Competitive Intelligence

Vioxx: Even Worse than We Thought

It's even worse than we thought - Merck shareholders take it on the chin again - here's USA Today's rundown:

Shares of Merck plunged more than 7% Monday after a report said the pharmaceutical giant apparently hid or denied evidence for years that its blockbuster arthritis drug Vioxx causes heart problems.

Merck, one of the world's top five drug makers, pulled the arthritis and acute pain drug from the market worldwide Sept. 30, saying it was acting in patients' best interest. Vioxx has been taken by about 20 million Americans and accounted for 11% of Merck's total revenue.

On Monday, Merck shares were down 7% after The Wall Street Journal reported that internal e-mails and marketing materials show the company knew as far back as 2000 that Vioxx was linked to an increased risk of heart attack but tried to discredit such evidence.

The newspaper says that a March 9, 2000 e-mail from Merck research director Edward Scolnick to colleagues conceded an elevated risk of heart attack and stroke was "clearly there." Nevertheless, the newspaper says, Merck continued to try to discredit academic researchers critical of the drug.

The Journal reported that one training document from Merck listed potentially difficult questions about the drug and stated in capital letters, "DODGE!"

Ted Mayer, a lawyer representing Merck, told the Journal that the e-mails and marketing materials were "taken out of context" and "do not accurately represent the conduct of Merck and its employees."

Merck shares had been trading in the $45 range until the drug was taken off the market. The stock plunged to the mid $30s that day.

But the BBC mentioned the real evidenciary consequences for Merck in potential class action lawsuits:

Merck already faces patient lawsuits, filed after its decision to recall the drug in September. Investors now fear that the picture could be grimmer and the potential costs higher.

The Wall Street Journal quoted internal company e-mails, including one from Merck's head of research Edward Scolnick in March 2000 to colleagues saying that cardiovascular problems with Vioxx "are clearly there".

"If the e-mails actually exist and say what they are purported to say, they appear at least superficially to be a smoking gun that lawyers could pull up as evidence against Merck," said drug industry analyst Trevor Polischuk of Orbimed Advisors.

The result is likely to be more litigation, though he believes it may be difficult for Vioxx users to prove the drug harmed them given that many will have had pre-existing heart problems.

Credit rating agency Standard and Poor's said it may downgrade Merck's credit rating and is seeking a meeting with the firm's management to discuss Merck's "long-term ability to retain its credit strength".

The agency said its actions "reflect Standard and Poor's increasing concern about the magnitude of possible litigation" over Vioxx.

Datamonitor had a great analysis of the situation that looked at competitive implications:

With the higher potency, and lower gastrointestinal side effect profile of Vioxx compared to Celebrex (celecoxib) being speculatively linked to its poor cardiovascular side effect profile, physicians may now be reluctant to prescribe the second generation products.

While a significant proportion of existing Vioxx users are expected to switch to another COX-2 product, particularly those that had been prescribed Vioxx as second line therapy after having failed on traditional NSAID therapy, Celebrex is expected to be the key beneficiary of this, and not the newer drugs.

Pfizer itself has reinforced this view, by immediately responding to Merck's announcement by turning the spotlight on Celebrex, re-affirming the drug's safety profile and guaranteeing its availability for current Vioxx users, while making little mention of Bextra. This action is particularly intriguing considering Pfizer's previous strategy had been to position Bextra, not Celebrex, against Vioxx. Perhaps the company feels that in the current environment of heightened safety fears, Celebrex's key marketing message of long-term experience and safety is more appropriate than Bextra's "powerful medicine" tag.

A key uncertainty that remains is to what extent this event will drive physicians to reconsider their use of COX-2 products, which have come under fire recently as many healthcare payors, such as insurance companies in the US and NICE in the UK, have questioned whether their high cost, compared with traditional NSAIDs, is justified. The key defense of leading players Merck & Co and Pfizer has been that the lower incidence of gastrointestinal complications associated with COX-2 products actually increased the cost effectiveness of these medications. With suggestions that Celebrex is inferior to Vioxx in this respect, the removal of Vioxx from the market may see physicians question this defense, and increasingly opt for traditional NSAIDs plus a proton pump inhibitor (PPI) for patients at risk of gastrointestinal side effects.

The views of key opinion leaders have differed widely in this respect, with industry opinion leaders seemingly holding diverse views on the precise impact of Vioxx's withdrawal. This uncertainty is unlikely to be resolved until prescribing data becomes available. Datamonitor expects Celebrex to pick up a significant share of existing Vioxx patients, but anticipates the COX-2 market as a whole to decline, as fewer new patients are prescribed COX-2 products.

