Profits Are Sweet Pill for Drugmakers

Second-quarter results at some of Europe's major pharmaceutical companies were affected by unfavorable comparisons with nonrecurring gains in 2004 and the impact of extraordinary charges this year. And at two of the firms, chemical operations served to hold down overall profitability.

Meanwhile, companies showed their commitment to R&D as a means for future growth--but not necessarily in Europe. Akzo Nobel's Organon pharmaceutical division, for example, last month opened new biotechnology laboratories in Cambridge, Mass., a city that already is home of the Novartis Institutes for BioMedical Research, established in April 2004 and being expanded (C&EN, July 11, page 31).

For Novartis, sales in the quarter were up 12% from second-quarter 2004. Prescription drug sales rose 12%, while the firm's consumer health division showed a 10% sales increase. Novartis' Sandoz generic drugs division grew slightly more, at 13%. Net income for the quarter was up 9% over 2004.

For the first half, the rate of growth was down slightly, up 11% over first-half 2004. According to Novartis officials, first-half operating income--up a matching 11% to $3.53 billion--was paced by a "robust pharmaceuticals performance." Performance and productivity initiatives, the company added, offset a restructuring-related decline in profitability at Sandoz.

In fact, according to Daniel Vasella, Novartis' chairman and chief executive officer: "In the first half-year, our broad health care portfolio delivered good results. Overall, we are on track to achieve our objectives for 2005."

Sandoz' net sales in the half were $1.6 billion, Novartis said, supported by the European market and by contributions from two acquisitions completed in 2004. The sales and income of the two latest acquisitions--Hexal and Eon Labs--will not show up in the company's books until the third quarter. The acquisitions of the two firms progressed as planned, Vasella noted.

R&D continued to strengthen at Novartis: Spending was up 15% in the second quarter, to $1.10 billion, and also up 15% for the entire first half, hitting $2.18 billion. The bulk of that spending was for the prescription pharmaceuticals division: $917 million in the second quarter and $1.82 billion for the first half.

At Roche, Novartis' crosstown rival in Basel, Switzerland, CEO Franz B. Humer exulted that his company "performed extremely well in the first half of 2005. Sales in local currencies were up by 17%, and operating profits were up 30% for the half." The company reports only sales--and not earnings--on a quarterly basis; sales for second-quarter 2005 were up 15.3% from the comparable period in 2004.

In the first half of 2004, Roche had an extraordinary gain of almost $550 million on conversion and redemption of bonds, so the comparison with this year would be expected to show a decline, Humer pointed out. But despite that skewing, he said, "net income for the first six months of this year was up 4%. This is equivalent to an increase of 28% on a comparable basis."

Sales in Roche's pharmaceuticals division were up 22% in local currencies, boosted by the company's oncology treatments. Avastin for colorectal cancer and Tarceva for lung cancer, for example, were launched during the first half of 2005.

During the half, Humer noted, Roche has been "investing heavily in expanding our biotech manufacturing facilities to meet the rising demand for our new biopharmaceuticals. Ongoing projects to increase the group's biotech manufacturing capacity currently represent investments" of nearly $2 billion, he added.

The impact of nonrecurring items was particularly clear at Merck KGaA: A sizable nonrecurring gain from divested businesses in the second quarter of 2004 caused this year to suffer in comparison. However, said Chairman Bernhard Scheuble, "excluding the gains from our strategic divestments, Merck's profit after tax rose a very substantial 27%" in the second quarter of the year.

And even with the loss of sales from the divested units, Scheuble said, "Merck continues to expect group sales to rise by a single-digit rate in 2005." Sales of the company's Erbitux cancer treatment reached $63 million in the quarter, up 22% from the first quarter of this year.

Merck's other "star" was its liquid-crystals division. Sales were $221 million in the second quarter, surpassing by nearly 10% the "record" second quarter of last year. Profitability of the division took a temporary hit, though, because of high R&D costs for the firm's new organic light-emitting diodes business and from higher-than-expected start-up costs for its new plant in Darmstadt, Germany.

Meanwhile, the results at Akzo Nobel point out the problems attending so-called hybrid companies that, like Merck, mix pharmaceutical and chemical operations.

Akzo Nobel's profit margins are significantly lower than those of the purely pharmaceutical operators that have reported first-half results. But its improvement from the previous year's second-quarter and first-half results is more dramatic, an indication of the cyclical impact of chemical operations.

Akzo Nobel's net income in the second quarter was up 22% to $221 million, based on favorable developments in Organon and Intervet, the company's animal health division, and one-off net gains. However, higher raw material and energy prices at its coatings and chemicals divisions continued to put pressure on profit margins, despite selling-price increases, according to Chief Financial Officer Rob Frohn.

OVERALL SALES rose 6% in the quarter. Pharma operations showed strong growth, Frohn said. In the coatings division, price increases in mature markets caused a slight decline in sales volume, although acquisitions helped overcome that dip.

And in chemicals, volumes were flat, Frohn said, while selling prices increased by 3%. Sales were hurt, too, he added, by external events such as a pulp and paper industry strike in Finland that cut into sales of specialty chemicals for that industry. The company's divestment program, which will take roughly $840 million in sales off Akzo Nobel's books, is on track for completion early next year if not earlier, Frohn said.

The divestitures were announced late in 2003 by Akzo Nobel Chairman G. J. (Hans) Wijers, who pledged to improve the company's profitability by leaving less profitable chemical businesses and focusing on pharma and coatings operations.

In fact, during the second quarter, R&D expenses at Organon were increased significantly in line with the company's requirements to develop drugs in its pipeline. Moreover, in late June, Organon launched its biotechnology research initiative with a seminar and open house in its new R&D labs. The topic of the day was R&D strategy and collaborative opportunities.

"Organon is expanding upon its current biotechnology programs with a global discovery research initiative aimed at diversifying our therapeutic areas of focus and bringing the next generation of biopharmaceutical products to market," said David Nicholson, executive vice president for global research at Organon.

The company's strategy in biotechnology, he said, is to develop and market biological entities that represent new therapeutic approaches within areas that include immunology, oncology, and osteoporosis. The Cambridge research center, opened on June 29, is expected to serve as the hub of the company's interface with institutes and companies in the U.S.