Cloudy Forecast For Big Pharma

THE NEWS out of the pharmaceutical industry in recent months illustrates the roller-coaster ride that comes with heavy reliance on blockbuster drugs. Some companies are striking deals to expand their portfolios and insulate themselves from patent expiries and drug setbacks, while others are attempting to break the blockbuster addiction altogether.

Overall, second-quarter results for big U.S. drug companies looked healthier than in recent years. Average sales for the eight U.S. firms tracked by C&EN increased by 11.5%, and earnings were up 16.4%. The group’s average profit margin of 22.0% was an improvement over the 21.1% reported in the second quarter of 2007. For the first half of the year, average sales were up 10.1%, while earnings increased 8.7%. The average profit margin of 22.4% was down slightly from 22.7% in the 2007 period.

European companies are having a tougher time in 2008. Sales for the first half of the year for the companies followed by C&EN increased just 2.6% on average, and earnings were up a mere 0.7%. Profit margins for the first six months averaged 26.5%, a slight decrease from 27.0% in the first half of 2007.

Faced with slowing growth in sales and earnings, more drug companies are eyeing their biotech industry partners as a means of bolstering the bottom line.

In the past month, Roche, which saw its first-half sales fall by 3.6% to $21.6 billion, made a bid for full control of Genentech; Sanofi-Aventis, which experienced a 3.5% decline in six-month sales to $21.5 billion, is buying vaccines partner Acambis; and Bristol-Myers Squibb is trying to acquire ImClone Systems, its partner for the cancer drug Erbitux. Analysts wonder whether Amylin, Eli Lilly & Co.’s partner for the diabetes drug Byetta, might be the next target.

However, these biotech partners won’t give in without a fight. Most stock analysts believe Genentech’s board will reject Roche’s offer as undervalued, although they also think Roche will eventually fork over more to win control of the biotech firm. Meanwhile, ImClone is contemplating the spin-off of its drug pipeline in a move designed to spurn BMS. Carl Icahn, the financier who chairs ImClone’s board, has said the BMS offer is not nearly high enough given the value of a potential successor to Erbitux in ImClone’s pipeline.

BMS was one of the stronger looking companies this quarter, apparently fully recovered from the short-lived generic competition its blood thinner Plavix faced early last year. Second-quarter sales increased 16.4% to $5.2 billion, while earnings surged 24.4% to $903 million.

And BMS has one of the industry’s fresher drug portfolios. Ixempra, a breast cancer treatment launched last fall, had sales of $26 million in the quarter. Sprycel, approved two years ago to treat chronic myeloid leukemia, brought in $76 million—more than double the sales during the second quarter of 2007. Sales of the arthritis drug Orencia, recently approved for children, were up 55% to $106 million. And benefiting from introduction to markets outside the U.S., the hepatitis B drug Baraclude saw a 131% surge in sales to $136 million.

YET THE SITUATION could get tougher for BMS going forward. Second-quarter sales of Plavix were up 17% to $1.4 billion, but last month a court in Germany said two generic drug companies could sell their cheaper versions of Plavix there. And Novartis’ generics unit, Sandoz, is seeking permission to sell the drug in other European countries.

Merck & Co. and Schering-Plough were hit in the quarter by bad news for their cholesterol joint venture, which markets both Zetia and Vytorin, a pill that combines Zetia and Merck’s statin Zocor. In January, the companies released preliminary data from a large trial showing that although Vytorin is more effective at lowering “bad” cholesterol than Zocor, it also causes more plaque to build up in the arteries of patients with an inherited form of high cholesterol. Physicians cut back on prescriptions, causing sales of Vytorin to fall 14% in the second quarter to $592 million. Zetia sales dipped 3% to $560 million.

That decline could be exacerbated in the remainder of the year. Last month, Merck and Schering-Plough got more disappointing news about Vytorin. Results from another trial showed Vytorin did not reduce the number of major cardiovascular events in a subset of patients with an abnormally thick valve in the aorta.

The study did show the risk of developing coronary artery disease was lower, but that benefit was overshadowed by an alarming side effect noted in the study: a higher incidence of cancer among patients taking Vytorin compared with those taking a placebo. Although the companies believe the findings were an anomaly—they noted that an analysis of earlier trials did not demonstrate an increased risk of cancer, the finding still set off panic among patients.

For Schering-Plough, the financial impact of the cholesterol drug troubles was obscured by the benefits of its 2007 acquisition of AkzoNobel’s Organon Biosciences unit. Second-quarter sales jumped to $4.9 billion, a 54.8% improvement, and earnings increased by 19.2%.

Merck was also able to offset the cholesterol drug decline in the first quarter with strong sales of new products such as Januvia and Janumet. These diabetes drugs continued to go strong in the second quarter, posting combined sales of $406 million; however, the human papilloma virus vaccine Gardasil had a weak showing. The result: Merck’s overall sales for the quarter declined 1.0% to about $6.1 billion, although earnings improved 5.9% to nearly $1.7 billion.

Gardasil sales fell 9% to $326 million, a drop Merck attributed to a slowdown in vaccinations among teenage girls and lower than expected vaccination rates among women age 19 to 26. “Despite our efforts to increase the penetration rates in this population, we clearly underestimated the attitudinal and behavioral barriers with both the 19- to 26-year-old females themselves as well as the doctors that treat them,” Kenneth C. Frazier, Merck’s president of global human health, told investors on a call to discuss the results. Frazier went on to say that Merck considers that population segment “still very much in front of us” and noted a range of efforts to reach consumers and doctors to increase uptake of the vaccine.

GIVEN THE RISKS of a business in which a setback with just one blockbuster product can derail sales growth for quarters if not years, some firms are looking to overhaul their approach. GlaxoSmithKline, which took a hit last year when its diabetes drug Avandia was linked to an increased risk of heart attacks, revealed a shift in strategy away from reliance on blockbuster drugs. “In the past, there has been almost an industry mantra that ‘we have to find a blockbuster,’ ” an endeavor that’s like finding a needle in a haystack, GSK’s chief executive officer, Andrew Witty, said in announcing second-quarter results.

GSK is now focused on launching a handful of new drugs each year to generate a steady revenue stream. “Every now and again, among all those products, we’re going to discover a needle, and we’re going to make the most of it,” Witty added. The British firm also plans to diversify its businesses beyond proprietary small molecules—the traditional bread and butter for big pharma¯by increasing its activity in vaccines and in selling its off-patent drugs in emerging markets.

GSK’s second-quarter sales increased 3.5% to $11.7 billion, and its profits improved 10.2% to $4.2 billion. The picture for the first half of the year was less rosy: Earnings were up just 1.9% to $8.3 billion, based on a 2.6% rise in sales to about $23.1 billion.

Sales of Avandia and related products were down 46% in the quarter to $379 million. The company’s HIV drug franchise saw a 6% drop in second-quarter sales to $705 million; a 24% increase in Combivir sales partially offset erosion across several other HIV products.

Meanwhile, GSK’s vaccines portfolio proved to be an area of strength, posting 34% sales growth to $1.1 billion. Witty said GSK can continue to capitalize on the vaccine business by expanding into new markets and geographies.

[Top of Page]