Prior to the withdrawal of Vioxx, Datamonitor forecast the COX-2 market (defined as Bextra, Celebrex, Vioxx, Dynastat, Arcoxia, Prexige and Mobic), to grow at a CAGR of 2.8% between 2004 and 2010, reaching sales of $9,099 million. This forecast has now been reduced to $7,056 million in 2010, representing an average annual decline of 0.4% between 2004 and 2010, as a proportion of Vioxx patients leave the COX-2 market, and with lower uptake of premium priced products Bextra and the pipeline COX-2s among new patients now anticipated.

Despite expecting the COX-2 market to remain static, two key COX-2 products are expected to directly benefit from withdrawal of Vioxx. Forecasts of both Pfizer's Celebrex and Abbott/ Boehringer Ingelheim's Mobic (meloxicam) have been increased following this event.

The key factor driving Mobic's success lies in its differentiation from the remainder of the COX-2 market. While the drug has some selectivity for cyclo-oxygenase II, and therefore may be associated with a lower rate of gastrointestinal adverse events than other NSAIDs, it is not a specific COX-2 inhibitor. Abbott and BI may therefore be able to distance the drug from association with cardiovascular side effects in a way that some of the true COX-2s may struggle to. Although this product is expected to suffer from generic competition in 2005, until that time, sales are expected to be boosted by patient switching from Vioxx. Forecasts for 2005 sales for this product are $996 million, compared to the previously forecast $442 million.

In the case of Celebrex, Pfizer's marketing strength will ensure this product is a key beneficiary among those patients currently taking Vioxx that will be switched to another COX-2. The 2005 forecast for this drug has raised from $2,472 million to $3,677 million, as it benefits not only from direct patient switching from Vioxx, but also from reduced competition from Bextra and other new COX-2s.

Initial data, according to a report in the Wall Street Journal, suggests that of the 2.4% of Vioxx users that switched drugs within 24 hours of the announcement, 58% received either Celebrex or Bextra.

Merck & Co.'s ethical revenues amounted to $22,485 million in 2003, and were forecast to decrease at an average annual rate of 0.4% between 2003 and 2010, due to the loss of patent protection of three of its five blockbuster drugs, Zocor (simvastatin), Fosamax (alendronate) and Cozaar (losartan).

With Vioxx off the market, Merck will lose one of its only two blockbuster drugs not to face patent expiry in the short to medium term, with Singulair (montelukast) being the other. Without Vioxx, and with Arcoxia's prospects being significantly reduced, Merck's ethical sales are forecast to fall at a faster CAGR of 1.7% to 2010, recording sales of $20,502 million in 2004, $22,139 million in 2007 and down to $19,969 million in 2010.

Meanwhile, Pfizer's ethical sales forecast has received a boost from this event, and is now forecast a CAGR of 2.7% between 2003 and 2010, taking ethical sales to $47,649 million, up slightly from the previous forecast of 2.6% taking sales to $47,569 million. Pfizer is also expected to suffer from generic competition to several of its major brands over the forecast period, with all of its nine blockbuster products in 2003 facing patent expiry, except for Viagra (sildenafil) and Celebrex. Pfizer will therefore be watching development of the COX-2 market keenly following this event, and will do all it can to protect revenues in its COX-2 franchise.

The competitive positioning of Pfizer and Merck & Co. has diverged over the past few years and the loss of Vioxx will accelerate this process. From being the number one pharmaceutical company in terms of ethical sales in 1999, by 2002, Merck had dropped to third place, $7.9 billion behind GSK and $6.8 billion behind Pfizer. Then, in 2003, a $17 billion gap opened up between Merck and previous nearest rival Pfizer, following the latter's acquisition of Pharmacia. By 2010, Merck was forecast to fall to 7th position, but following the withdrawal of Vioxx, The company is now forecast to drop to 9th position, as a combination of loss of Vioxx and generic competition to its other leading brands takes its toll.

Merck & Co. has historically been resistant to a merger, and as recently as November 2003, it was busy denying rumors that it was to acquire partner Schering-Plough. However, M&A may now be the only way for Merck to achieve growth in the increasingly competitive pharmaceutical market. Schering-Plough, with its ethical sales forecast to grow at a CAGR of 5% between 2003 and 2010 (well above the average of 2.9% for the top 10 pharmaceutical companies), would indeed boost Merck's growth prospects. Whether Merck will be in a position to make any major acquisitions in the light of Vioxx's withdrawal and the likely litigation costs associated with this is another matter.

But I think the whole market is essentially a trainwreck... watch Celebrex and Bextra - there're rumblings about the FDA needing to yank more drugs off the market and that'll have big consequences for everyone in this business. I just wrote an article for SCIP's Competitive Intelligence Magazine about the implications of the Vioxx situation, alongside the Oracle/PeopleSoft consequences, and Section 409 of Sarbanes-Oxley. As always, I'd be interested in any feedback. I'm doing a presentation in a couple of weeks at CBI's Philadelphia "Pharmaceutical Decision Support" Conference on corporate governance, so Merck and SarbOx are very timely topics.

- Arik