Icos Struggles to Bolster Cialis Sales

Despite some strong early sales numbers and tens of millions of dollars in advertising, Cialis is coming up short.

When Icos (ICOS:Nasdaq – news – research) and Eli Lilly (LLY:NYSE – news – research) kicked off the U.S. launch of their much-hyped impotence drug in November 2003, optimists said the drug — nicknamed “the weekender” because of its 36-hour potency — would quickly leapfrog over Pfizer’s (PFE:NYSE – news – research) Viagra and GlaxosmithKline’s (GSK:NYSE ADR – news – research) Levitra.

But Cialis’ share of total new prescriptions in the erectile dysfunction (ED) market has been flat for the past three months and is still No. 2 behind market leader Viagra. Meantime, the entry of Cialis and Levitra — and all the associated marketing and publicity — has not grown the overall ED market to any significant degree. Total prescriptions, new and renewals, for all three ED drugs also are flat.

On Monday, Lehman Brothers analyst Jim Birchenough downgraded Icos to equal weight from overweight, essentially throwing in the towel on his optimistic projections for Cialis.

“The basis of our rating change is non-reassuring [prescription] trends for Cialis suggesting an early flattening that could jeopardize 2004 sales and 2005 [joint venture] profits,” he wrote. (Icos and Lilly share marketing expenses for Cialis. Icos doesn’t report Cialis sales on its income statement, only the profit or loss from its 50% share of the joint venture. Lilly and Icos report second-quarter financial results on July 22 and Aug. 4, respectively.)

The Lehman downgrade helped pushed Icos shares down 89 cents, or 3.5%, to $24.26 Monday. But as is often the case, investors have been one step ahead of the sell side. Icos shares have been cut almost in half since last November, when the stock was in the mid-$40 range.

In February, this column warned that lofty sales and market-share expectations for Cialis were in danger of getting too far in front of actual results. At the time, it was really too early to tell how well Cialis would perform, or whether Cialis sales would ever be large enough to move Icos into profitability, especially given the drug’s huge marketing and launch costs. Now, the caution of some of my more skeptical and bearish sources appears prescient.

Lehman’s Birchenough says data gathered by Icos and Lilly show that more than 50% of men who go to their doctor seeking treatment for impotence for the first time are walking out with Cialis in their pocket. But this impressive statistic is not borne out in actual market-share data. (Lehman doesn’t do banking for Icos.)

Cialis has been stuck at about 19% market share for new ED prescriptions since April, according to research firm IMS. By comparison, Viagra is maintaining an approximate 65% market share of new prescriptions, while Levitra has grabbed about 15% market share.

The problem, says Birchenough, is that aggressive use of free sampling by Icos and Lilly is not translating into loyal and repeat Cialis customers.

“We would have expected that after three months of sampling, some modest fraction of the patients receiving a Cialis sample and representing a large part of the 50% new patient starts would have returned to the physician office to receive a prescription if they intended to buy Cialis on a semi-regular and long-term basis,” the Lehman analyst wrote. “To the extent this hasn’t happened suggests to us that patients initiating Cialis, particularly those receiving samples, may be more transient, short-term and perhaps recreational users as opposed to potential long-term users.”

In order for new ED entrants Cialis and Levitra to succeed — and meet Wall Street’s expectations — it is just as important for drugmakers to grow the overall ED market as it is to steal market share from Viagra. So far, this hasn’t happened either.

According to IMS, the total number of ED prescriptions has grown just 8% since Levitra was launched here in the third quarter of 2003. That’s well below Wall Street’s expectations of growth in the high teens to low 20%.

On Monday, Icos and Lilly announced the “Cialis Challenge” in which the companies will pay patients to switch to Viagra or Levitra if they’re not satisfied with Cialis. This new marketing push, along with similar strategies recently deployed by Pfizer and Glaxo, suggests that stealing market share from one another — and not growing the overall ED market — has become priority No. 1.

Following the downgrade, Birchenough is now forecasting second-quarter U.S. Cialis sales of $38.9 million, down from $57.8 million and well below the consensus range of $42 million to $57 million. For 2004, he now foresees domestic Cialis sales of $207 million, down from $303 million previously.

Current Icos management guidance calls for the company to lose between $3 and $3.35 per share this year. Birchenough’s forecast for Icos’ net per share loss widened to $3.57 from $3.28. Analysts, on average, are expecting Icos to lose $3.27 per share this year, according to Thomson First Call.

From a valuation perspective, Birchenough believes Icos should trade more in line with a specialty pharmaceutical firm than a biotech firm, which means a near-term multiple of three to four times sales vs. a typical biotech multiple of six times sales. As such, Birchenough lowered his Icos price target to $27 from $53; more in line with the reality of Cialis’ struggles, that is.

source:-http://www.thestreet.com