Schering's Risky Growth Gambit

The pharma's $14.4 billion deal to buy Organon BioSciences represents a big bet on the tricky schizophrenia-drug market

Schering-Plough's (SGP) Chief Executive Fred Hassan has steered his company through an impressive turnaround in recent years, but the Kenilworth (N.J.) pharmaceutical outfit's fate remains pinned to its cholesterol drugs Vytorin and Zetia. Now, in an effort to keep the business growing, Schering announced a deal on Mar. 12 to buy the Organon BioSciences unit of Akzo Nobel (AKZOY) for around $14.4 billion. Hassan is buying several advanced-stage drugs from the Netherlands-based company—along with plenty of risk.

To be sure, Schering is also picking up nearly $5 billion in annual revenue generated by Organon businesses ranging from women's health to animal vaccines. Once the deal closes by the end of 2007, it's expected to start adding about 10¢ per share to Schering's earnings in the first full year, excluding things like acquisition-related costs and accounting adjustments. The company thinks it will begin to save $500 million annually by 2010. "Organon BioSciences will be an excellent fit with Schering-Plough—strategically, scientifically and financially," Hassan said in a press release Mar. 12.

Organon's experimental drug Asenapine, for schizophrenia and bipolar disorder, is fighting to establish a presence in a market that is rife with challenges. In November, 2006, the New York drugmaker Pfizer (PFE) pulled out of a deal to co-develop Asenapine with Organon after mixed results were announced from clinical trials. Meanwhile, critics are blasting companies such as Eli Lilly (LLY) and Johnson & Johnson (JNJ) for marketing their antipsychotic drugs too aggressively.

Others are encouraging doctors not to assume that it's best to prescribe the newest drugs; the National Institute of Mental Health announced a study on Dec. 1 showing that the older antipsychotic drug perphenazine was not only cheaper, but also just as effective as its newer rivals.

"We'll take a closer look at the drugs in Organon's pipeline, but we're not overly enthusiastic about some of them at first glance," said Morningstar analyst Heather Brilliant in a Mar. 12 research note. She pointed out problems such as Asenapine's "rocky clinical data."

Schering spokesman Steve Galpin counters that the company did not do the deal because of one pipeline compound, but rather "because Organon will be an excellent fit." He adds that Asenapine represents an opportunity for the launch of a product in the near term that could fill a high, unmet need.

It's true that Organon has many drugs that recently moved into advanced stages of development, such as the insomnia-fighting compound Esmirtazapine, the infertility hormone ORG36286, and the oral contraceptive NOMAC/E2. And Organon's Sugammadex, a drug used in anesthesia, is expected to be filed for approval in 2007.

But some are dubious. "Most, if not all, of these products are likely to be modest in size," said Prudential Equity analyst Tim Anderson, MD, in a research note.

Investors may have taken a mildly positive view of the deal. On Mar. 12, Schering's stock price was edging ahead by 0.6%, to $24 per share.

Organon aside, Hassan already has his hands full. He's staked his company's success on Zetia, which prevents absorption of cholesterol in the intestine, as well Vytorin, which blends Zetia with Merck's (MRK) cholesterol blocker Zocor. The combination pill will be under patent protection through the middle of 2015 (see, 7/26/04, "Hooked On the Cash from Cholesterol"). So far, Schering's venture with Merck has been a boon for the company—it booked equity income from the venture of $1.46 billion in 2006, up from $873 million in 2005, according to Standard & Poor's. (S&P, like, is owned by the McGraw-Hill Cos.)

But competitors are swarming. The generic version of Merck's Zocor hit the market last year, bringing on the threat of slowing sales for Vytorin and Zetia. Schering has still managed to grab more customers recently, but the war for dominance remains far from over. Combined sales of Zetia and Vytorin accounted for close to 17.9% of U.S. cholesterol drug sales as of December, 2006, up from some 11% in July, 2005, according to S&P's estimation based on IMS data. Meanwhile, Merck and Schering face formidable foes: Pfizer's Lipitor could have generic rivals as early as 2011 and AstraZeneca (AZN) is struggling to establish its own cholesterol drug Crestor.

Luckily, Hassan seems to enjoy the feeling you get from standing on the edge of a cliff. Soon after he took over as CEO of Schering-Plough in 2003, he said, "I like adventure, and I like a challenge" (see, 6/23/03, "Schering's Dr. Feelbetter?"). If so, he'll have much to enjoy in the months ahead.

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