Johnson & Johnson will gain access to Scios' Phase II oral rheumatoid arthritis program through its proposed $2.4 bil. acquisition of the biotech company.

Scios' orally available p38 MAP kinase inhibitor would complement J&J's Remicade , which is administered via intravenous infusion. Remicade (infliximab) is approved for rheumatoid arthritis and Crohn's disease. A psoriasis indication is in Phase III.

Scios' lead p38 kinase inhibitor, SCIO-469, is in Phase IIa studies, with back-up compounds in Phase I.

Data from a four-month, placebo-controlled, dose-ranging safety study will be available in April.

SCIO-469 is in a new class of compounds that inhibits p38 kinase, which modulates inflammation through three different pathways: tumor necrosis factor-alpha, interleukin-1 and COX-2.

The Scios compound would have a theoretical advantage over other RA agents, which typically block only one area: J&J's Remicade, Abbott's Humira and Amgen/Wyeth's Enbrel inhibit TNF, while Pfizer's Celebrex and Bextra , and Merck's Vioxx inhibit COX-2. Amgen's Kineret is an IL-1 receptor antagonist.

The merger agreement grew out of Scios' search for a partner for the p38 kinase program.

"Quite frankly, we had reached the limit of our resources that we could devote to a drug development program that clearly has implications far beyond rheumatoid arthritis," Chief Scientific Officer George Schreiner, MD/PhD, said during a Feb. 10 conference call announcing the merger.

"We want to make sure that we are able to continue that and to develop other indications, should they come before us, and to constantly stay ahead of the game," Scios CEO Richard Brewer added. "The way to do that is to have more than one compound in development."

"But we can only do so much as a small biotech company, and we're looking forward to the synergies that can be developed with Johnson & Johnson on this regard," he added. "If we're successful...this promises to be a multi-billion dollar opportunity."

While the p38 kinase inhibitor program adds to J&J's R&D platform, the company sees an immediate opportunity in Scios' single marketed product, the congestive heart failure therapy Natrecor .

Natrecor has been on a steep upward trajectory since its launch in 2001 as the first new CHF agent in a decade. Sales are expected to further increase 70% in 2003 to $180 mil.-$185 mil. Scios' peak forecast (prior to the J&J announcement) was $500 mil.

J&J will pay $2.4 bil. net of cash ($45 per share) for Scios, a 30% premium over Scios' closing price Feb. 6 before the first business media reports of a pending deal (¹ 'The Pink Sheet' Feb. 10, In Brief).

J&J's comfort level with the price tag may in part reflect the company's previous success with large biotech bets.

J&J bought Centocor in 1999 when Remicade was in its infancy, with quarterly sales just over $20 mil. (² Also see "Centocor Remicade RA Launch Will Get J&J Support, Ultram Experience" - Pink Sheet, 26 July, 1999. p. 3). In 2002, sales of the TNF inhibitor were $1.3 bil., up 80%.

Although J&J is already a large competitor in the RA category, the Federal Trade Commission is unlikely to raise antitrust concerns regarding SCIO-469. FTC allowed the Amgen/Immunex merger to proceed even though the deal was combining two RA agents in different classes (Kineret and Enbrel) (³ 'The Pink Sheet' July 15, 2002, In Brief).

In the bidding for Scios, J&J had some wiggle room to make a dilutive transaction. The company says it will still meet First Call consensus earnings-per-share estimates of $2.62 for 2003 despite a 5¢ dilutive impact from Scios in each of the next two years. (The EPS estimate excludes a one-time charge of $700 mil. for in-process R&D, which will have an additional impact of 23¢.)

J&J will be able to neutralize the Scios dilution with upside from Cordis' Cypher drug-coated stent, as well as "some strength in other portions of our business," CFO Robert Darretta told investors.

In an era where most pharma companies are struggling to make earnings targets, other bidders on the Scios RA program may have had less flexibility to pursue dilutive transactions.

J&J's decentralized corporate structure also makes the company a relatively attractive suitor. As was the case with the Centocor deal in 1999 and in the Alza deal in 2001, Scios will retain its name, corporate identity and management team following the acquisition.

J&J is planning a two-part strategy to build Natrecor (nesiritide) sales beyond its baseline expectations for 2003.

J&J will first use its marketing muscle to increase penetration within the existing label. In the longer term, the company will support ongoing R&D to expand the indication into out-patient therapy.

"Our Centocor sales force in cardiovascular has great penetration and relationships in the emergency rooms, great coverage there, which is probably an area that is still unexplored" for Natrecor, Worldwide Pharmaceuticals Group Chairman Christine Poon said.

"The other sales force synergy that's a possibility is certainly our Ortho Biotech organization, [which] calls in the critical care unit in a pretty substantial way. Again, this is probably where we would probably see a lot of acute heart failure patients," she said.

Centocor markets the antiplatelet agent ReoPro . Ortho Biotech's critical care business includes the anemia therapy Procrit ; pain product Duragesic and intravenous antifungal Sporanox IV . Natrecor is currently promoted by 172 Scios reps; five to 10 additional reps are planned.

As of the end of 2002, 86% of targeted hospitals have stocked Natrecor, and 87% of those that placed an order in the third quarter reordered for the fourth.

The companies will look to improve Natrecor's efficacy profile and patient compliance through the use of Alza's drug delivery technology, Poon added. "We could also provide the resources to expand the use of the product in other patient populations," she said.

Expanding Natrecor use into outpatient therapy could double Scios' current peak projections. "If we are successful, this is certainly equal, if not superior, to the projected uses of this compound within the hospitals," Schreiner maintained.

Scios is analyzing outcome data from a dose-ranging safety and tolerability study (FUSION I) in 210 patients after hospital discharge, and will announce the results in the first quarter. Scios plans to discuss with FDA the design of the next phase (FUSION II).

J&J also sees potential synergies between Natrecor and a Scios-owned diagnostic. "We may also explore a link between Natrecor and a proprietary experimental diagnostic tool that is owned by Scios, which could be used for diagnosis of heart failure," Poon said.

The diagnostic measures plasma BNP levels to detect the degree to which the heart is experiencing stress. The product could theoretically be used in conjunction with Natrecor therapy, and could be especially helpful in evaluating the product's efficacy in out-patient care, Schreiner said.

While J&J has ambitious plans to grow Natrecor, its first challenge in marketing the product may be a defensive one. A meta-analysis that is expected to raise safety questions about the biologic will be the subject of a poster presentation at the American College of Cardiology meeting in March.

J&J and Scios dismissed concerns about the issue during the investor call, maintaining that the ACC presentation will not be based on any new data and represents a flawed analysis of the Natrecor database.

"What this represents is a re-interpretation of data that was in the public domain that the FDA has already analyzed," Schreiner maintained. "A conclusion was obtained by selectively deleting certain populations of patients and re-interpreting events that allowed this investigator to make these claims."

"This was not original clinical research, this arose from no personal experience. It was simply a counter to the review that the FDA had already conducted exhaustively on a much broader range of patients," he declared. "This was done on less than 700 patients," versus Scios' field experience with 100,000 patients.

The expected second quarter closing date for the merger allows J&J time to review both the ACC poster presentation on Natrecor and the Phase IIa data on Scios' lead p38 kinase inhibitor.

One challenge in completing the merger may come from a large pool of investors who have an interest in breaking up the deal. The short interest of Scios' stock was unusually high; 24.3% of shares outstanding were shorted by Scios stockholders as of Jan. 8.

J&J Buys Scios: Will Natrecor Make Another Centocor?

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