Issue Date: November 17, 2008
THE DRUG INDUSTRY is less affected than other businesses during a sharp financial downturn, but that insulation was cold comfort to the pharmaceutical companies that struggled in the third quarter. Big drugmakers had another challenging quarter, marked by modest if any growth and news of more job cuts and research shake-ups.
Merck & Co. arguably had the toughest quarter of all, although its earnings before exceptional items increased 4% to $1.7 billion, based on a 2% decline in sales to $5.9 billion. Although Merck has been the rare pharma major to consistently launch new drugs in recent years, it has also faced a steady stream of problems with its portfolio.
Several of Merck's new and old drugs did experience robust growth. The company's diabetes franchise, which includes Januvia and a pill that combines Januvia with the older drug metformin, raked in $2 billion, a 21% increase. The HIV treatment Isentress, approved a year ago, brought in $110 million in sales, a 43% improvement over the second quarter. And Merck's sales of the blood pressure drugs Cozaar and Hyzaar were up 9% to $888 million.
But the good news couldn't outweigh the disappointments. After explosive growth in its first 18 months on the market, Gardasil, a vaccine for human papillomavirus, has experienced sales declines for two quarters in a row. The company blames the 4% decline in third-quarter sales, to $401 million, on negative media coverage of the vaccine and difficulty in convincing women over the age of 18 to initiate the three-shot course.
Manufacturing problems caused shortages of several Merck vaccines, most notably the shingles vaccine Zostavax. Sales shrank to $11 million, compared with $61 million in the third quarter of 2007.
The company is responding with measures to ensure vaccine supplies. It is investing roughly $1 billion to expand capacity, a move that includes a recently opened plant in Durham, N.C., and one under construction in Carlow, Ireland. Merck expects to be able to fulfill back orders of Zostavax by the end of the year and return to its normal supply levels in the U.S. by mid-2009.
Although the vaccines portfolio will likely rebound, Merck has bigger problems with two blockbuster drugs. The osteoporosis treatment Fosamax lost patent protection in February and now faces generic drug competition in the U.S. on virtually all formulations. As a result, third-quarter sales of Fosamax plummeted 51% to $354 million.
The company is also confronting uncertainty in its cholesterol franchise. Vytorin, which combines Merck's newer drug Zetia with its older statin Zocor, is under scrutiny after data from several studies conducted after its approval questioned both its efficacy and its safety. Sales of Vytorin dropped 18% to $567 million in the quarter, while Zetia saw a 12% sales decline to $535 million.
Last week, at a meeting of the American Heart Association, a panel discussed the results of a trial suggesting Vytorin raises the risk of cancer. The implications for Vytorin will likely be "mixed to negative," says Seamus Fernandez, a pharmaceutical stock analyst at Leerink Swann. Nonetheless, Fernandez increased his 2008 sales forecast for Merck's cholesterol franchise by $100 million, on the basis of continued international growth.
PRIOR TO the Vytorin setback and Fosamax loss, Merck had seemed on the road to recovery after a few rough years following the withdrawal of Vioxx and the loss of patent protection on Zocor. But the outlook is murkier now, and the company is taking drastic measures to reduce its cost structure.
In conjunction with its earnings release, Merck announced that it would slash another 7,200 jobs around the world and close research facilities in Seattle; Tsukuba, Japan; and Pomezia, Italy. Merck estimates it will save up to $4.2 billion between 2008 and 2013 with the new plan. Once completed in 2011, this latest downsizing will bring the total number of job cuts at the company to some 17,600 since 2005.
"Although we believe these moves are rational and positive, Merck still faces many challenges, including uncertainty around Gardasil growth and vaccine supply constraints," Fernandez says.
Meanwhile at Pfizer, third-quarter sales were stagnant at $11.9 billion, although the company did see a 5% bump in earnings to $4.2 billion.
Sales of the cholesterol drug Lipitor, by far Pfizer's biggest earner, dipped 1% to $3.1 billion, but another of Pfizer's older products, the arthritis drug Celebrex, posted an 8% increase in sales to $625 million. Two newer drugs experienced strong growth: Sales of the pain treatment Lyrica rose 45% to $675 million and that of the kidney and gastrointestinal cancer drug Sutent surged 49% to $226 million.
But demand dropped for Pfizer's smoking cessation drug Chantix, which was launched in 2006. Sales were down 24% to $182 million because of label changes that alert consumers of safety risks.
Moreover, the clock is ticking on the Lipitor patent, and Pfizer is scrambling to offset some of that loss. During the third quarter, Pfizer outlined a major overhaul of its R&D efforts. The company will exit research in anemia, bone health, obesity, gastrointestinal disease, and some cardiovascular diseases and narrow its focus on areas such as oncology—where there is more need, less competition from generic drugs, and better chances of gaining approvals. The shift will clearly involve job cuts, but Pfizer has yet to outline where and how many positions will be affected.
Deutsche Bank stock analyst Barbara Ryan views the overhaul as positive, but she says Pfizer needs to follow up with "strategic initiatives, namely acquisitions," that will ensure profit stability. This could mean buying a competitor or significantly advancing its drug pipeline by buying into compounds in late-stage clinical trials.
GlaxoSmithKline, meanwhile, is also reassessing its operations as it deals with generic drug competition. Third-quarter earnings slid 10% to $3.1 billion, while sales fell 3% to $11.0 billion.
Sales dropped nearly across the board in its HIV franchise, which was down 5% to $706 million. Sales of the respiratory drug Serevent decreased 14% to $111 million, and the diabetes drug Avandia, still suffering from cardiovascular safety concerns, experienced a 23% decline in sales to $357 million. GSK's vaccine portfolio, however, stood out as a strong performer, with overall sales growing 12% to $1.4 billion.
Earlier this month, the British firm said it would cut 1,000 sales jobs, tying into an earlier plan to shed up to 850 jobs in preclinical discovery and molecular discovery research in the U.S. and U.K. The R&D cuts come as GSK heads in a new strategic direction, announced in July, aimed at reducing its dependence on small molecules and increasing its activities in vaccines, biopharmaceuticals, consumer health care, and emerging markets.
OTHER EUROPEAN FIRMS are also struggling. Novartis announced a minor overhaul of its operations in connection with its quarterly results. Discovering that the strategy of selling both branded and generic drugs may be a difficult feat to pull off, the company is cutting 550 jobs from its U.S. sales force and launching a new approach to selling drugs in that market.
Still, Novartis' third quarter looked far healthier than its competitors': Sales rose 12% to $10.7 billion, and earnings improved 32% to $2.1 billion. The vaccines division, helped by flu shots and pediatric vaccines, drove growth in the quarter. Sales in Novartis' generics arm, Sandoz, increased 7% to $1.9 billion. But the company failed to launch any new generic drugs in the U.S., and sales there dropped 15%.
Industry observers expect French drug firm Sanofi-Aventis to be the next to announce a shake-up. Like Novartis, Sanofi relied heavily on vaccines to offset challenges to its overall business, which experienced generic drug competition for the sleep aid Ambien and, in Europe, for the blood thinner Plavix.
Sanofi's third-quarter sales were down 2% to $9.9 billion, but net income rose 2% to $2.5 billion. The company's major products performed weakly; sales were down 5% for Plavix and flat for Lovenox, another blood thinner. Sanofi's vaccine sales, meanwhile, grew 9.4% to $1.2 billion.
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