Pharma's Mixed Bag

AS ILLUSTRATED BY A WIDE RANGE of second-quarter results, the pharmaceutical industry's reliance on "blockbuster" drugs is a double-edged sword. Although Pfizer and GlaxoSmithKline were taken down a notch by pressures on multi-billion-dollar drugs, Merck and Schering-Plough are at their healthiest in years thanks to skyrocketing sales of newer products.

Overall, the average second-quarter profit margin for the 13 drug companies tracked by C&EN slipped only slightly to 22.0% from 22.5% in the second quarter of 2006. Sales grew 5.4%, and earnings increased 2.8%.

Combined sales at U.S. firms were up 7.2% compared with those of second-quarter 2006, while earnings increased 5.6%. The profit margin of 21.5% in the quarter was nearly even with the 21.8% posted in the year-ago period.

European companies didn't do as well, with earnings dropping 0.8% based on a 2.9% rise in sales. Average profit margins were down slightly to 22.7%, compared with 23.6% in the second quarter of 2006.

The biggest surprise of the quarter was the significant drop in sales and earnings at Pfizer, which suffered an unexpectedly steep decline in sales of Lipitor. Sales of the cholesterol drug, by far Pfizer's best selling product, dipped 13% to $2.7 billion in the second quarter, with U.S. sales falling 25%. The Lipitor loss contributed to a 19.6% dive in second-quarter earnings based on a 5.6% decline in sales.

The company had expected the drug to be under pressure as generic versions of two other statins, Merck's Zocor and Bristol-Myers Squibb's Pravachol, penetrated the U.S. market. But the erosion was far more severe than Pfizer had anticipated.

Pfizer's outlook for the drug is less sanguine than it was in the first quarter, when Pfizer still thought sales growth was possible. The firm is now predicting Lipitor sales will be flat or even down 5% for the year.

But Pfizer's problems are not limited to Lipitor. The company is also trying to counter the loss of patent protection on the blood pressure drug Norvasc and the anxiety medicine Zoloft, which saw sales fall 45% and 82%, respectively. Earlier patent expiries had already knocked down sales of the anti-infectives Diflucan and Zithromax.

Furthermore, Pfizer finally came clean with its sales data for Exubera, an inhaled form of insulin that was approved in early 2006. Though Pfizer has spent more than $2 billion developing the drug and touts it as a potential blockbuster, Exubera brought in just $4 million in the second quarter.

"This is for a product that has been on the market for six quarters," says James F. Reddoch, an analyst at Friedman, Billings & Ramsey, which tracks Nektar Therapeutics, Pfizer's development partner for Exubera. "We thought the number was missing a zero at first." Reddoch notes that Pfizer had originally marketed the product to endocrinologists but, failing in that, is now launching a major direct-to-consumer campaign.

Even Pfizer's two bright spots, cancer treatment Sutent and nerve-pain drug Lyrica, couldn't come close to offsetting the other disappointments. Sales of Lyrica were up 49% to $405 million, while sales of Sutent more than tripled to $146 million.

It doesn't appear that Pfizer is going to get healthier anytime soon. Morgan Stanley analyst Jami Rubin points out that Pfizer's propensity for big acquisitions has not only weighed on its profits but may have actually impeded its R&D productivity—a situation that could make getting out of its rut difficult, if not impossible. However, she says, "the company's fundamentals are substantially worse than the industry average, and thus should not be representative of the group as a whole."

AT LEAST ONE other major drug company was also experiencing blockbuster woes. GlaxoSmithKline suffered a major setback in the quarter when a paper in the New England Journal of Medicine (NEJM) suggested that its diabetes drug Avandia raised patients' risk of heart attack. Though the report came out midway through the quarter, U.S. sales of the Avandia franchise, which includes combinations of Avandia and other diabetes drugs, were down 42% in the period. Just one month after the adverse findings, GSK's second-quarter sales fell 2.4% to $11.4 billion, while earnings gained only 1.3% to $2.7 billion.

Last month, a Food & Drug Administration advisory committee voted 22-1 to keep Avandia on the market, but the doubts raised by the NEJM paper, combined with the availability of other drugs to treat diabetes, could permanently dampen sales.

The British drug firm is setting its sights on newly approved products to help offset some of the Avandia losses. Tykerb, a small-molecule breast cancer agent that targets the same receptor as Genentech's biologic drug Herceptin, brought in $24 million in its first full quarter on the market. And GSK launched two other drugs during the period—the allergy nasal spray Veramyst and Altabax for impetigo—and is nearing European approval for Ceravix, its cervical cancer vaccine.

Meanwhile, Bristol-Myers Squibb seems to have finally overcome a setback to its major blockbuster drug, Plavix. A botched deal with the Canadian firm Apotex led to an early launch of a generic version of the blood thinner, BMS's biggest selling product. Sales and earnings plummeted in the fourth quarter of last year, and despite BMS winning an injunction preventing Apotex from shipping any more of the generic product, pharmacies still had a lot of generic drug on hand in the first quarter.

The problem appears to have been resolved in this period, and Plavix sales were up 4% to $1.2 billion. Overall, BMS sales were up 1.2% to $4.9 billion, while earnings improved 6.8% to $726 million.

Results for other drugs in the BMS portfolio were relatively steady. Sales of the schizophrenia drug Abilify improved 27% in the quarter to $412 million, while the company's franchise around the HIV drug Sustiva brought in $233 million, up 21%.

Although the declining performance of blockbuster drugs caused some companies to have a rough quarter, a number of firms are enjoying improving fortunes as newer drugs bring in billion-dollar sales annually. Merck's sales were up 5.9% in the quarter, while earnings increased 11.8%. Those figures don't include the contribution of its joint venture with Schering-Plough to produce the cholesterol drugs Zetia and Vytorin. The venture would have added another $1.3 billion in sales to the balance sheet.

Merck's new diabetes product, Januvia, posted sales of $144 million. Sales of Janumet, a combination therapy of the active ingredients in Januvia and metformin that just gained approval in April, were already at $24 million.

Schering-Plough also had a strong quarter, boosted by its cholesterol venture with Merck. The company posted a 66.1% rise in earnings to $623 million, based on a 12.8% increase in sales to $3.2 billion.

Morgan Stanley's Rubin called the results "impressive" and noted that the company has the best growth prospects among the U.S. pharma majors.