Issue Date: February 26, 2007
Pharma Takes Action
The pharmaceutical industry's recurring laments of generic competition, weak sales, and pipeline setbacks reached a crescendo in the fourth quarter of 2006. Profits fell overall for U.S. companies and failed to make the customary double-digit gains at European firms.
Pfizer and AstraZeneca responded with action plans, and analysts see further restructuring on the horizon. Yet even in the midst of the shake-up, analysts see light at the end of the tunnel; the industry appears to be at the end of a wave of patent expirations on major products, and the new-drug pipeline is looking a little healthier heading into 2007.
The average 2006 fourth-quarter profit margin for the 13 big drug companies tracked by C&EN dipped to 19.6%, compared with 20.7% in fourth-quarter 2005. Average sales growth came in at 5.8%, while earnings growth was virtually flat at 0.3%. For the full year, the aggregate profit margin was 23.0%, compared with 22.2% in 2005.
European companies fared better than their U.S. counterparts, posting an average fourth-quarter earnings growth of 7.5%, based on a sales growth of 7.9%. For the year, the Europeans enjoyed a 16.6% rise in profit, based on a 10.5% increase in sales.
On the other hand, the eight U.S. pharma majors tracked by C&EN saw an overall decline in fourth-quarter profits of 4.9%, though sales increased a modest 4.3%. For the year, the companies eked out an earnings growth of 5.4%, based on a 3.4% rise in sales.
Fourth-quarter profit margins among the U.S. companies fell to 18.4%, compared with 20.2% in the 2005 period. For the full year, however, profit margins crept up to 22.0%, compared with 21.6% in 2005.
Companies are under the gun to improve results that, although the envy of many industries, are below Wall Street expectations. The response has been a dramatic shift in management—Pfizer, Merck & Co., and Bristol-Myers Squibb (BMS) are all operating under new leaders—and an intense focus on cutting costs and improving R&D to deal with a tougher operating environment and fewer new-product launches.
"The new guard is now on duty," says Deutsche Bank analyst Barbara Ryan. The new management "understands that they must improve earnings or suffer a similar fate [as their predecessors]; hence aggressive cost-cutting is already under way and will likely intensify in the near term."
Yet talk of restructuring overshadows what some analysts believe are signs of an improving late-stage pipeline at big pharma. "The good news is that, in 2006, we saw signs of an emerging pipeline from the group for the first time in several years," says Bank of America analyst Chris Schott.
Though new drug launches remain at a low level, several novel products did make their way to consumers last year. Merck launched the diabetes drug Januvia and the cervical cancer vaccine Gardasil; Pfizer launched the cancer treatment Sutent, the smoking cessation drug Chantix, and the inhaled insulin product Exubera; and BMS launched the arthritis drug Orencia and the cancer treatment Sprycel.
Schott expects the trend to continue in 2007, "with higher R&D budgets finally translating into an increase in late-stage pipeline compounds and, importantly, new-product launches."
The highest profile shake-up came from the biggest drug company. On Jan. 22, Pfizer announced plans to slash 10,000 jobs by the end of next year. The company also earmarked several manufacturing and research facilities for shutdown, adding to the facilities that had been casualties of earlier cost-cutting efforts. Lastly, Pfizer announced that research teams for specific therapeutic areas will be concentrated at one of four major sites, rather than spread across the globe.
The restructuring was unveiled on the same day that Pfizer reported lackluster fourth-quarter and full-year results. Quarterly earnings fell 15.1% to $3.0 billion, based on flat sales of $12.6 billion. For the year, earnings increased 3.5% to $15.0 billion, and sales increased 2.0% to $48.4 billion.
Sales of the cholesterol drug Lipitor continued to grow, albeit at a rate that failed to live up to Pfizer's expectations. Sales increased 6% to $12.9 billion for the year, just shy of Pfizer's $13 billion target.
Pfizer's nerve pain drug Lyrica, launched in late 2004, saw fourth-quarter sales more than double to $353 million, while those of the schizophrenia drug Geodon grew 32% to $210 million.
