Breaking down the Merck-Schering-Plough merger	April 2009

Merck & Co. agreed to acquire Schering-Plough Corp. last month for $41 billion in a cash and stock transaction expected to close in the fourth quarter of this year. Datamonitor analysts recently broke down the R&D impact of the planned merger by therapeutic area.

Cardiovascular

Merck: The consolidation of the cholesterol joint venture between Merck and Schering-Plough has been touted as one of the key drivers for the merger. As far as Merck independently, the drugmaker’s cholesterol pipeline has been substantially weakened by the non-approval in the United States of Tredaptive, formerly Cordaptive, which was approved in Europe but not yet launched due to manufacturing problems. The drug could be approved in the United States around 2012, after completion of the ongoing outcome study requested by FDA

The imminent patent expiries of hypertension drugs Cozaar and Hyzaar, which together totaled sales approaching $3.6 billion in 2008, in combination with the challenges faced by the cholesterol franchise have left Merck in a highly exposed position with regards to its cardiovascular products.
  
“The merger with Schering-Plough is unlikely to alleviate the problems that Merck is facing since the only marketed cardiovascular product [apart from their share of the cholesterol joint venture] that [Schering-Plough is] bringing to the deal is Integrilin,” says Dr. Nick Karachalias, Datamonitor cardiovascular lead analyst. “While the latter is leading its class in terms of sales, it is nowhere near as successful as Merck’s products.”

Schering-Plough: The situation is reversed in the pipeline with Schering-Plough having the most promising late-stage agents in the form of its thrombin receptor antagonist SCH-530348. The agent, which has been fast tracked by the FDA, is nearing completion of Phase III trials and is expected to be submitted to FDA in 2010 or 2011. In Phase II trials, SCH-530348 showed a trend toward fewer ischemic events without increasing bleeding when added to standard antiplatelet therapy with aspirin and clopidogrel in patients undergoing percutaneous coronary intervention. If Phase III trials confirm that the drug does actually reduce ischemic events without increasing bleeding, it will be a surefire winner. 

Outlook: Even if Schering-Plough’s late-stage pipeline fulfils its commercial potential, it is unlikely that it will be able to cover the gap left by the soon to be defunct hypertension franchise and the diminishing sales of Zetia and Vytorin. Hence, Merck’s original strong position in the cardiovascular arena will be diluted after the deal. In addition, the resulting company is expected to change its focus in the cardiovascular arena from primary care indications to indications mainly covered by specialists.

CNS

Merck: The merger will not have a significant impact on Merck’s outlook over the near to mid term. Neither company has a significant presence in the CNS market or a blockbuster CNS brand. The deal will not offer Merck any synergies in its current core CNS indication of acute migraine therapy. Merck markets Maxalt in this indication, which it already planned to supplement with novel product telcagepant, now in Phase III trials.

Schering-Plough: While Schering-Plough does possess several CNS drugs in its late-stage pipeline, including Saphris for schizophrenia and esmirtazipine for insomnia, these will be entering mature and highly competitive markets and are not forecast to generate blockbuster revenues.

Outlook: While the combined company will remain underweight in terms of CNS therapy area revenues compared to its peers over the near to mid term, both companies have invested in CNS-focused R&D over the last few years, with a plethora of promising early-stage products providing the potential for significant gains in this therapy area over the long term.

Diabetes

Merck: With 2006’s launch of Januvia, the company gained an impressive entry in the diabetes therapy area, leapfrogging Novartis to bring the first, and still only, dipeptidyl peptidase-4 inhibitor in the market. With sales of $1.4 billion in 2008, Januvia has had the second most successful launch in the cardiovascular and metabolic diseases arena, behind only Pfizer’s mega-blockbuster Lipitor.

Merck has already launched Janumet, a combination with metformin, and is developing a combination with pioglitazone, called MK-0431c. FDA changed the requirements for approval of antidiabetic medications late in 2008, raising the bar in terms of proving cardiovascular safety and at the same time ensuring Januvia will enjoy an even longer period in the market without any true competitors. 

Outlook: “Schering-Plough has virtually nothing to offer in the diabetes arena both in terms of marketed products and in terms of developmental pipeline,” Dr. Karachalias says. “Merck’s focus in the therapy will be somewhat diluted post-merger.” 

Infectious disease

Merck: In the HIV market, Merck has one marketed antiretroviral and a strong pipeline which will make it a fierce competitor. The company launched Isentress, a first-in-class integrase inhibitor, in 2006 and has an active early-stage pipeline. Isentress is already proving a commercial success with worldwide sales of $361 million in 2008, forecast to grow to $1.5 billion by 2013.

