How Vytorin Fell Short

Updated from Jan. 21

OKLAHOMA CITY -- In the summer of 2006, Schering-Plough(SGP Quote - Cramer on SGP - Stock Picks) made a bold -- if premature -- call.

During a two-day strategy session, the company's latest proxy statement shows, Schering-Plough declared that its crisis period from recent years had come to an end. The company reached that conclusion shortly after the close of a key trial meant to further strengthen a booming cholesterol-drug franchise that it operates with Merck(MRK Quote - Cramer on MRK - Stock Picks).

Not until last week, nearly a year and a half later, did the results of that trial finally emerge. The study, popularly known as ENHANCE, suggested that Schering-Plough's blockbuster cholesterol-lowering drugs work no better -- and could pose greater risks -- than the far cheaper generic Zocor.

Schering-Plough's shares plummeted 20% in a matter of days as a result. The stock couldn't even manage a rebound on Friday after CEO Fred Hassan announced plans to buy $2 million worth of the hammered shares.

"The media interpretations of the top-line ENHANCE results, and the resulting stock price reaction, have been deeply troubling," Hassan stated. "This investment in Schering-Plough reflects my long-term confidence in the company. ... There are still significant challenges facing Schering-Plough, but I firmly believe this company can be turned around."

By now, Hassan and other Schering-Plough leaders have already collected generous awards for the company's "comeback." Notably, regulatory filings show, Schering-Plough linked much of the "long-term" incentive awards for its recovery to a three-year period ending in 2006.

Certainly, Schering-Plough looked strong enough at the time. Thanks in part to its new cholesterol drugs, Zetia and Vytorin, the company managed to post substantial improvement in virtually every key financial metric -- including sales, earnings and shareholder returns -- since Hassan's arrival in the spring of 2003.

Blockbuster Drugs

At his arrival, Hassan inherited the cholesterol franchise that has brought Schering-Plough so much success.

Back in 2000, the company teamed up with Merck in an effort to develop a next-generation cholesterol drug that could lower the risk of heart attacks.

By late 2002, the two companies had won approval for Zetia and introduced the first new cholesterol drug to hit the market in 15 years. Traditional treatments, known as statins, slow the liver's production of cholesterol to cut the risk of heart attacks. Zetia works by a different mechanism, slowing the body's absorption of cholesterol instead.

By supplementing regular statins with the new drug, experts reasoned, patients could further lower their cholesterol and -- theoretically -- reduce their heart attack risk as well. Thus, faced with hard-to-treat patients, physicians began prescribing Zetia alongside Pfizer's (PFE Quote - Cramer on PFE - Stock Picks) best-selling Lipitor and Merck's Zocor.

They wound up with a new option in 2004, when Schering-Plough and Merck combined Zetia with Zocor -- which was facing patent expiration -- to create Vytorin.

Vytorin's makers had high hopes for their new drug. While they were under no regulatory obligation to do so, they wanted to offer prescribing physicians more scientific evidence to back up the idea that their drug provided big health benefits.

And so came ENHANCE.

A so-called surrogate trial, ENHANCE examined whether Vytorin could reduce plaque build-up in arteries -- often a trigger for heart attacks -- rather than heart attacks themselves. It followed a group of 720 high-risk patients and regularly measured their plaque build-up, using specialized ultrasound techniques, over the course of two years. Evaluation of those scans, totaling some 40,000 in the end, promised at least some hints of the drug's effectiveness while a more comprehensive trial moved forward.

Like Schering-Plough, Merck needed a victory. By late 2004, the company had withdrawn one blockbuster -- the painkiller Vioxx -- due to safety concerns and had started counting the days for another. Zocor, still its best-selling drug at the time, would lose patent protection by mid-2006.

Conveniently, ENHANCE was scheduled to conclude around that time.

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