Alza Brings Ditropan XL To Abbott As Near-Term Project In $7.3 Bil. Merger

Abbott would expand its urologic products franchise with the urinary incontinence treatment Ditropan XL as one of the immediate effects of its proposed acquisition of Alza.

Launched in February, Ditropan XL (oxybutynin) has captured a 16% share of new prescriptions, Alza reports. "The market for overactive bladder products continues to expand," the company added, "with the number of Ditropan XL prescriptions surpassing 50,000 for the month of April." A 15 mg tablet was approved June 22, joining 5 mg and 10 mg strengths.

Ditropan XL complements Abbott's existing position in the urology market built on the use of Hytrin (terazosin) for benign prostatic hyperplasia. It could further give Abbott a new product to keep that category alive as Hytrin approaches the loss of exclusivity.

Abbott's deals with Ivax and Geneva delaying the introduction of generic Hytrin (terazosin) expire in February 2000. Hytrin sales were $650 mil. worldwide in 1998. While Abbott has touted the incontinence and BPH products in its pipeline as "promising," they are in early development. Abbott has an interest in a Phase III erectile dysfunction therapy, apomorphine (Uprima), through its TAP joint venture with Takeda.

Alza has 300 sales professionals in its urology sales team, and Ditropan XL promotional partner UCB Pharma has 400 reps. Alza's urology offerings also include the interstitial cystitis therapy Elmiron, for which it has North American rights from Ivax.

The Abbott/Alza merger is a $7.3 bil. message from Abbott's new senior management that the company is ready to take larger risks to support its drug business.

Abbott Chairman Miles White, selected to head the company 10 months ago from the diagnostics side of the business, stated the importance of the move as a sign of commitment to pharmaceuticals. "Our acquisition of Alza is an excellent strategic fit and an important step that builds our pharmaceutical business and accelerates Abbott's long-term growth."

With his diagnostics background, White's commitment to the drug business initially was unclear. The drug business also has a new head, Senior VP Arthur Higgins, who succeeded Exec VP Paul Clark in 1998.

Abbott has also emphasized a change in its attitude to the drug business by rejoining the Pharmaceutical Research & Manufacturers of America ("The Pink Sheet" Feb. 15, p. 24).

In his inaugural address as chairman at the annual shareholders meeting, White signaled Abbott's intentions to grow the drug business from outside the company. "Internal R&D alone cannot provide all the growth that Abbott - or any modern pharmaceutical company - needs," he said. "We will continue to place significant emphasis on...supplementing our pipeline with products and technologies acquired from external sources. We have grown our licensing and acquisition function to meet the task before it."

Abbott has used in-licensing to supplement its R&D effort but has shied away from major purchase commitments. At a European conference last year, Director of Corporate Licensing Al Harris noted that Abbott generates more than half of its pharmaceutical revenues from in-licensed products ("The Pink Sheet" Nov. 2, 1998, p. 17). Some of the company's largest products, including the billion-dollar antibiotic Biaxin (from Taisho), are in-licensed. The TAP joint venture contributed income of $266 mil. to Abbott in 1998.

However, the company has avoided big risks on the pharmaceuticals side (including passing on the opportunity to develop the business that became Amgen when it was a subsidiary of Abbott in 1980). It has acquired a number of companies for other divisions, most recently the purchase of MediSense in diagnostics.

At $7.3 bil. in a stock-for-stock deal, Alza is not a conservative move: it is 11.3 times Alza's trailing year revenues (including Sequus) and 37 times trailing operating earnings.

On one level, the transaction is a merger of companies with similar profit ratios. Operating earnings are about one-third of sales for both companies. However, Abbott's Rx business has a higher margin: operating earnings are about half of net sales for the pharmaceuticals division. Alza thus has the potential to lower Abbott's pharmaceutical operating margins.

Abbott is looking to Alza for existing products and development skills. However, from the perspective of pipeline enhancement, Abbott is getting an unusual partner because of Alza's specialty in delivery and dosing improvements rather than in new ingredient development.