Previous high expectations for Pfizer's inhaled insulin product Exubera, which it comarkets with Nektar Therapeutics, are moderating. The drug received Food & Drug Administration approval in January 2006 but took almost a year to launch, resulting in "negligible" sales for the year, according to Morgan Stanley stock analyst Jami Rubin. The company maintains that Exubera will eventually reach its lofty $2 billion peak sales estimate, but not by 2010 as originally projected.
Analysts, on the other hand, are skeptical of Pfizer's assessment of patient demand for the novel insulin formula. Rubin believes the drug will bring in $300 million this year, and sales will rise to $800 million in 2010.
Heading into 2007, Pfizer is likely to be on the acquisition trail, though analysts believe the company will avoid the big purchases such as Pharmacia and Warner-Lambert that contributed to its current malaise.
"We think Pfizer is less interested in making a mega-acquisition for the sake of financial gain and far more interested in pursuing smaller, strategic acquisitions of products, diagnostics, and technology-intensive companies," Rubin wrote in a note to investors after the company announced earnings.
European pharma major AstraZeneca also disclosed cutbacks in conjunction with its earnings announcement. Though the company reported relatively healthy sales and earnings for 2006, important products are expected to be challenged this year, and it has little in the pipeline to offset the pressure. The restructuring plan, still subject to negotiations with labor unions, involves shedding 3,000 jobs and streamlining production capacity.
Fourth-quarter profits at AstraZeneca improved 17.8% to $1.4 billion, based on a 13.8% increase in sales to $7.2 billion. For the year, earnings were up 13.1% to $4.4 billion, based on a 10.5% rise in sales to $26.5 billion.
The cholesterol drug Crestor had a particularly strong performance; sales surged 73% to $625 million in the quarter and were up 59% for the year to $2 billion. AstraZeneca acknowledges that growth for the drug in 2007 may not be as pronounced, due to increased competition from generic versions of Merck's cholesterol agent Zocor, which lost patent protection in June.
Nexium, AstraZeneca's ulcer pill, brought in $1.4 billion in fourth-quarter sales, a 13% increase. However, European authorities rejected a patent on the drug in December, thereby making it vulnerable to generic competition in Europe in 2007.
Merck, which has completed much of the overhaul that it initiated after withdrawing the painkiller Vioxx in 2004, continues to see its business improve. Despite the loss of patent protection on Zocor, the company saw fourth-quarter sales grow by 4.8% to $6.0 billion. Earnings, though, fell 22.0% to $1.1 billion. For the full year, profits slid by 1.0% to $5.5 billion, based on a 2.8% rise in sales to $22.6 billion.
Meanwhile, BMS continued to suffer from generic competition for its blood thinner Plavix, its cholesterol drug Pravachol, and its cancer treatment Taxol. The firm's fourth-quarter sales dropped 16.1% to $4.2 billion, while earnings plummeted 36.8% to $380 million. For the year, earnings were off 25.0% to $2.1 billion, based on a 6.7% decline in sales to $17.9 billion.
Most painful for the company, Plavix sales were down 53% in the fourth quarter to $1.1 billion, and full-year sales fell 15% to $3.3 billion. A loophole in a patent settlement agreement with BMS and its marketing partner Sanofi-Aventis enabled the generic drug firm Apotex to launch a version of the blood thinner in August, years ahead of the anticipated patent expiration. A court has approved an injunction against Apotex while litigation between the companies plays out, but the firm had shipped enough generic product to supply the market through the first quarter of 2007.
Meanwhile, generic competition ate into sales of Pravachol, which sank 75% to $146 million in the quarter, and Taxol sales dropped 28% to $130 million. On the upside, fourth-quarter sales of the antiviral Reyataz increased by 36% to $255 million, and sales of the cancer treatment Erbitux rose by 38% to $167 million.
Despite a rocky 2006, analysts are fairly confident in BMS's prospects for 2007. They expect inventories of generic Plavix to have run out by the end of the current quarter, and they say the company has already taken the majority of the hit from losing patent protection on Pravachol and Taxol.
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