In my last article, I put on the Sherlock Holmes hat and poked around Schering-Plough's (NYSE: SGP) 1999 annual SEC filing in search for clues as to why our company's share price has hit the skids in the past year. Today, I'll pick up where I left off and take a look at our pharmaceutical Rule Maker's research pipeline.

To review, my conclusion last time was that the market is acting more or less rationally, and has not been fooled by the 20% earnings growth of the past two years. Such earnings growth isn't nearly so impressive in light of the company's free cash flow, which has not grown over the last three years. Further, the company's uncertain direction, given the expected Claritin patent expirations, has simply outweighed the growth in reported earnings in the minds of investors. Of course, investors haven't been very enthusiastic about the entire pharmaceutical sector in the last year, and a certain amount of Schering-Plough's lackluster stock performance can be attributed to this negative investor sentiment.

Aside from general investor disinterest, the main factor dogging Schering-Plough's stock price is likely the concern about patent expirations for the company's dominant Claritin asthma drug family. While the company is making every effort to extend their Claritin allergy franchise (including resorting to congressional appeals to extend patent protection), generic competition for Claritin is likely to appear soon, and could materialize as early as 2002.

In 1999, four different companies notified Schering-Plough of the submission to the Food and Drug Administration (FDA) of an Abbreviated New Drug Application (ANDA) for the approval of generic forms of Claritin. One company, Andrx Pharmaceuticals (Nasdaq: ADRX), has submitted an ANDA for the approval of a bioequivalent form of Claritin-D. Schering-Plough has or will file suit against each of these companies seeking a patent infringement ruling. But even if the company prevails, it will clearly only be postponing the inevitable. Claritin sales accounted for just under 29% of Schering-Plough's 1999 earnings, so sales deterioration due to generic competition is a major threat to the company's future earnings growth. Still, those threats are at least two years away from where we stand today, and our company hasn't been standing idly by to watch their bread and butter get eaten by competitors.

Our company has spent over $4 billion in research and development money over the last five years to discover and advance new products to market. We need to evaluate the potential of Schering-Plough's recently approved drugs and late-stage product candidates before we can make an informed judgment as to the company's future direction.

In the recently published 1999 annual report, the company states that during fiscal 1999 it achieved nine separate U.S. or European marketing approvals for new products or new medical indications for existing products. In addition, our company signed five agreements to license new technologies for development from third-party firms, increasing the number of product collaboration agreements to more than 30. Finally, by my count, there are 10 ongoing Phase III trials for new compounds or for new treatment applications for existing products in the immediate pipeline.

I will say, however, that in my opinion Schering-Plough doesn't give a very clear overview of their pipeline in comparison to some other pharmaceutical companies that I have looked at. Nevertheless, I'll try to sort it out as best I can, starting with those products that achieved new marketing approvals in the last year, and then moving on to those in Phase III clinical trials.

Among the new products to achieve recent marketing approval is Temodar, a chemotherapy agent for the treatment of various brain tumors. Temodar will likely not exceed $50 million in worldwide sales this year, but could eventually achieve annual sales of $200 million or more.

Also in 1999, the company was awarded expanded marketing approval for the use of Nasonex, a nasally inhaled steroid, for treatment of allergies in children as young as three years in the U.S., and as young as six years in Europe. Nasonex is now sold in 48 countries and achieved 1999 sales of $259 million, more than doubling 1998 sales. It is expected that this product will continue to achieve rapid sales growth, and the peak sales potential of the drug could be as high as $1 billion annually. If Nasonex achieves these lofty expectations, it would obviously go a long way towards alleviating concerns of slowing sales and earnings growth.

In addition, European Union marketing approval was granted to Remicade for Crohn's disease. Schering-Plough owns the marketing rights for Remicade in most non-U.S. companies by virtue of a licensing deal with Centocor, which was acquired last year by Drip Port holding Johnson & Johnson (NYSE: JNJ). Pending is the approval in the EU for the use of Remicade in the treatment of rheumatoid arthritis, which is by far the larger market. International sales potential of this drug could be in excess of $250 million per year, but of course our company will be sharing the spoils with J&J.

