Cialis, the impotence drug that hit the U.S. market in late November, recently grabbed second place for new prescriptions, moving ahead of Levitra, which entered the market several months before it.

Neither drug has approached the still-dominant market share of Viagra, which lost its five-year monopoly in August 2003 when Levitra reached U.S. pharmacies. But the people who market Cialis haven't been shy, issuing a batch of announcements about prescriptions and patient preferences at home and abroad.

The question now for investors assessing the impotence drug market is whether Cialis' recent performance signals a trend -- or whether it's simply a case of premature self-congratulation.

Wall Street analysts are impressed with Cialis' gains, but they'd also like to see several more months of data. Additional time and information would lessen the initial impact of free samples, vouchers and other distractions from pure revenue recognition that have characterized the launches of Cialis and Levitra as well as the defense of Viagra.

Doctors welcome the competition because they believe more drugs will encourage more men to seek help for impotence. But doctors are as mystified as analysts on what product will eventually sell best.

"The companies have flooded the market with free samples," said Dr. Wayne Hellstrom, professor of urology at the Tulane University School of Medicine in New Orleans, who has participated in clinical trials for all three impotence drugs. "There's so much out there. It will be hard to get a feeling for what patients want for six to eight months."

Competition Intensifies

Cialis was developed by the small biotechnology company Icos ( ICOS), which has entered into a joint venture for marketing and co-development with Eli Lilly ( LLY).

Levitra was developed by Germany's Bayer ( BAY), which has joined forces to market the drug with GlaxoSmithKline ( GSK).

And Viagra, which reached the U.S. market in 1998, is made and marketed by Pfizer ( PFE).

With so many multinational giants involved, there's an enormous arsenal of marketing firepower for persuading patients and their doctors. Analysts say that if these drugs can encourage more men to seek treatment, it may not matter which company places second or third in the prescriptions sweepstakes because there will be enough profit for everybody. But if the erectile dysfunction, or "ED," pill market grows slowly, they add, companies face the prospect of eroding potential profits with an escalating marketing arms race.

"We believe that total prescriptions may need more robust growth over the long term for all three players in this market to avoid an expensive share battle," said Dr. Steven Harr, a Morgan Stanley analyst, in an April 5 research report.

From late August until the week ended March 26, total U.S. prescriptions for all erectile dysfunction drugs moved up 7%, says the medical data research firm IMS Health. Weekly returns have been erratic. In fact, total prescriptions -- new prescriptions plus refills -- for the week ended March 26 were the lowest since the week ended Jan. 30.

A more positive interpretation of this data shows that the March 26 weekly figure -- the latest data available -- was 14.3% higher than total prescriptions for the same period last year. (New prescriptions gained 28.2%.)

However, that total prescription growth rate is still not good enough for Harr, whose economic model calls for 20% U.S. prescription growth this year. "Unless the market grows meaningfully over the next several years, we do not believe that all three ED drugs can be substantial contributors to the companies' bottom line," he said. "It appears that the overall market is reacting positively to the recent marketing blitz ... that began around the time of the Super Bowl. However, growth needs to accelerate to meet expectations for all three drugs."

The Battle for Second Place

The two newcomers have cut into Viagra's market dominance, but Viagra still has two-thirds of new U.S. prescriptions for impotence drugs, according to the latest data from IMS Health. The drug has significant brand name recognition and loyalty even if patients decide to try Levitra and/or Cialis. "They're curious. There's a bias in our culture to think that newer is better," said Janice Lipsky, Pfizer's U.S. team leader for Viagra. "This is not necessarily the case in pharmaceuticals. Newer is not synonymous with better."

But if Viagra falls, analysts say Cialis appears to have a better chance of dethroning the impotence treatment champion. Cialis is moving in "a positive direction," Harr said. IMS Health says new U.S. prescriptions for Cialis have been gaining market share steadily since the beginning of the year, reaching 19.1% for the week ended March 26.

Levitra's share of new prescriptions flattened in early 2004 and has drifted lower recently, hitting 14.8% for the week ended March 26. Cialis surpassed Levitra for new prescription market share for the week ended Feb. 27 and has kept its lead.

Also, for the first time, Cialis edged Levitra for the total U.S. prescription market share, winning 10.8% vs. 10.7% for the week ended March 26. Levitra's impact on the total market has leveled off since early February, while Cialis continues to advance. Viagra holds 78.5% of the total prescription market.

"Our product has had solid market growth," said Michael Fleming, director of U.S. pharmaceutical product communications for GlaxoSmithKline, saying investors should be careful in reviewing the weekly fluctuations of new prescriptions. "We're confident in the long term that Levitra will be the preferred choice."

A Cialis marketing executive says the prescription trend is clear. "Levitra got off to an earlier start in the U.S. There's little reason to believe they're going to get some kind of second wind," said Leonard Blum, vice president of sales and marketing for Icos.

Another way to examine these drugs' prospects is dollar market share. Because the average wholesale prices for the drugs are similar -- there's only about a 5% difference among them -- analyzing the dollar market shares can remove some of the distortions caused by free samples and other discounting tactics.

Cialis' U.S. dollar market share has advanced for 13 consecutive weeks, taking 10.7% for the week ended March 26, according to the latest available data from NDC Health, a medical data monitoring firm.

Levitra had a 9.6% share for the week ended March 26; it has slipped to third place for the last three weeks. Viagra's dollar market share was 79.7% for the week ended March 26 vs. 90.9% in late November before Cialis entered the market.

