BUSINESS
PFIZER'S TROUBLES PULL DOWN DRUGMAKERS Top U.S. company joins Merck and Bristol-Myers Squibb in posting third-quarter sales declines MICHAEL MCCOY, C&EN NORTHEAST NEWS BUREAU
D
I F F I C U L T I E S AT PFIZER, T H E
world's largest drug company, dragged down die performance of die U.S. pharmaceutical sector in the third quarter. And if Pfizer's oudook for the fourth quarter and beyond is any indication, an improvement in the U.S. industry's overall fortunes may be a while in coming. Nine U.S. drugmakers surveyed by C&EN eked out a paltry 1.9% combined earnings gain in the third quarter. The aggregate U.S. profit margin was 23.1%, high by most industries' standards but down from the 23.4% margin recorded in thirdquarter 2004. Led by AstraZeneca's strong performance, four European firms did much better in the quarter, posting a combined 22.6% earnings rise. Profit margins at European firms rose as well, to an overall 20.8% in the quarter from 19.2% in the year-ago period. Once seemingly immune from the woes
faced by rival U.S.firmslike Merck and Bristol-Myers Squibb, Pfizer stumbled badly in the third quarter. The company's sales fell 5.0% to $12.2 billion, and its profits tumbled 8.4% to $3.8 billion. Problems for Pfizer included the continuing impact of the April withdrawal of the COX-2 inhibitor Bextra, generic competition for the epilepsy treatment Neurontin, slow growth for the cholesterol-lowering medicine Lipitor, and declining sales for the erectile dysfunction drug Viagra. In announcing third-quarter results last month, Henry A. McKinnell, Pfizer's chief executive officer, lowered his outlook for the firm's full-year earnings and withdrew his predictions for financial performance in 2006 and 2007, "in light of current and anticipated business conditions." Pfizer's response to its diminished performance, which started earlier this year, has been its "adapting to scale" productivity initiative, through which it seeks to generate
$4 billion in annual cost savings by 2008. Under the plan, the company is reorganizing R&D into 11 therapeutic categories. Each category will have three team heads: a research leader for compounds not yet in human testing, a development leader for compounds in testing, and a commercial leader for marketed compounds. Merck, which like Pfizer is also suffering from generic competition and a COX-2 drug withdrawal, saw sales fall 2.2% in the third quarter to $5.4 billion. However, Merck reversed the profit drop it saw in the second quarter, posting a 10.2% earnings increase to $2.0 billion. Without pulling the COX-2 drug Vioxx, which preceded Pfizer's Bextra withdrawal, Merck's third-quarter sales would have been up 1%. A strong performer was Singulair, a once-daily asthma drug that had an 11% sales gain in the quarter to $692 million, while the antihypertensive medicines Cozaar and Hyzaar enjoyed 6% growth to a combined $751 million. On the other hand, the cholesterol drug Zocor, Merck's top-selling product, saw a 14% sales decline in the quarter to $1.0 billion. Richard T Clark became Merck's CEO in May, and stock analysts are expecting him to launch a significant restructuring at the firm. In announcing earnings, Clark promised that "by the end of the year, I'll provide details about our plans as well as the milestones and metrics that can be used to evaluate our progress against them."
DRUG COMPANIES Tough third quarter for Pfizer, Merck, and Bristol-Myers Squibb puts a lid on earnings growth THIRD-QUARTER 2005 SALES EARNINGS3 CHANGE FROM 2004 PROFIT MARGIN6 ($ MILLIONS) SALES EARNINGS 2005 2004
U.S. Abbott Laboratories Baxter International Bristol-Myers Squibb Eli Lilly & Co. Johnson & Johnson
$5,384.0 2,398.0 4,767.0 3,601.0 12,310.0
$903.4 296.0 602.0 794.0 2,625.0
15.0%
8.2%
3.4
0.3
-0.2
9.8 6.6
-30.4 14.3 12.1
Merck Pfizer Schering-Plough Wyeth TOTAL U.S.C
1,998.4 5,416.2 12,189.0 3,811.0 2,284.0 141.0 4,716.3 1,103.3 $53,065.5 $12,274.1
-2.2 -5.0 15.5
10.2 -8.4 442.3
5.5
8.8
3.2%
1.9%
EUROPE AstraZeneca GlaxoSmithKline Novartis Schering AG TOTAL EUROPE0
$5,789.0 9,644.3 8,415.0 1,632.5 $25,480.8
$1,226.0 2,208.8 1,666.0 192.8 $5,293.6
10.0% 11.1 19.2 13.3%
43.9% 19.7 13.4 29.1 22.6%
TOTAL ALL COMPANIES0
$78,546.3 $17,567.7
6.3%
7.4%
9.7
NINE-MONTHS 2005 SALES EARNINGS" CHANGE FROM 2004 PROFIT MARGIN" 2004 SALES EARNINGS 2005 ($ MILLIONS)
$2,731.6 16.1% 829.0 6.5 2,221.0 -0.2 2,259.0 5.4 8,228.0 9.6
8.3% 20.0 -14.2 10.0 12.8
16.8% 11.3 15.7 21.0 21.7
18.0% 10.0 18.2 20.1 21.1
16,246.0 4,151.6 -5.5 37,705.0 11,235.0 0.3 6.2 7,184.0 511.0 18.0 1.3 14,009.1 23.4 22.7 2,924.6 10.2 5.3% 23.1% 23.4% $161,650.3 $35,090.8
-12.1 -4.4 382.1 -2.5 1.1%
25.6 29.8
27.5 31.3
7.1
1.7
20.9 21.7%
23.6 22.6%
$17,664.0 $3,481.8 13.0% 27,769.4 6,460.7 6.8 23,555.0 4,789.0 14.0 578.3 7.1 4,701.1 $73,689.5 $15,309.8 10.5%
41.9% 13.8 12.8 24.7 19.2%
19.7% 23.3 20.3 12.3 20.8%
15.7% 21.8 20.5 10.6 19.3%
6.0%
21.4%
21.6%
16.8% 12.3 12.6 22.1 21.3
17.8% 12.7 18.1 21.2 20.3
36.9 31.3
32.7 32.4
21.2% 22.9 19.8 11.8 20.8%
16.2% 21.3 20.8 10.0 19.2%
$16,290.0 7,358.0 14,188.0 10,766.2 37,904.0
22.4% 22.4% $235,339.8 $50,400.6
6.9%
NOTE: European company results are converted at June 30 exchange rate, except for AstraZeneca and Novartis, which report in dollars, a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring items, b After-tax earnings as a percentage of sales, c For companies reporting.
