction agent Levitra .

In addition, Schering will promote Bayer's Adalat (nifedipine) calcium channel blocker franchise and the antibiotics Avelox (moxifloxacin) and Cipro (ciprofloxacin), which has gone generic.

Bayer receives co-promotion rights to Schering cholesterol agent Zetia (ezetimibe) in Japan, where the drug is currently awaiting approval. Bayer will also receive co-promotion rights to "certain" Schering cancer products in the U.S. (see ¹ (Also see "Bayer U.S. Focus Will Be Oncology, Blood Products And OTCs" - Pink Sheet, 20 Sep, 2004.)).

Bayer's cardiovascular experience in Japan with Adalat was one reason for entering into the collaboration. "This is principally a strategic deal that allows us to partner with a strong cardiovascular company in Japan for the launch of Zetia," Hassan said.

Under the agreement, Schering will pay a "substantial royalty" to Bayer based on net sales of the products, the company said.

The addition of Bayer's primary care products to the Schering product portfolio in the U.S. will bolster Schering's portfolio and enables the company to fill in some excess capacity.

As Schering attempts to turn around the performance of its struggling allergy and hepatitis franchises - once cornerstones of the company's Rx business - the company is making Vytorin a priority to drive future growth (² (Also see "Schering Sales Force Recruitment Is 80% Complete; Morale Remains High" - Pink Sheet, 2 Feb, 2004.), p. 11).

Bayer's selection of Schering is also a "validation" of the company's commitment to the primary care market, Hassan suggested. "We see Bayer's selection of Schering-Plough as a U.S. primary care partner to be a validation of our evolving strength in this critical market."

GSK said that it is "very excited about" working with Schering on Levitra promotions in the U.S. "Schering has a very experienced sales force, and the new marketing team there we think is terrific," GSK President-Pharmaceutical Operations David Stout told investors Sept. 14 at the Bear Stearns conference.

The agreement, however, is not likely to have a significant impact on Schering's performance over the near term. Schering said that the deal will be mildly dilutive in 2004 (based on expenses associated with the transition of the products) and mildly accretive by 2005 in terms of earnings per share.

Levitra is a heavily promoted product in a blockbuster category, but its first year sales have not lived up to expectations (³ (Also see "Bayer May Cut U.S. Sales Force After Cipro Generics Enter Market" - Pink Sheet, 6 Sep, 2004.), p. 6).

In that context, Hassan emphasized Schering's continued commitment to Vytorin (simvastatin/ ezetimibe) as the company's primary growth driver. Vytorin is marketed under a joint venture with Merck.

Hassan said he personally attended the sales force launch meeting for Vytorin.

"This is not customary for CEOs in our industry, but I feel very strongly that one of my most important tasks is to be in touch with the people on the front lines. So I made the time to be there. I can report to you that this team is motivated, excited and well trained," he said.

"Let me say, in all aspects of marketing, we will be competitive with our peers in this important category," Schering CFO Bob Bertolini added.

Hassan highlighted the importance of gaining formulary coverage for Vytorin to ensure a successful launch.

"Managed care formulary acceptance will be key to the success of Vytorin," Hassan said. "For competitive reasons, we are not prepared to provide specifics today, but we are making good progress in this regard. And we will continue to watch this closely over the next six to nine months," he said.

According to a survey conducted by Prudential Equity Group and market research firm Cognet-X, Vytorin is expected to have a favorable formulary coverage with approximately 38% of managed care payors (⁴ (Also see "Vytorin Managed Care Outlook More Positive Than Crestor, Survey Finds" - Pink Sheet, 23 Aug, 2004.), p. 24).

While still in early stages of the launch, the company says that it is "pleased with the market's response." The Vytorin launch expanded Schering's market share of the new prescriptions within the cholesterol market. The Merck/Schering joint venture also sells Zetia.

Schering's new prescription market share grew to 7.3% (as of Aug. 27) compared to 6.4% at the end of July, Schering said. "This morning's numbers look even better," Hassan said.

The company noted that the product will benefit from labeling that shows LDL lowering superiority to both Pfizer's Lipitor (atorvastatin) and Merck's Zocor (simvastatin) (⁵ (Also see "Merck/Schering’s Vytorin Clears FDA: Price Is 22% Discount To Lipitor" - Pink Sheet, 2 Aug, 2004.), p. 11).

Schering noted that it has "played a big role" in developing the launch strategy for Vytorin, and particularly in the decision to run an unbranded ad campaign ahead of the product launch.

The Merck/Schering joint venture launched an unbranded TV ad July 26, three days after approval, that highlighted "the two sources" of "bad cholesterol."

Schering's expertise in direct-to-consumer marketing may help the company re-energize Levitra's performance.

GSK believes Levitra's lackluster performance can be partly attributed to a DTC campaign that was poorly managed around the time of the product launch, Stout told the Bear Stearns conference.

"We had bad positioning. Some of it was probably bad marketing decisions. As the second out, we didn't want to be the first to do ads with the indication," Stout said. "We didn't want to have to scare them with that information."

"With [Pfizer's] Viagra being out there, everybody knows what Viagra is, so we did reminder advertising without the litany of side effects and everything else," Stout said. GSK/Bayer launched Levitra reminder ads shortly after the product was approved in August 2003.

"When [Lilly's] Cialis came, they had no choice so they launched with" fully branded ads, Stout noted. "Low and behold, it didn't really seem to matter to people that they heard this list of bad things. Some were even viewed as positive things."

Lilly's full product and use ads - the first for the category - launched during the 2004 Super Bowl and emphasized the product's duration of action. The ads also noted the risks associated with "erections lasting longer than four hours" (⁶ (Also see "Super Bowl Ads Pit Levitra Against Cialis; Viagra Stays On The Sidelines" - Pink Sheet, 9 Feb, 2004.), p. 7)

Cialis pulled ahead of Levitra in market share to claim the second spot, behind Viagra (⁷ 'The Pink Sheet' March 29, 2004, In Brief). Full product-and-use ads for Levitra have subsequently launched (⁸ (Also see "Bayer/GSK Levitra “Product And Use” TV Ad Stars Woman With A “Secret”" - Pink Sheet, 19 Apr, 2004.), p. 32).

Levitra's sales also have been hampered by slower-than-expected growth in the erectile dysfunction therapy category, Stout said.

"I wish the market was growing faster," he said. "I think there was some over-optimism about how many people would just jump on the bandwagon."

The GSK exec cited two factors contributing to the category's limited growth: product sampling and internet sales of counterfeit products.

"The amount of samples out there is just unbelievable," Stout said. "In some ways, if you look at a doctor's shelves, you're surprised that we're selling anything. But nobody wants to be the first to back off."

"The other part - and it's hard to quantify - is that I think we're losing a lot of business over the internet to products that may not even be real drugs."

"If you look at the counterfeit drug reports from around the world, the drugs that are the most counterfeited are Viagra, Levitra and Cialis," he said. "I don't know what we can really do there except to make our random purchases and try to get publicity out there."

In light of the challenges and costs associated with supporting Levitra, Stout said GSK has not seen any profits from the drug. The company hopes the brand will become profitable "in the next couple of years."