Manufacturing Problems Cast Pall on Schering-Plough Earnings Food & Drug Administration has made the approval of Clar

09 July 2001 00:00  [Source: ICB Americas]

While other pharma companies focus on improving sales and productivity to battle lackluster stock performance, Schering-Plough Corp. (SGP) is struggling with manufacturing issues that could impact earnings and growth for several quarters to come. With the launch of Clarinex, a key component in maintaining the company's powerhouse allergy franchise hanging in the balance, SGP has cautioned that the deficiencies will take time to resolve. To get back on track, SGP is directing attention to new and anticipated product launches.

The Food & Drug Administration (FDA) recently slapped SGP with its second citation for manufacturing deficiencies this year, referencing further inadequacies at the company's New Jersey and Puerto Rico sites. The hasty resignation several days later of president and COO Raul Cesan, widely believed to be responsible for leading the action plan to correct the issues, left many wondering if it would take even longer for the company to clean up its act. SGP's stock price dropped from $40.55 before the disclosure of additional manufacturing deficiencies to $36.98 following Mr. Cesan's resignation.

SGP says it is making every effort to correct the problems. "Right now, this is my number one priority and the FDA is my number one customer," said Richard J. Kogan, chairman and CEO at Schering-Plough at a recent meeting for analysts. Yet he also cautions that the issues "must be addressed deliberately and methodically," and not to look for a quick fix. The company also said that EPS would be flat for the quarter compared to last year.

SGP's manufacturing woes trace back to 1998, when the company was first cited for deficiencies at the New Jersey and Puerto Rico sites. The February FDA warning letters carried a more serious consequence: final approval for Clarinex will be contingent upon SGP achieving manufacturing compliance.

The company has devised a cGMP work plan, which includes both structural and organizational changes, to deal with the issues. "To say we are highly motivated to resolve our manufacturing [difficulties] is an understatement. These GMP issues have affected product shipments, sales and earnings, approval of Clarinex and even our share repurchase program," adds Mr. Kogan.

Simultaneously, SGP's allergy franchise has been confronted with the threat of a forced switch for several antihistamines, including Claritin, to over-the-counter status. In a surprising move, an FDA panel sided with a health insurer that asked the agency to switch the products to OTC, despite protests from the drugs' manufacturers that such a move would be both unsafe and costly for patients.

The timing of a switch for Claritin could impact the success of Clarinex, which SPG hopes to make a fixture in the allergy market before Claritin's patent expiry in December 2002. However, analysts expect that because the FDA action is unprecedented, and pharma companies are sure to challenge a forced switch, the issue will not be resolved prior to the Claritin patent deadline.

"If generic Claritin does in fact hit the markets in late 2002 (the worst-case scenario to be determined in the courts), and Clarinex is not launched before the spring 2002 allergy season, our projections that the Claritin Family revenues remain north of $3 billion could be too high by $2 billion," says Carl Seiden, analyst at JP Morgan.

Given its falling stock price and the series of organizational setbacks, the company seems like it could be vulnerable for a merger or takeover. Several weeks ago, rumors circulated about a possible arrangement with Merck & Co., Inc., with which SGP has a joint-development agreement for cardiovascular drugs, but nothing came to fruition. But analysts say that at this time the Merck deal is unlikely.

"I'd cast cold water on the deal with Merck. For the time being, they'd be an awful big acquisition for anybody to swallow in a friendly way," says Robert Hazlett, analyst at Robertson Stephens. "Yes, the low stock price does create an opportunity for a lot of folks to look at them, but there are a lot of patent issues and the ongoing manufacturing issues are a distant, open question."

But further down the road, a merger might be possible, adds Mr. Hazlett. The size of success for ezetimibe, a cholesterol-lowering agent in development with Merck, could make SGP an attractive acquisition target.

Ezetimibe, currently in Phase III trials, could be a strong asset for SGP going forward. It belongs to a new class of drugs called cholesterol absorption inhibitors, which prevent absorption of cholesterol across the intestine instead of across the liver, as statins work.

While ezetimibe is not potent enough on its own to challenge statins' blockbuster status, the drug complements the action of statins, effectively doubling the level of efficacy. Thus instead of competing with current therapies, ezetimibe could benefit from a dual therapy approach that appears to be effective with all statins.

"I believe this is going to be the future best product of Schering-Plough," said Jonathan R. Spicehandler, president, SGP research, at the analysts' meeting. And with sales of cholesterol-lowering drugs in the US topping $9 billion in 2000 and a rapidly growing patient population, the market potential is clearly significant.

SGP also has high hopes for its new hepatitis drug PEG-Intron (peginterferon alfa-2b) to drive sales. PEG-Intron was launched early this year, expanding SGP's hepatitis C portfolio, which already included Intron A (interferon alfa-2b), Rebetol (ribavirin) and the combination therapy Rebetron. PEG-Intron, a pegylated version of an interferon drug, offers an enhanced delivery profile, improved efficacy and a longer life span in the body compared to traditional interferon drugs.

SGP sees room for growth for its hepatitis franchise through increased screening and diagnosis of undiagnosed cases and educating to promote compliance. The company is also banking on improved efficacy, such as is offered by PEG-Intron and the anticipated benefits of a PEG-Intron/Rebetol combination therapy now under FDA review, to drive treatment decisions.

The combination therapy could provide a significant boost for SGP, assuming the expected September approval is not affected by manufacturing issues. "Many patients have delayed treatment waiting for this therapy so the launch should be strong," says Mr. Seiden of JP Morgan. However, cautions Mr. Seiden, the manufacturing deficiencies appear to also include ribavirin, and the FDA could apply a similar contingency to final approval as for Clarinex.

PEG-Intron is also expected to face serious competition when Roche's own pegylated hepatitis drug, Pegasys (peginterferon alfa-2a), is approved. Separate clinical trial results for the Pegasys/ribavirin and PEG-Intron/ribavirin combination therapy appear to indicate the drugs are similar in efficacy.

"We think Pegasys will really give it a run for its money if Roche can adequately support it in terms of the sales effort behind it," says Mr. Hazlett.

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