In the hepatitis C virus arena, Merck has no marketed products, but has a protease inhibitor, MK-7009, in Phase II development.

Schering-Plough: Schering-Plough is a well-established leader in the hepatitis C market, with marketed pegylated interferon and ribavirin therapies achieving combined sales of $1.2 billion in 2008. The developmental protease inhibitor boceprevir in Phase III trials and its follow-up compound SCH900518 in Phase II are among the most eagerly anticipated new hepatitis C drugs with large sales potential.

In HIV, although Schering-Plough has no marketed antiretrovirals, the company has vicriviroc, a CCR5 inhibitor, in Phase III development. Vicriviroc’s outlook, however, is not nearly as bright. Belonging to the same class as Pfizer’s commercial flop Selzentri/Celsentri, it suffers from an efficacy limited to a subset of patients.

Outlook: If vicriviroc is successfully approved, there is an attractive opportunity for Merck/Schering-Plough to trial and market Isentress and vicriviroc use in combination, strengthening the combined entity’s presence in the HIV market. In hepatitis C, The new combined company will probably prioritize its research efforts in favor of either MK-7009 or SCH-900518 as boceprevir’s follow-up protease inhibitor.

Merck is the second-biggest player in the vaccines market, achieving vaccine franchise sales of just under $4.1 billion worldwide. While the failure or discontinuation of several pipeline candidates has thinned Merck’s vaccine pipeline considerably, it will be strengthened by Schering-Plough’s Nobilon unit, a Dutch vaccine development subsidiary spun out of Organon in 2003. Nevertheless, the merger will inevitably dilute the significance of vaccines to Merck’s overall sales performance.

Oncology

Merck: Oncology has historically been a minor source of revenue for Merck. The company markets a single anticancer drug, Zolinza, which is approved and recently launched for the niche indication of cutaneous T-cell lymphoma. Merck also markets Emend, indicated for chemotherapy-induced nausea and vomiting. The acquisition of Schering-Plough bolsters Merck’s narrow portfolio of oncology pipeline agents, although this is unlikely to drive significant future sales growth for the company. Deforolimus, which is in Phase III development for sarcoma, is Merck’s only late-phase oncology pipeline drug.

Schering-Plough: The company’s late-phase pipeline agent PEG-Intron is in pre-registration in the United States for melanoma. Schering-Plough will also add three Phase II compounds— a CDK inhibitor and a CHK-1 inhibitor—to the two Phase II agents already being developed by Merck, MK-0457 and MK-0646.

Outlook: Datamonitor does not forecast PEG-Intron to achieve notable market penetration given the toxicity shown in clinical trials, low use of interferon-alfa-2b in melanoma, and likely competition from biosimilar versions of interferon alfa-2b.

Women’s health

Merck:. In anticipation of osteoporosis blockbuster Fosamax’s patent expiry in 2008, Merck put in place an effective lifecycle management strategy, which included the launch of Fosamax Plus D. As expected, however, the patent expiry has compromised Merck’s position as a market leader, cutting Fosamax’s sales in 2008.

The two pipeline osteoporosis drugs, MK-0822 and MK-5442, that Merck is developing are unlikely to make up for the revenues lost from the Fosamax franchise. MK-0822 harbors greater potential as it is the furthest developed cathepsin K inhibitor and is expected to reach FDA by 2012, ahead of GlaxoSmithKline’s and Ono’s competitor products. In addition, early clinical results have shown that it is safe and well tolerated. If these are confirmed in Phase III trials, Merck can exploit its leading market position and continue its successful osteoporosis franchise. In contrast, Datamonitor expects MK-5442 to launch in a competitive section of the market, currently dominated by Eli Lilly’s Forteo and target a niche population of severe osteoporosis sufferers.

Schering-Plough: The merger with will not broaden Merck’s osteoporosis portfolio but it will considerably augment the highly related portfolio of women’s health. In particular, following the acquisition of Organon, Schering-Plough has developed a strong market position in the infertility and contraception markets with not only numerous marketed products, including Puregon/Follistim, Pregnyl, Ganirelix, and NuvaRing, but also a solid pipeline with four products in Phase III development. In addition, Schering-Plough’s considerable dedicated sales force is expected to benefit the promotion of Merck’s HPV vaccine Gardasil.

Outlook: “As expected, the addition of the Schering-Plough products will not only consolidate the women’s health and urology portfolio but it will also mark a radical change in Merck’s focus in this therapy area,” Dr. Karachalias says.