Alza has been attempting to make a transition from a delivery boutique to a company with marketing capabilities. The company expects to file NDAs for two of its own products this year: an Oros version of methylphenidate for attention deficit disorder treatment and a Duros leuprolide product for advanced prostate cancer. Abbott has experience in both markets. Its neuroscience presence includes two ADD therapies (Cylert and Desoxy), and TAP sells leuprolide in a depot formulation (Lupron).

Perhaps the trickiest part of the deal for Abbott will be nurturing Alza's third-party development business. Contract development still represents nearly half of Alza's reported revenues from outside sources ($227 mil. of $584.5 mil.).

Alza will operate as a subsidiary of Abbott. The company's R&D and manufacturing operations will remain in northern California with the Alza name. CEO Ernest Mario will step down after the deal.

A previous attempt to run Alza as a development arm from within a major company ran into trouble two decades ago. Ciba acquired a controlling interest in Alza in December 1977 and held it for four years before spinning the company back out in June 1982. American Home Products had a longer tenure of ownership of a drug development firm with Eurand, which came with Robins in 1989. AHP sold Eurand to the investment firm E.M. Warburg, Pincus in April.

To maximize its value from the Alza acquisition, Abbott will need to preserve its character as a service firm. Abbott has some experience with that role from its recent work as a contract manufacturer.

"Of growing importance" to Abbott's Chemical & Agricultural Product Division is "the manufacture of bulk chemicals and high-value custom pharmaceuticals for third-party customers," Abbott's annual report states. CAPD had sales of $352 mil. and operating earnings of $117 mil. in 1998.

The company has manufacturing relationships with most major industry players, including Bayer, SmithKline and Glaxo; it even supplies erythromycin to its competitor in the macrolide market, Pfizer.

Since Ciba's brief stewardship of Alza, relationships among competing firms have become more common and complex in the drug industry, which may mean that the climate will be more accepting of the Abbott/ Alza deal. However, there are also many more development firms (such as Noven, Penwest and Iomed) to which companies can turn to avoid working with a competitor.

The combination of Alza's finished dosage form expertise and Abbott's bulk capabilities could be compelling, Abbott said, particularly to companies that are already purchasing bulk ingredients from Abbott.

The Alza delivery technologies also can be applied to Abbott's own products. Alza has an established position in transdermal systems, providing the technology for products like SmithKline's Nicoderm, Novartis' Transderm-Nitro and Estraderm and its own Testoderm. The company is also working on Oros extended, rate-controlled oral delivery, E-Trans electro-transport through the skin, Duros polymer implants for subcutaneous delivery and RingCap oral tablets for modulated drug release in the GI tract.

Alza does not expect the merger to have an impact on any of its current development projects, including E-Trans fentanyl for chronic/breakthrough pain with Janssen, which Alza will co-market. Janssen also markets the Alza-developed transdermal fentanyl Duragesic. Abbott markets Anesta's oral transmucosal fentanyl products Actiq and Fentanyl Oralet.

Alza will accelerate Abbott's plans to develop an oncology business. Alza/U.S. Bioscience's chemoprotective Ethyol (amifostine) gained an indication for prevention of radiation-induced xerostomia in post-operative head and neck cancer patients June 24 (see related story, p. 14).

Alza's purchase of the liposomal technology firm Sequus for $580 mil. at the end of 1998 brings to the Abbott deal the liposomal doxorubicin Doxil. The product was recommended for a new indication by an FDA advisory committee June 8. The acquisition announcement shortly after two positive committee reviews indicates the growing importance of the advisory committee as a milestone in merger talks.

The Sequus acquisition also brings a liposomal cisplatin project in Phase II. With Alkermes, Alza is working on the development of Cereport for delivery of chemotherapeutic agents to the brain. In the oncology market, Abbott agreed in January to market and distribute Sicor's multisource oncology products.