Cialis' performance "remains quite impressive," said Christopher J. Raymond, an analyst at Robert W. Baird, commenting on the NDC Health data. He has an outperform rating on Icos. "We believe Cialis's growth may be supported by both new patients as well as existing Viagra users," Raymond said in an April 5 report to clients. (He doesn't own shares, but his firm is a market maker in Icos' stock and it intends to receive or seek investment banking compensation within the next three months.)

A Dynamic Market

The magnitude of market growth will depend on several key issues, including a greater willingness of men to seek treatment and a greater willingness of insurers to pay for it.

Companies estimate that 30 million American men -- and an estimated 152 million worldwide -- suffer from some form of erectile dysfunction. Lilly Icos, the joint venture marketing Cialis, points to research saying that 80% of impotence is caused by physiological factors such as heart disease and diabetes, while 20% of the cause is psychological. Pfizer estimates that 20% of U.S. men with erectile dysfunction use the impotence drugs. Lilly Icos says the drug treatment percentage outside the U.S. is lower.

"A healthy amount of market growth is possible," said Blum, the Icos marketing executive and board member of the Lilly Icos joint venture.

Several urologists interviewed by say the market will expand thanks to the companies' advertising, which they say has been educational and effective.

"Bob Dole took the thing out of the closet," said Dr. John Mulcahy, a professor of urology at the Indiana University School of Medicine, referring to the former U.S. senator and Republican presidential candidate. Dole was featured in television ads several years ago advising men to talk to their physicians about erectile dysfunction. The ads never mentioned a product even though the ads were financed by Pfizer and Dole made it clear on the talk show circuit that he was taking Viagra.

"Pfizer has done a good job of marketing and educating the family," said Mulcahy, who has performed clinical trials of Viagra and Cialis and who has been paid for advisory work for GlaxoSmithKline and Bayer. "We're seeing more people coming in to discuss this."

Direct-to-consumer drug ads have encouraged more men to seek medical advice, added Dr. James Cummings, director of the urology division at the Saint Louis University School of Medicine. "The patient who has been fearful or embarrassed will now say to his doctor 'How about a free sample of Viagra.' That ends up enhancing the conversation with the patient." Cummings has performed clinical trials of Cialis and has been paid by Pfizer and Lilly to conduct education talks for other doctors.

Cummings said about half his patients have some form of insurance coverage for the impotence drugs, including private insurers and Missouri's Medicaid program (which pays for four pills a month). Other doctors cite similar experiences. One of them notes that Medicaid patients, whose coverage can vary from state to state, will slice the actual pill in half to prolong the number of days they can use the medicine because the federal-state program for the poor only covers a handful of pills per month.

The current insurance coverage experience is basically Viagra's because the other drugs are new and because managed care organizations take time to review so-called lifestyle drugs for inclusion in health care plans.

Pfizer says half of its Viagra prescriptions are covered by insurance. "We're actively working with third-party payers to achieve reimbursement like Viagra's," said Icos' Blum. Right now, patients preferring Cialis must pay out of their own pocket.

Bottom-Line Impact

Erectile dysfunction drugs mean different things to the different companies.

For Icos, Cialis means just about everything. Strong growth could push the Bothell, Wash.-based company into profitability by the end of 2005, said Robert Hazlett, of SunTrust Robinson Humphrey, in an April 5 report to clients. He has had a buy rating on the company since January 2003, and he believes Cialis could eventually become a $1 billion a year drug worldwide. (He doesn't own shares; his firm is a market maker in Icos' stock and has had an investment banking relationship with Icos in the past 12 months.)

Phil Nadeau of SG Cowen is more cautious; he doesn't see Icos becoming profitable until 2006. His interviews with urologists produced a consensus that although Cialis would be "a solid performer," the erectile dysfunction drug market would experience "only minimal growth," Nadeau said in a March 15 research report.

Those physicians said the market would expand by as much as 35% in five years; Nadeau was figuring on 150% growth. If the doctors are correct, Cialis would produce $900 million in revenue in 2008; Nadeau was estimating $1.48 billion. The doctors believe Cialis could grab 16% to 30% of the U.S. market share in 2008; Nadeau predicts 26%.

"Cialis's sales must surpass expectations for the stock to continue to work," said Nadeau, adding that he'll have a better idea on the drug's "peak potential" by year-end. He had rated the stock as outperform until March 1, when his firm eliminated ratings on all stocks. (He doesn't own shares, but his firm is a market maker in the stock and has managed an Icos public offering.)

The financial impact on other companies is even less clear. A nonscientific perusal by of recent analysts' reports for Eli Lilly, GlaxoSmithKline and Bayer shows little commentary about their respective impotence drugs as significant profit contributors.

One reason is that these drugs' sales and profits are carved up in joint ventures and/or alliances that mute the products' impact on each multinational company. The Lilly Icos joint venture that markets Cialis in North America and Europe is a good example. The joint venture is equally funded by the participants; profit and loss are split evenly. Lilly has the rights to sell Cialis outside those markets, paying a 20% royalty on net sales to the joint venture.

And because all of the participants, except Icos, are so large, the early progress of a new product may fly below the radar of investment banking firms, especially when analysts are assessing generic challenges to top-selling drugs or evaluating research to predict the next blockbuster.

Even Viagra's impact on Pfizer has changed, especially after the company's instant growth due to its 2003 acquisition of Pharmacia. Viagra recorded $1.88 billion in worldwide sales last year, an 8% gain over 2002. That's more revenue than most biotechnology companies produce in a year; but Viagra accounts for only 4% of Pfizer's sales. And now, Pfizer must invest marketing dollars to defend a product for which it once held a monopoly. Despite its historic ability to attract headlines, Viagra doesn't play a prominent role in recent analysts' reports on Pfizer.

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