Profit Growth Slows at Big Drugmakers

Second-quarter growth slowed in the core pharmaceutical businesses of several big U.S. drug companies, forcing them to turn to cost-cutting measures and nondrug operations to prop up profits. Europe's drugmakers had a better quarter. The firms surveyed by C&EN posted a combined 16.4% increase in earnings compared with the year-ago quarter, against a mere 2.5% gain for surveyed U.S. firms.

Even with the belt-tightening, three major drugmakers--Pfizer, Merck, and Eli Lilly & Co.--posted declines in earnings from continuing operations in the second quarter compared with the same period a year ago.

Pfizer, the world's biggest drug company, is dealing with a rare profit decline after a lengthy stretch of often double-digit quarterly earnings gains. The company's second-quarter earnings fell 5.2% to $3.42 billion on a mere 1.2% sales gain to $12.4 billion.

Sales in Pfizer's human-health business were down 1% in the quarter and up just 2% in the first half because of patent expirations on key products and the April recall of the COX-2 inhibitor Bextra. Without these setbacks, notes Karen L. Katen, president of the business, first-half human- health revenues would have increased 18%.

Pfizer is responding to its relatively weak performance with restructuring and cost-cutting initiatives in R&D, manufacturing, sales, and information technology. "Pfizer is tearing down silos and streamlining processes," Katen says. "Unfortunately, some of these organizational changes will result in job reductions."

Merck continues to struggle in the wake of the 2004 recall of its own COX-2 drug, Vioxx. The company's second-quarter earnings fell 23.0% to $1.36 billion on a 9.2% sales decline to $5.47 billion. Without the recall, sales would have been up 2%.

Raymond V. Gilmartin unexpectedly stepped down as Merck's chief executive officer on May 5, to be replaced by Richard T. Clark, former head of the firm's manufacturing division. Clark says the company will focus on launching the four vaccines in its pipeline, gaining approval for its late-stage therapeutic products, and increasing efforts "to reduce Merck's cost structure over and above what has been achieved to date."

Eli Lilly & Co. had a lackluster second quarter, even without the recall problems that plagued Pfizer and Merck. The company's earnings before special items slipped 1.4% to $728 million on a modest 3.1% sales increase to $3.67 billion.

Lilly actually posted a net loss for the quarter of $252 million, thanks to a $1 billion special charge taken in June to settle claims that patients who took Zyprexa for schizophrenia weren't adequately warned that, like all atypical antipsychotics, it could cause diabetes. The legal cloud over the drug, Lilly's top seller, took its toll on the firm's top line as well: Second-quarter Zyprexa sales were $1.1 billion, down 10% compared with the same period last year.

Schering-Plough, the drug industry's basket case for two years after patents expired on its Claritin antihistamine, continued to show signs of recovery in the second quarter. Sales were up 17.9%, the most of any firm surveyed by C&EN, and the company posted earnings before special items of $218 million, compared with a loss of $31.4 million in last year's second quarter.

"We are now registering our third consecutive quarter of strong sales growth and, excluding special items, our second consecutive quarter of higher earnings," says CEO Fred Hassan, who joined the company at its nadir in April 2003.

Hassan adds that the firm has taken several recent actions to increase its focus on science and innovation, including establishing a new board committee on science and technology and an outside scientific review panel. "We recognize that innovative science is the driver of product flow excellence and also of supply-chain excellence," he says.

Bristol-Myers Squibb also continued its emergence from a difficult period marked by patent expirations and legal woes. The company reported earnings of $933 million, up 3.1%, and sales of $4.89 billion, up 1.5%.

CEO Peter R. Dolan notes that two newer products--the antipsychotic drug Abilify and the HIV treatment Reyataz--roughly doubled in sales over the same period last year. "We're building a product portfolio and flexible cost structure that are expected to deliver a period of sustained sales and earnings growth beginning in 2007, when major exclusivity losses should be behind us for some time," Dolan says.

WHILE PFIZER and Merck struggle, and Schering-Plough and Bristol-Myers fight their way back, Wyeth and Johnson & Johnson continue to be financial standouts among U.S. drugmakers.

Wyeth reported an 18.0% rise in earnings to $977 million on an 11.6% jump in sales to $4.71 billion. CEO Robert Essner attributes the "exceptional results" to strong global sales of products such as the arthritis drug Enbrel, the antidepressant Effexor, the pneumococcal vaccine Prevnar, and the heartburn drug Protonix.

The company is also bullish on the recent debut of Tygacil, an antibiotic active against a broad spectrum of microbes, including the drug-resistant bacteria methicillin-resistant Staphylococcus aureus. "Launch of this first-in-class product comes at a time when the need for new antibiotic options to combat serious, resistant infections is increasing," Wyeth says.

As in other recent quarters, J&J attributes its strong performance to a health care business that spans pharmaceuticals, medical devices, diagnostics, and consumer products. Indeed, the firm's weakest business was pharmaceuticals, which saw second-quarter sales rise just 2.1% after currency effects.

Overall, J&J's earnings rose 14.1% to $2.80 billion on an 11.1% sales increase to $12.8 billion.

Europe's leading drug companies all had strong quarters that helped them further close the historic profit gap with their U.S. counterparts. The average profit margin of the nine U.S. firms surveyed by C&EN fell to 21.4% in the second quarter from 22.0% a year ago. The Europeans' average, on the other hand, rose to 20.9% in the quarter from 19.7% a year earlier.

C&EN's survey of European firms does not include Sanofi-Aventis, which won't report first-half profits until Aug. 31. Results for Akzo Nobel, Merck, Novartis, and Roche were analyzed recently (C&EN, Aug. 1, page 24).

AstraZeneca had perhaps the strongest quarter of any major drug company--European or otherwise--posting a 50.0% earnings jump to $1.22 billion on a 16.0% rise in sales to $6.13 billion. Moreover, AstraZeneca's performance in the first half of the year was its best ever, prompting the company to increase its earnings target for the full year.

The results announcement, then, was perhaps a fitting time for CEO Tom McKillop to reveal that he will retire at the end of the year, to be replaced by David Brennan, executive vice president of the firm's North American operations.

GlaxoSmithKline, in contrast, had an unremarkable quarter. Sales rose 5.5% to $9.47 billion while earnings increased 6.7% to $2.15 billion. A number of products posted double-digit sales increases, but Glaxo's overall growth was held back by the Food & Drug Administration's seizure of the antidepressant Paxil CR because of manufacturing deficiencies. Generic competition for products such as Paxil and fellow antidepressant Wellbutrin also trimmed sales.

Like Merck and Wyeth, Glaxo is bullish on a historically sleepy business--vaccines. Glaxo's vaccine sales were up 15% in the quarter, and the company anticipates the launch of five major new products in the next five years.

DRUG COMPANIES
Second-quarter earnings growth slows in the industry as Pfizer, Merck, and Lilly post declines
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