In the fall of 1999, Schering filed marketing applications in both the U.S. and in the EU for desloratadine, a long-acting antihistamine that is a metabolite of Claritin. Our company has indicated that it considers desloratadine a key player in the company's efforts to protect the Claritin allergy franchise going forward. Multiple studies are ongoing for other allergic indications with various formulations of desloratadine.

Also under development is Asmanex, an orally inhaled corticosteroid for the treatment of asthma. A dry-powder inhaler formulation received U.S. approval last October, and an application has been filed in the United Kingdom. In addition, a metered-dose, inhaled version of Asmanex is currently in Phase III studies. Asmanex sales could exceed $75 million in 2000 and $200 million in 2001.

In cancer and infectious diseases, Schering-Plough has extended the range of treatment indications for the best-selling Intron-A (interferon alfa-2b) product, which is the company's other blockbuster drug. Intron-A, licensed from Biogen (Nasdaq: BGEN), was initially approved for the treatment of leukemia in 1986. Since then, Intron-A (in combination with Rebetron) has become the standard care for the treatment of Hepatitis C, which may have a patient population of more than 10 million in major world markets. Intron-A remains one of the most successful biotechnology products on the market, and achieved another $1.1 billion in sales in 1999.

Schering-Plough continues to expand the medical applications for Intron-A. A longer-acting formulation, called PEG-Intron, is currently in Phase III trials for leukemia and malignant melanoma. In addition, early phase trials are ongoing for the treatment of solid tumors. PEG-Intron utilizes a protein-based drug delivery system called Pegnology, licensed from Enzon (Nasdaq: ENZN). This formulation may allow the delivery of a higher dosage of Intron-A, thereby reducing dosing frequency. In 1999, the company also filed applications in both the U.S. and the EU for the use of PEG-Intron as a once-weekly treatment of chronic hepatitis C. Analysts are predicting 2000 sales of Intron-A to grow by about 20%, and peak sales for all indications could approach $2 billion annually by 2002.

Another drug in the infectious disease category is Tenovil, which has shown promise as a treatment against several inflammatory and viral diseases. Tenovil is in Phase III for the treatment of Crohn's disease, and in Phase II for the treatment of psoriasis and hepatic fibrosis, a liver condition. Should Tenovil achieve approval for multiple indications, sales for this drug could be quite substantial.

To combat acquired bacterial infections, Schering-Plough is in Phase III clinical trials for Ziracin, an intravenous antibiotic for the treatment of severe or resistant infections. If approved, Ziracin could possibly add another $100-150 million per year in peak sales.

Yet another Phase III candidate is Melacine for the treatment of malignant melanoma, both on a stand-alone basis and in combination with Intron-A. This agent has already achieved marketing approval in Canada. Schering-Plough has exclusive worldwide marketing rights to this compound, which was developed by Ribi ImmunoChem Research. Wall Street analysts project the peak sales potential of Melacine at between $150 million and $250 million annually.

Finally, our company also has non-U.S. marketing rights to Caelyx, licensed from SEQUUS Pharmaceuticals, (since merged with ALZA Corp.). A regulatory application has already been filed in the EU for the use of Caelyx in the treatment of advanced ovarian cancer, and an additional Phase III trial is ongoing for the treatment of breast cancer.

Overall, I'd say that Schering-Plough's pipeline of late-stage drug candidates is impressive, and could account for as much as $1 billion in additional sales by 2001. In addition, the company has several promising compounds in Phase II clinical trials. The company states in the annual report that it expects to increase R&D spending by 15% in 2000, which pushes annual research expenditures up to about $1.4 billion.

While Schering-Plough's financial performance the past three years may not be as good as advertised, I think the market's perception that the company will not be able to continue to grow sales and earnings long into the future is unfounded. It appears to me that our company should be able to bring several drugs to market in the next two years, which will likely more than offset the eventual loss of some Claritin sales to generic competitors. While I'm not advocating that we add to our position at this time, it's my opinion that Schering-Plough definitely remains entrenched as a pharmaceutical Rule Maker.

Until next time, stay Foolish!

Zeke