GlaxoSmithKline looks to Bayer for tonic to pep up its struggling drugs pipeline

Buying German group would give Garnier control of latest rival to Viagra

GlaxoSmithKline got a cool reaction yesterday to suggestions it will make a £5bn bid for the drug making business of Germany's Bayer in a move which would allow it to take full control of the latest rival to Viagra, the iconic impotence treatment.

GSK, Europe's biggest pharmaceuticals company, is considering the deal as it readies itself for a vicious – and expensive – assault on the market for erectile dysfunction drugs, which could be worth £3bn by the middle of the decade.

That it is even considering such a move, when shareholders have clearly signalled their desire for an end to GSK's merger activity, underlines the importance of Levitra, the impotence treatment which was developed by Bayer but which is the subject of a global co-marketing agreement between the two companies.

An estimated $1.7bn (£1.1bn) of Viagra will be sold this year and Pfizer, the world's biggest drug maker, has already begun a series of rearguard actions to snuff out the challenge from Levitra and from Cialis, another similar drug which is being launched by Eli Lilly, its US rival.

Pfizer spent $88m in the US alone last year to market Viagra, and that figure is likely to have risen in 2002. In Europe, where the European Parliament voted last month to maintain a ban on drug advertising to the consumer, the US giant is sponsoring a public education campaign fronted by the Brazilian footballer Pelé. The European campaign does not mention Viagra by name but, with leaflets in pale blue, is colour co-ordinated with the world famous diamond-shaped pill.

Meanwhile, Pfizer has also set the US lawyers on its rivals, arguing that their new drugs infringe its patents. This tactic failed in Europe last year.

GSK and Eli Lilly both promise to market their new drugs aggressively with direct-to-consumer advertising in the US, the world's largest pharmaceutical market, and educational campaigns in Europe. Both have been held up by US regulators concerned over potential abuse of the drugs, but Cialis appears to be several months further along in its application process. In Europe, Cialis was approved last week and will be launched early next year, with Levitra likely to follow shortly after.

Analysts reckoned Levitra is more likely to overcome the handicap of its time lag if the GSK marketing machine has full control. Jo Walton, analyst at Lehman Brothers, said in a note to clients yesterday that this would be the most interesting short-term plus from a combination with Bayer.

"GSK may not wish to see Bayer's share of the drug move into other hands. Although we only have peak sales of $850m in our estimates, GSK thinks the drug could be much bigger and Pfizer's Viagra, the first entrant, has sales of over $1.7bn in 2002."

Others were more obviously struck by the obstacles to a deal. Even though Bayer's chief executive, Werner Wenning, signalled a more realistic tone last week and dropped his insistence that Bayer keep majority control of the ailing drugs division, he continued to argue that a 50:50 joint venture would be possible and that the division as a whole was not for sale.

It is not clear that GSK could justify the deal to its shareholders. The company's shares are languishing close to seven-year lows and there is widespread disquiet over the prospects for sales growth both in the medium term and over the longer term if GSK's giant research operation does not start to yield promising new drugs soon. Bayer could add little to top-line growth, since its most promising drug, a cholesterol treatment called Baycol, had to be withdrawn last year and its best-selling antibiotic is about to lose patent protection.

Jean-Pierre Garnier, GSK's chief executive, would need all his charm to persuade the City of the benefits of another cost-cutting merger, but his personal stock is not high. GSK is currently trying to persuade shareholders to agree to a big hike in M. Garnier's pay, which totalled £3.5m last year.

The market is not as bullish on Levitra's prospects as GSK and Bayer have been. Cialis is making headway in the battle of brand awareness, months before launch, and in France is already being dubbed "le weekend" because studies suggest it can be taken on a Friday and its effects may still be felt on Sunday morning. It is also faster acting than Viagra, which takes at least half an hour to work and lasts for only a few hours.

GSK plans to argue that Levitra is the safest of the trio, since it stays in the body only as long as Viagra, but does not have the effect on vision associated with that pioneering drug. Viagra users sometimes complain of blue vision.

Mark Clark, analyst at Deutsche Bank, is sceptical that even the GSK marketing machine can do the business for Levitra. He said: "It's a good drug, the only problem is that Viagra is one of the world's most recognised brands after Nike and Coca-Cola. Levitra is going to be a costly product to try to establish as an alternative brand, and it is going to involve a hefty and extensive direct-to-consumer advertising campaign which will mean that the product is not profitable for some time. Bayer says it can reach €1bn (£637m) of sales in two or three years, but we think €500m in three to five years may be more realistic."

Like Viagra, Levitra and Cialis both act by blocking an enzyme that limits blood flow to the penis during arousal. Half of all men aged over 40 are said to suffer from erection problems, but only one in 10 currently gets treated. Since Viagra's introduction in 1998, the drug has been used by some 17 million men worldwide and nine pills are dispensed every second. But this still does not live up to some of the financial expectations that accompanied the breakthrough.

Michael Thomas, of the pharmaceuticals practice at IBM Business Consulting, said part of the problem has been the reluctance of national health organisations to reimburse the cost of the drug, or to recognise erectile dysfunction as a serious condition. The National Health Service in the UK, for example, pays for Viagra only for people with particular disabilities or for whom the psychological impact of impotence is exceptionally severe.

Mr Thomas said: "While we wouldn't describe this class of drug as a lifestyle drug exactly, reimbursement authorities don't necessarily put it on their critical list. Up to now, the marketing spend has been concentrated on persuading people that this is a condition, that it is a condition that ought to be treated, and that it is worth getting reimbursement."

He believes that sophisticated direct-to-consumer marketing will be needed if this class of drugs is able to resume the stellar growth of Viagra's early years. And, whether or not GSK splashes out £5bn on the whole Bayer medicine chest, it is still sure to be an expensive battle.