High Hopes for Merck, Schering-Plough

The struggling drugmakers may score a victory with their novel anticholesterol drug Vytorin.
By Robert Steyer ,

Slowly, step by step, Vytorin is expanding its market share and raising the hopes of investors in

Merck

(MRK) - Get Report

and

Schering-Plough

(SGP)

, which have created this cholesterol pill from two separate drugs.

Vytorin's progress has come primarily at the expense of

AstraZeneca's

(AZN) - Get Report

Crestor, which was approved for the U.S. market in August 2003.

"Vytorin continues to grow while Crestor is pulling back," says Albert L. Rauch of A.G. Edwards. "But Vytorin isn't impacting Zetia or Zocor." Schering-Plough's Zetia and Merck's Zocor are sold separately as cholesterol treatments; they also are the two ingredients in Vytorin.

Analysts have wondered how Vytorin would affect the sales of these two drugs individually, especially Zocor, which is the second-bestselling cholesterol drug and whose U.S. patent expires in mid-2006. For now, their fears appear unwarranted.

A Very Important Product

Vytorin's growth is critical to Schering-Plough. "It

is

Schering-Plough," says Rauch, who has a buy rating. Vytorin also helps Merck, which has been stung by September's recall of the arthritis drug Vioxx and by the recent and impending patent protection losses of several big drugs. Rauch has a hold rating on Merck, and he doesn't own shares in either company. His firm has had a noninvestment banking relationship with Schering-Plough.

Vytorin and Zetia are sold through a joint venture, whose revenue could increase to $5 billion in 2009 from $1.2 billion last year, according to a recent report by S.G. Cowen & Co.

Schering-Plough's earnings through 2009 "depend most critically upon equity income from the cholesterol joint venture," says Steve Scala, author of the S.G. Cowen analysis. Scala says Schering-Plough's profit from the joint venture could exceed $2 billion in 2009 vs. only $33 million in 2003. Scala doesn't own shares, and his firm does not issue stock ratings; but S.G. Cowen "does and seeks to do business" with companies mentioned in research reports.

Vytorin also is part of a bigger drama in a cholesterol market filled with many unanswered questions. For example, how will it fare when a new pill from

Pfizer

(PFE) - Get Report

is expected to reach the market in a few years? The pill combines Lipitor with an experimental drug.

What happens when a flood of generic copies of Zocor and

Bristol-Myers Squibb's

(BMY) - Get Report

Pravachol are marketed?

Will managed care companies steer patients to cheaper generics, raising copayments or restricting choices of Vytorin and brand-name drugs?

And what happens to Crestor, which has been attacked repeatedly by critics but which

recently received a favorable opinion from the Food and Drug Administration? Although AstraZeneca agreed to strengthen some label warnings, the FDA said Crestor's side effects are similar to those of other cholesterol drugs.

Crestor has had disappointing U.S. sales. The near-term trend doesn't appear favorable, although it's hard to tell how much the latest FDA pronouncements will help Crestor in terms of removing the clouds of criticism.

Research by Morgan Stanley and IMS Health show that new prescriptions of Crestor accounted for 6.7% of the U.S. cholesterol market during the fourth quarter of 2004. At the current prescription-writing rate, Crestor will have a 5.6% market share during the first quarter of 2005.

Vytorin's market share is expected to climb to 4.9% from 3.5%. Zetia's new prescription market share is expected to move to 7.6% from 7.5%. Zocor's market share should slip to 17.5% from 17.8%, Morgan Stanley says.

New prescriptions are a better indicator than total prescriptions, when comparing new drugs against each other or comparing new drugs vs. older drugs such as Lipitor, the market leader. It had 47.3% of new prescriptions in the fourth quarter and is projected to have 47.2% during the first quarter, says Morgan Stanley. In second place was Zocor with a 17.8% market share for 2004's fourth quarter and a projected 17.5% for the first quarter of 2005.

Future Prospects

How far can Vytorin go? A lot will depend on whether several more years of patients' experience and more clinical trials produce outcomes that propelled sales of the market leaders. It also will depend on whether doctors believe there's a difference between Vytorin and the statin class of cholesterol drugs such as Lipitor and Crestor.

Although the Zocor component of Vytorin is a statin, the Zetia component acts in a different way. Statins work in the liver to cut bad cholesterol; Zetia works in the digestive tract, reducing the amount of cholesterol that the body absorbs.

Clearly, the bar for Vytorin's growth has been set higher. That's why investors yawned last week when Schering-Plough and Merck presented a study showing Vytorin did a better job of lowering cholesterol than did Lipitor at different doses. The reason: Analysts said they had already seen similar data.

As with Crestor, Vytorin now must show analysts and doctors that it can improve clinical outcomes; lowering bad cholesterol is no longer enough.

What may capture their attention is several clinical trials sponsored by Merck and Schering-Plough. One trial is testing the bad cholesterol-lowering ability of Vytorin vs. placebo in patients with chronic kidney disease. It will measure if the drug has a beneficial impact on heart attacks and/or strokes and how fast predialysis patients reach end-stage renal disease.

Another trial will examine Vytorin vs. placebo in assessing death and injury of patients with aortic stenosis, a disorder that obstructs the heart valve leading to the aorta, the main artery, restricting blood flow to the body.

A third test will compare Vytorin vs. Zocor to see if the combination pill does a better job in reversing the plaque-related thickening of the carotid arteries in patients with high cholesterol. A buildup of plaque in these two arteries, which carry blood to the brain, increases the risk of a stroke. And a fourth trial will look at Vytorin vs. Zocor in reducing death, heart attacks and other major coronary events among patients with a variety of heart-related problems.

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