Online Extra: Schering Sticks to the Sweet Spots
By Kerry Capell
In 1851, Ernst Schering opened a small chemist shop in Berlin. He gradually moved into making pharmaceuticals and in 1887 developed the procedure to manufacture a new pain reliever: cocaine. These days, Schering, with a market value of 8.4 billion euros ($9.5 billion), is better known as one of the world's top makers of birth-control pills and a leader in specialized areas such as hormone therapies and diagnostics.
Although Schering is a relatively small player in an industry dominated by blockbuster-producing behemoths such as Pfizer (PFE ) and GlaxoSmithKline (GSK ), it has managed to carve out a lucrative niche in specialized therapeutic markets. Under the leadership of CEO Hubertus Erlen, Schering is also moving into new areas such as oncology and beginning to reap the rewards. The drugmaker debuts at No. 62 in BusinessWeek's inaugural list of top European companies, based on the Standard & Poor's Europe 350.
Erlen says Schering's success is the result of a focused strategy. Instead of spreading its resources across a broad portfolio of therapy fields, Erlen has concentrated its efforts on four key areas: Gynecology and andrology, diagnostics and radiopharmaceuticals, dermatology, and specialized therapeutics for cancer and central nervous system disorders, such as multiple sclerosis. Revenues from the sale of drugs for contraception, multiple sclerosis, and diagnostics represented 73% of Schering's 2002 sales of 5 billion euros ($5.6 billion).
The most notable success in recent years was Schering's 2001 launch of Yasmin, a new type of oral contraceptive. A decade ago, most drugmakers had all but stopped research in this area, believing that little room for innovation remained. "We have now shown that major improvements are possible," Erlen says. Yasmin, which had 2002 worldwide sales of 152 million euros ($171 million), has been shown to help women avoid weight gain and bloating while improving their skin appearance. "As a result, Yasmin has been able to capture market share very quickly," Erlen says.
Thanks to Yasmin, Schering now has 8% of the oral-contraceptive market in the U.S. Schering hopes to launch Yasmin 20, a new lower-dose version in the U.S. next year, and the drugmaker estimates it could reach peak annual sales of 200 million euros ($226 million). Analysts expect that the original Yasmin could rack up as much as 600 million euros ($678 million) in sales by 2008.
MONEY IN MENOPAUSE.
Another lucrative area for Schering is hormone therapies. Despite the bad publicity such treatments have received in the U.S. press in the past year, Schering won European approval on July 8 for its Angeliq for the treating menopausal symptoms and preventing osteoporosis in postmenopausal women. New studies have shown that Angeliq may also help reduce blood pressure. Schering predicts that the drug will achieve peak annual sales of 250 million euros ($283 million). "Over the next few years, contraceptives and hormone drugs will be the mainstays of Schering's revenues and earnings," says M.M. Warburg & Co. pharmaceuticals analyst Ulrich Uwald.
To keep the momentum going, however, Schering will need to build up its presence in the U.S., the world's most lucrative drug market. That could be tricky, but some women will need hormone therapies for menopausal symptoms despite the risks. Schering plans to increase U.S. sales to 30% of its total by 2005, from 26% in 2002. "Expanding our presence in the U.S. is a top priority," Erlen says.
Schering has already made significant progress. In 2001, it launched three new drugs in the U.S.: Yasmin, cancer therapy Campath, and Mirena, a hormone-delivery system for menopause. A year later, successful promotion of those new drugs and existing medicines helped boost Schering's U.S. sales by 22%.
FENDING OFF RIVALS.
Analysts reckon that figure is likely conservative. "Between Yasmin and the expected launches of Climara Pro and Angeliq for menopause, and the development of other cancer treatments, the U.S. should represent 35% of sales in 2007," says Oddo Securities analyst Didier Laurens in Paris. He predicts that Schering's overall sales will grow at about 6.5% a year from now till 2007.
The German drugmaker has its challenges. It will need to accelerate its U.S. expansion in the coming year to better protect its top product, multiple sclerosis drug Betaferon. Competition is heating up as new multiple sclerosis drugs have recently been launched by Switzerland's Serono and others. Moreover, Betaferon is the product of a joint venture with U.S. biotech Chiron, to which Schering pays 27.5% of sales in purchasing costs.
Although the payments will drop to 22.5% in November, it still means that despite the drug's considerable sales -- 783 million euros ($885 million) in 2002 -- it doesn't contribute much to Schering's overall results. And increased competition will force Schering to step up marketing and R&D spending for Betaferon.
Still, one area where Schering is the undisputed world leader is diagnostic imaging and radiopharmaceuticals. Its second-best-selling drug, Magnevist, a contrast agent used in magnetic resonance imaging machines (MRI), had 2002 sales of 322 million euros ($364 million) and is widely considered the industry's gold standard. Schering has 60% of the world market in such agents. "The growth of both the MRI field and the increasing use of Magnevist in particular have helped drive sales growth," Erlen says.
One of Schering's new MRI agents in clinical development also looks promising. MS-325, a brightening agent used to show blood flow in MRI, improved the test's ability to find kidney disease and circulatory disorders a recent study shows. Results from the last of three phases of MS-325 clinical studies showed "statistically significant" improvement in the accuracy of the MRI tests, Schering says. It expects to launch MS-325 in 2005 in the U.S. and estimates that the product could achieve peak annual sales of 100 million euros ($113 million).
Schering, like a number of smaller, specialized drugmakers, is also moving aggressively into cancer research. It already has five oncology drugs on the market and is developing several more. Earlier this month, Schering bought worldwide rights to an antibody treatment for tumors from Philogen, an Italian biotechnology outfit. And together with Switzerland's Novartis (NVS ), Schering is developing an experimental colon-cancer drug, now called PTK787.
In the last phase of studies, the product may come on the market in 2006, and analysts estimate it could achieve peak annual sales of 250 million euros ($283 million). PTK787 is one of a new class of cancer drugs called angiogenesis inhibitors that work by choking off the blood supply feeding tumors. Meanwhile, Avastin, a treatment for solid tumors, is in Phase Three trials and likely to launch in 2006. And Zevalin, for non-Hodgkin's lymphoma, may go on sale in Europe this year, with potential peak yearly sales of 50 million euros ($57 million).
Schering also is testing existing drugs for new uses, including its Betaferon multiple sclerosis drug as an antiviral for heart patients, Yasmin as a medicine for acne and premenstrual symptoms, and the cancer drug Leukine, which Schering acquired from Amgen (AMGN ) in the U.S., as a treatment for Crohn's disease, an inflammation of the small intestine.
Schering spent 19% of 2002 sales of 947 million euros ($1.1 billion) on research and development. "Our R&D strategy is focused," Erlen says. For a small player such as Schering to remain successful in a competitive industry dominated by much bigger players, keeping that focus is essential. And if Schering stays on track, as expected, investors are likely to remain satisfied with this niche pharmaceuticals player.
Capell writes for BusinessWeek in the Paris bureau
EDITED BY Edited by Beth Belton