42
C & E N / NOVEMBER 21 , 2005
WWW.CEN-0NLINE.ORG
Bristol-Myers Squibb was the other big drugmaker to see a sales decline in the quarter, although just by 0.2% to $4.8 billion. Its earnings decline was a much sharper 30.4%, to $602 million. The company divides its pharmaceutical portfolio into two categories: "growth drivers" and more mature products, many of which are subject to generics encroachment. At the top of the growth driver list is the platelet aggregation inhibitor Plavix, which posted 9% growth in the quarter to $980 million. A typical mature product is Taxol, which suffered a 28% sales decline to $175 million, primarily as a result of increased generic competition in Europe. FIRMS LIKE Pfizer, Merck, and BMS can look to Schering-Plough for comfort. The company was the U.S. drug industry's laggard for about two years but now seems to be in recovery mode. Sales were up 15.5% in the quarter to $2.3 billion, and earnings jumped fourfold to $141 million, although the firm's profit margin is an unenviable 6.2%. Still, with four consecutive quarters of sales growth and three quarters of earnings growth behind it, CEO Fred Hassan is declaring that "Schering-Plough has halted a downward spiral of performance." Key performers in the halt include the cholesterol drugs Vytorin and Zetia, sold in a partnership with Merck, and the Centocor arthritis drug Remicade, which ScheringPlough markets outside the U.S. If Schering-Plough is the role model for recovery, Eli Lilly & Co. would appear to be the model for not needing to recover in the first place. The Indianapolis-based firm re-
WE DELIVER ocess K&u Laooi
ported sales of $3.6 billion, up 9.8%, in the third quarter and earnings of $794 million, up 14.3%, the biggest gain of any U.S. drug firm in the quarter. Lilly's sales of the schizophrenia drug Zyprexa recovered in the third quarter, growing 1% to $1.0 billion, versus a 10% decline in the previous quarter, while sales of the diabetes care products Humalog, Humulin, and Actos increased a combined 13% to $653 million. "We are pleased that the products in our pipeline continue to progress through development, while at the same time our newer products grow as a percentage of our total sales," CEO Sidney Taurel says. Although Lilly led U.S. firms in increasing earnings, it was dwarfed by the U.K.'s AstraZeneca, which saw a 43.9% earnings jump to $1.2 billion on a 10.0% sales rise to $5.8 billion. Sales were driven by five key products: the ulcer drug Nexium, the cholesterol-reducing agent Crestor, the asthma treatment Symbicort, the oncology drug Arimidex, and the bipolar treatment Seroquel. Together, they posted a sales increase of 25% to $2.7 billion. Only a few AstraZeneca products are in decline. These include Losec/Prilosec, where patients are being encouraged to switch to the firm's Nexium, a single-isomer version of the same drug; the cardiovascular drug Plendil, which is suffering from generic competition in the U.S.; and the cancer treatment Iressa, which U.S. regulators have barred from being sold to new patients for lack of efficacy. GlaxoSmithKline, the largest European drugmaker, also had a good quarter. Sales
rose 11.1% to $9.6 billion, while earnings increased 19.7% to $2.2 billion. In announcing results, CEO Jean-Pierre Gamier raised his financial expectations for the full year to "midteens" earnings-per-share growth. GSK took steps to bolster its vaccines business in the third quarter by announcing the acquisition of Canada's ID Biomedical for $1.4 billion and purchasing a former Wyeth vaccines plant in Marietta, Pa. Its quarterly vaccines sales increased 20% to $694 million. The firm says it is developing a vaccine against the H5N1 flu strain and is building capacity to produce a vaccine for use in a flu pandemic. It is also looking to expand capacity for Relenza, an antiviral that is effective in treating the flu, through production partnerships and alternative delivery mechanisms. Novartis is yet another big European company that both did well in the quarter and is aggressively pursuing vaccines. The Swiss firm posted a third-quarter earnings rise of 13.4%, to $1.7 billion, on a 19.2% sales increase to $8.4 billion. Sales were aided by the addition earlier this year of the generic drugmakers Hexal and Eon Labs to Novartis' Sandoz generics portfolio. As a result, Sandoz' sales more than doubled in the quarter to $1.5 billion. Novartis' revenues from patented pharmaceuticals rose 11%, thanks in part to a 23% increase in sales of oncology drugs like Diovan, Gleevec, Lotrel, Femara, and Zometa. After the quarter closed, Novartis reached an agreement to pay $5.1 billion for the 58% it doesn't already own of the U.S. vaccines producer Chiron. •
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