Drug Firms Report a Decent Quarter

The pharmaceutical industry got off to a good, but not great, start in 2005. A few large drug firms posted double-digit gains in sales and earnings in the first quarter, but generic competition, dry new-product pipelines, and drug recalls kept most gains in the single digits or even contributed to sales and earnings declines.

Combined first-quarter sales for 13 leading drugmakers tracked by C&EN increased by 7.3%, compared with the same quarter in 2004, while combined earnings rose 9.8%. U.S. companies bore the brunt of the business difficulties, helping European firms narrow the traditional profitability gap between U.S. and European players.

Pfizer Chief Executive Officer Hank A. McKinnell, commenting on his firm's first-quarter performance, describes two Pfizers. One is the world's largest drug company with the industry's broadest array of marketed and new products. The other Pfizer is "a business going through the process of reinventing itself," he says. It is dealing with the recent loss of patent protection for products such as Neurontin, Diflucan, and Accupril and the recall of the COX-2 inhibitor Bextra.

On balance, the company saw sales for the quarter rise 4.8% to $13.1 billion and earnings increase just 0.6% to $4.00 billion. Pfizer's strongest performer continued to be the cholesterol-lowering drug Lipitor, which had first-quarter revenue of $3.1 billion, up 23% over the same period last year. Thanks to an active flu season, the antibiotic Zithromax achieved $797 million in first-quarter sales, up 71% over the 2004 period.

Merck, which last year experienced the recall of Vioxx, its own COX-2 inhibitor, doesn't have Pfizer's size and breadth to fall back on. The company posted a 4.8% sales decline in the first quarter, to $5.36 billion, and a 15.4% reduction in earnings to $1.37 billion. In addition to the Vioxx loss, Merck suffered from 15% lower sales in the quarter for Zocor, which faces competition from Lipitor and other products in the cholesterol-lowering category.

If Vioxx sales in first-quarter 2004 were to be removed from the equation, Merck points out, first-quarter 2005 sales would have been up 8%. But this wishful thinking wasn't enough for CEO Raymond V. Gilmartin. He stepped down from his job early in the second quarter to be replaced by Richard Clark, Merck's former head of manufacturing.

Wyeth had arguably the best quarter among U.S.-based drug companies, reporting a 14.1% increase in sales to $4.58 billion and a 27.7% earnings jump to $1.08 billion. The company benefited from a 12% increase in year-over-year sales of the antidepressant Effexor, which last year became the firm's first $3 billion-per-year product. Also strong was the arthritis drug Enbrel, copromoted with Amgen in North America and sold exclusively by Wyeth outside North America. Enbrel sales outside North America grew 75% in the quarter to $237 million.

Johnson & Johnson also did well, with an 11.0% sales gain to $12.8 billion and a 17.4% rise in earnings to $2.93 billion. "Our strategic principle of being broadly based continues to serve us well," CEO William C. Weldon says. Sales in the firm's medical devices and diagnostics business rose 16.0% to $4.8 billion, helping to offset a more modest increase in pharmaceutical sales of 7.0% to $5.8 billion.

IN PHARMACEUTICALS, J&J's strong performers included Remicade for arthritis, the antiepileptic Topamax, and the antipsychotic medication Risperdal. Generic competition hit Procrit, an anemia drug, and Duragesic, a transdermal patch that delivers fentanyl for pain.

Compared with Wyeth and J&J, Eli Lilly & Co. had a modest quarter, reporting a 3.6% gain in sales to $3.50 billion and a 10.0% increase in earnings to $737 million. It says newer products, like the antidepressant Cymbalta, accounted for 14% of first-quarter sales, compared with 9% of sales in the year-earlier quarter.

AstraZeneca had the strongest quarter among European firms and the best earnings increase of any major drug company. Its sales rose 13.2% to $5.74 billion on a 30.5% leap in earnings to $1.04 billion, a quarterly record for the firm. "This excellent start to the year has set us on track to deliver our financial targets for the year," CEO Sir Tom McKillop says.

AstraZeneca's growth leader was the cholesterol-lowering drug Crestor, which posted first-quarter sales of $273 million, more than double the figure for first-quarter 2004. AstraZeneca's biggest selling drug, the heartburn treatment Nexium, saw sales rise 11% in the quarter to $1.1 billion. Sales of Iressa, the firm's new lung cancer drug, were down 15%, largely because the company has stopped promoting it in the U.S. while the Food & Drug Administration assesses a clinical trial.

Novartis was another European standout, posting a 10.6% increase in sales in the quarter to $7.34 billion and a 19.8% rise in earnings to $1.48 billion. CEO Daniel Vasella says the company is gaining market share and is on track to deliver record sales and earnings for the year.

Sales of Novartis' top-selling drug, Diovan for hypertension, rose 14% in the quarter to $845 million. Its fastest growing drug was the breast cancer treatment Femara, which jumped 47% to $118 million in quarterly sales.

Unlike other major drug companies, Novartis has embraced the generics business, and during the quarter acquired the sister generic drugmakers Hexal and Eon Labs. Vasella says Novartis is integrating the two acquisitions with the company's Sandoz unit to create the world leader in generics.

While announcing first-quarter results, a number of drug companies made predictions for the full year. Pfizer repeated an earlier statement that 2005 will be a "transition year." It expects full-year earnings per share to fall from $2.12 in 2004 to $1.98 in 2005. Merck likewise sees earnings declining, from $2.61 per share in 2004 to between $2.44 and $2.52 in 2005.

Lilly, in contrast, expects to report full-year 2005 results of $2.80 to $2.90 per share, compared with $2.58 in 2004. "We expect acceleration of sales and earnings growth in the second half of this year, driven by our newer products," CEO Sidney Taurel says, noting in particular Cymbalta and Alimta, a new lung cancer drug.

And Wyeth expects to come in with 2005 earnings at "the upper end" of the range of $2.70 to $2.80 that it previously estimated. It earned $2.65 per share in 2004. "Wyeth reported exceptional results for the 2005 first quarter, providing us with a great start for the year," says CEO Robert Essner.

DRUG COMPANIES

Good first-quarter performance by European firms helped narrow profit margin gap with U.S.