The Wall Street Journal-20080117-Study Missteps Threaten Turnaround at Schering
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Study Missteps Threaten Turnaround at Schering
The mishandling of what should have been a relatively routine study of two of Schering-Plough Corp.'s most profitable drugs threatens to deal a serious setback to the painstaking turnaround implemented by Chief Executive Fred Hassan.
Since Mr. Hassan took the helm at the Kenilworth, N.J., drug maker five years ago, he has increased sales of key products, beefed up the product pipeline and returned profitability to a company that posted losses in 2003 and 2004 and was feeling pressure because of generic- drug competition and regulatory problems.
Much of the chief executive's success can be attributed to Vytorin and Zetia, cholesterol drugs Schering sells jointly with Merck & Co. Sales of the drugs have doubled to $5 billion a year since 2005. But that rich revenue stream is at risk following this week's disclosure that a study that could have boosted the medications' marketing prospects instead suggests they offer no more benefit than a cheaper generic alternative.
The impact of the finding was amplified by a long delay in releasing the results, and the revelation in November that the researchers considered altering the study's primary goals -- widely considered a violation of scientific protocol. The developments exposed the companies to suspicions -- which they have denied -- that they had postponed announcing the results because they were unfavorable.
The missteps are likely to dent the companies' finances and reputation. Congress is investigating whether the companies improperly deferred publicizing the results, and yesterday lawmakers expressed concern about Vytorin ads. In addition, prominent medical professionals have questioned the drug's benefits.
Investor unrest is focused less on Merck than on Schering, whose bottom line relies much more on the drugs than Merck's does. Analysts estimate that Vytorin and Zetia account for more than half of Schering's earnings. Bank of America estimates the figure is close to 60% for 2007, compared with about 15% in 2007 for Merck. Schering's stock has tumbled 15% to $23.49 a share since the news came out Monday, while Merck shares have fallen 4% to $58.35, in New York Stock Exchange trading.
"Vytorin and Zetia have been keys to Schering-Plough's resurrection," said Michael Krensavage, a drug analyst at Raymond James & Associates. "Any damage to these products could hurt the company significantly."
In an interview yesterday, Mr. Hassan said he remains optimistic about Schering's prospects. "What makes us feel good about the future is that there is strength and diversity," he said. "The company has the size and strength to deal with these shocks."
It is still unclear how big a hit Vytorin and Zetia will take. Several major health insurers said they have no plans to reduce their coverage of the two drugs based on the study, in part because it didn't raise significant safety concerns. The American College of Cardiology and the American Heart Association urged caution interpreting the results, saying that the drugs appear to be safe and that doctors and patients should discuss any clinical decisions. Cowen & Co. reduced its estimate of the drugs' annual sales by $600 million by 2010.
Merck declined to make its executives available for an interview. Spokesman Chris Garland said in a written statement that the joint venture is managed by a committee that has "equal clinical representation from both parent companies." He said that Merck doesn't believe the study was mismanaged, but that it "required meticulous examination" of "intricate details" and took longer than anticipated.
Schering and Merck said Monday that results of the trial, called Enhance, showed that Vytorin failed to slow progression of heart disease more effectively than Zocor, a cholesterol drug known as a statin that is available in generic form at a far lower price. Vytorin is a pill combining Zetia and Zocor.
The Enhance trial began in 2002, a year before Mr. Hassan took over Schering-Plough. At the time, cardiologists were asking Schering and Merck to show that Zetia -- which works differently from highly popular statins -- didn't just lower cholesterol but also helped patients live longer and prevented heart attacks. Large studies looking at such outcomes take a long time and the Enhance study offered an interim look that focused on how much plaque formed in the arteries of Vytorin users.
Analysts asked Mr. Hassan when the Enhance results would be disclosed as long ago as April 2007, during a conference call. But he said he began to focus on the issue around Thanksgiving, after media reports questioned the delay.
When Mr. Hassan arrived at his office on Jan. 10, he and his research chief met in a conference room adjacent to his office to discuss the data. Even though the company didn't plan to present the full results until March, Mr. Hassan said he favored releasing some of the material early. "I said, 'Do the right thing, move forward,'" he recalled. But the delay had already caused damage.
Mr. Hassan declined to speculate on how much the negative publicity could hurt sales of Vytorin and Zetia. "Things happen with the media, and things happen sometimes with the way people react on a short-term basis," he said. "But in the end, science dictates what the real strength is, and here, the science is solid."
Meanwhile, Mr. Hassan pointed to Schering's growth sources beyond its cholesterol franchise, including its pipeline and portfolio of current products. Both expanded with last year's $16 billion acquisition of Organon BioSciences NV, a Dutch maker of women's health products.
Schering's major products include the allergy drug Nasonex and the anti-inflammatory treatment Remicade, which it markets outside the U.S. and Japan. Schering also doesn't anticipate patent expirations on any major products over the next several years, a problem that is bedeviling many of its rivals. "While we do know that cholesterol gets a lot of attention, this is a pretty broad company," Mr. Hassan said.
The fallout from Enhance is likely to heighten public mistrust of pharmaceutical makers, and the companies will have to devote time and energy to countering the effects. Yesterday, for example, widely circulated reports questioned the timing of stock trades made by the president of Schering's pharmaceutical division, Carrie Cox, in April and May 2007 that totaled about $28 million. Corporate secretary Susan Wolf said she personally approved the transactions because they are allowed by Schering's rules. "It was well, well before anyone at [Schering] received the unblinded [Enhance] data," she added.
Another lingering headache for Mr. Hassan will be Capitol Hill scrutiny, which is likely to continue for months. Yesterday, Reps. John Dingell and Bart Stupak, Michigan Democrats who are leaders of the House Energy and Commerce Committee, widened their investigation to include the high-profile Vytorin "food and family" ad campaign. The panel is also looking at Ms. Cox's stock sale, Mr. Stupak said.
The companies said they are cooperating with the inquiry.
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Anna Wilde Mathews and Ron Winslow contributed to this article.
