Biotech Results Are Disappointing

There are two kinds of biopharmaceutical companies--those that make money and those that don't. In the second quarter, among 27 companies surveyed by C&EN, the latter outnumbered the former by a ratio of 5 to 4.

In general, product sales make up most of the revenues at companies that make money. For those that don't, revenues come largely from nonproduct areas such as collaborative agreements and royalties.

Overall in the second quarter, the 27 companies had combined earnings from continuing operations, excluding unusual items, of $1.42 billion, a 16.1% increase from the same period last year. Revenues increased slightly more, growing 20.1% to $7.98 billion. Thus, the firms' aggregate profit margin declined to 17.8% from 18.4%.

For the first six months, combined earnings rose 24.1% to $2.91 billion on a 25.5% increase in revenues to $16.0 billion. Profitability slipped to $18.2% from 18.5%.

The difference in fortunes among the companies becomes apparent when one considers that, among the 27 companies, the three largest--Amgen, Genentech, and Denmark's Novo Nordisk--account for some 60% of total revenues and about 80% of total earnings.

Amgen, the largest company on the list, saw earnings increase 23.8% in the second quarter to $808.6 million as revenues rose 21.7% to $2.48 billion. Profitability at the company was 32.5%, up from 32.0% in the same period in 2003.

"The strong second-quarter performance reflects our solid execution across the business in the U.S. and European markets," says Kevin Sharer, Amgen's chief executive officer. "In Europe, Aranesp has become the market leader for anemia treatment in both chemotherapy and nephrology patients with its less frequent dosing regimen. In addition, we launched Sensipar for secondary hyperthyroidism in dialysis patients and Enbrel for moderate psoriasis. Both products are enjoying initial launch success."

Genentech's earnings rose 23.4% to $201.8 million as revenues increased 41.1% to $1.13 billion, which the company notes marks its first billion-dollar-plus quarter. The revenue growth was driven by a 42.0% increase in product sales to $913.4 million.

Genentech CEO Arthur D. Levinson notes, "Rituxan continued to exhibit healthy growth, with a 17% increase over the same period last year." He also points out that three new product launches that took place before the quarter--Avastin, Xolair, and Raptiva--contributed $190.1 million, or 21% of product sales, in the second quarter.

At Novo Nordisk, earnings were almost unchanged, rising just 0.4% for the quarter to $213.0 million on an 11.5% increase in sales to $1.19 billion. CEO Lars R. Sørensen says, "Strategically important products like the insulin analogs and NovoSeven continue to drive sales growth and enable us to raise our expectations for growth in underlying operating profit in 2004." A company statement says, "Despite a continued challenging currency environment, the expectation for sales growth in 2004 remains around 10%, whereas operating profit is now expected to grow by slightly more than 5%."

The number of companies with losses in the second quarter increased by one, for a total of 15, compared with the same period last year as ImClone Systems, which had a loss last year, swung to profitability this year but ArQule and MedImmune went the other way. ArQule's loss was a mere $10,000.

However, the losses swelled. Total losses for the 15 companies this quarter were $382.0 million, compared to $291.0 million for the 14 companies in 2004. On a same-company basis, the decline was even worse. The 15 companies with the $382.0 million in losses this year had losses of just $242.4 million in the 2003 period.

ONE REASON for the big difference in losses was that MedImmune went from earnings of $13.5 million in the second quarter last year to a loss of $29.0 million this year. This swing was on a 16.7% decline in revenues to $93.7 million.

According to the company, there were a number of factors that affected the bottom line in the second quarter, including increased R&D expenditures, plus increased selling, general, and administrative costs caused primarily by the reacquisition of an influenza vaccine franchise from Wyeth. The dissolution of this partnership added other charges, which MedImmune says will affect its results for the remainder of 2004.

Sepracor's losses swelled from $33.8 million in second-quarter 2003 to $81.1 million this year. Sales at the company declined 8.5% to $70.0 million. Sepracor gives no reason for the greater loss, but the data show that the firm's pretax expenses--especially sales and marketing costs--increased greatly. Sales and marketing expenses grew 134.8% to $86.4 million in the quarter, causing a 53.4% jump in operating costs to $139.3 million.

There were, of course, companies with good earnings gains during the quarter. For instance, earnings at Celgene jumped 327.6% to $12.4 million. Revenues at the company increased 30.5% to $87.8 million. The earnings increase was enough to spur Celgene to raise its earnings guidance for the full year to a range of 50 to 60 cents per share from its previous forecast of 42 to 52 cents.

At ImClone, earnings totaled $24.3 million, compared with a loss of $34.8 million in the second quarter a year ago. Sales at the company almost quadrupled to $71.5 million. The much improved results came on the strength of Erbitux, the colorectal cancer drug that, upon not recieving Food & Drug Administration approval, prompted the government investigations into the company that brought down CEO Sam Waksal in 2002 and started insider trading problems for Martha Stewart.

Michael J. Howerton, ImClone's chief financial officer, says, "We expect to remain a profitable entity for the balance of the year, with continued progress in the key aspects of our business, while managing expenses to maximize our long-term prospects."

Chiron had a large earnings decline for the quarter but remains optimistic. Earnings were down 28.6% to $48.0 million, despite a 12.4% increase in revenues to $393.6 million. The company still feels good about the remainder of the year, however. CEO Howard Pien says: "We expect to deliver beyond our initial estimates for the 2004–05 influenza season, bringing an additional 2 million doses of Fluvin to the U.S. market."

Shire Pharmaceuticals also sees good second-half prospects. Earnings at the U.K.-based company rose 23.1% in the second quarter to $89.5 million on a 7.6% increase in revenues to $321.0 million. CEO Matthew Emmens says that "2004 is proving to be a very good year for Shire. The underlying business is strong, and our reorganization is positioning the company to deliver value this year and beyond."