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Drug Firms Revamp

After a difficult 2008, big firms are taking aggressive restructuring steps

by Lisa M. Jarvis
February 23, 2009 | A version of this story appeared in Volume 87, Issue 8

Credit: Pfizer
Pfizer CEO Kindler (left) and Wyeth CEO Benard J. Poussot.
Credit: Pfizer
Pfizer CEO Kindler (left) and Wyeth CEO Benard J. Poussot.

INVESTORS JUDGE drug companies by a different set of rules. Whereas they would be ecstatic with most other industrial firms reporting rising sales and double-digit earnings growth, particularly in the current economic landscape, they expect more from the drug industry.

In 2008, the biggest companies of the pharma industry failed to deliver as they have in the past. Many companies did report strong earnings growth, but it was mostly due to cost cutting. Overall, generic competition, regulatory problems, and a lack of new products caused sales at the major drugmakers to stagnate or even shrink.

Given that none of these problems shows signs of going away, changes are likely ahead. The lull that followed the megamerger spree from the late 1990s to 2003 seems over, and drug companies appear to be back on the prowl for big deals. Likely among their targets are better-performing biopharmaceutical companies.

The goal is to fill revenue gaps and diversify portfolios away from small-molecule drugs. Already this year, Pfizer has agreed to buy Wyeth, and Roche has become more aggressive in its effort to take full control of Genentech. Other pharma majors claim to be on the lookout for deals, and the big biotechs might find themselves vulnerable.

Kicking off the year with a splash, Pfizer's planned acquisition of Wyeth is a telling sign of the challenges many companies face. Although both firms reported faltering sales in the fourth quarter, they believe joining forces will lay the foundation for future growth.

Pfizer's fourth-quarter and year-end results reflected the company's struggle to ramp up productivity and underscored the even greater challenge it will face when the cholesterol drug Lipitor loses U.S. patent protection in late 2011. Fourth-quarter sales were down 4.1% to $12.3 billion, though earnings surged 29.0% to $4.4 billion, owing to aggressive cost cutting.

Newer drugs and several products in the company's central nervous system portfolio fared well. Fourth-quarter sales of Lyrica, for nerve pain, were $702 million, up 25%, while the schizophrenia drug Geodon had sales of $276 million, an increase of 19%. Sales of the cancer drug Sutent improved 21% to $220 million.

But sales fell across Pfizer's entire portfolio of cardiovascular and metabolic disease drugs. Lipitor sales were down 8% to $3.1 billion in the quarter and off 2% to $12.4 billion for the full year. The smoking cessation drug Chantix continues to be impacted by reports of dangerous side effects—sales fell 36% to $180 million. Meanwhile, generic competition for the blood pressure pill Norvasc caused sales to drop 16% to $542 million.

With fading sales on several drugs, the looming Lipitor patent expiry, and few new products to pick up the slack, Pfizer executives felt they needed to make a big move.

The $68 billion bid for Wyeth is designed not only to prop up sales in the post-Lipitor era, but also to reduce reliance on small-molecule, blockbuster drugs, Pfizer's chief executive officer, Jeffrey B. Kindler, told investors when the deal was announced (C&EN, Feb. 2, page 7). With the addition of Wyeth, Pfizer significantly increases its position in biologics and animal health. By 2012, the company claims, no one drug will represent more than 10% of its sales.

While establishing a platform for future growth, Pfizer also continues to hack away at costs. In 2008, the company exited research in anemia, bone health, obesity, gastrointestinal disease, and some cardiovascular diseases, then ended the year by cutting some 700 jobs in France. The move added to the 10,000 positions it had eliminated since early 2007.

THE COST CUTTING will only intensify over the next three years. Pfizer is slashing another 8,000 jobs, or about 10% of its workforce, and shedding five manufacturing sites. More cuts will come after the deal with Wyeth closes; 15% of the companies' current combined workforce of about 128,000 is expected to go by 2012. The moves will help Pfizer save some $4 billion by 2012.

Like Pfizer, Merck & Co. posted steady fourth-quarter results on cost-cutting measures, despite faltering sales. Fourth-quarter sales fell 3.4% to $6.0 billion, while earnings improved 5.0% to $1.8 billion.

Not helping were generic competition for some products and the ongoing travails of its cholesterol franchise. Sales of Zetia and Vytorin, the cholesterol drugs Merck comarkets with Schering-Plough, continued to drop on concerns about their efficacy. Fourth-quarter sales of the two drugs totaled $1.1 billion, down 26% from the 2007 period. For the year, combined sales were down 12% to $4.6 billion.

Fourth-quarter sales of the osteoporosis drug Fosamax, which lost patent protection in February 2008, sank 60% to $318 million. Meanwhile, quarterly sales of Gardasil, the vaccine for human papillomavirus, dipped 16% to $286 million. Merck has had a tough time expanding the vaccine's market to women over the age of 18.

There were some bright spots in Merck's portfolio, including new drugs for diabetes and HIV. Fourth-quarter sales of Januvia, a novel type 2 diabetes pill, were up 64% to $413 million, while sales of Janumet, a combination of Januvia and the older drug metformin, nearly tripled to $120 million. Meanwhile, Isentress, an HIV integrase inhibitor that was approved in October 2007, brought in $130 million in the quarter.

Still, Merck continues to take steps to improve the health of its business. Late last year the company announced plans to shutter three research facilities and cut 7,200 jobs, or about 12% of its workforce, by the end of 2011. A few weeks later, the firm laid out plans to diversify its business, unveiling Merck BioVentures, a unit devoted to developing generic biologic drugs, and a new focus on emerging markets.

Interestingly, a company that for years has resisted the urge to participate in megamergers now appears ready to do whatever it takes to survive in a tougher operating climate. Merck CEO Richard T. Clark recently told investors he could no longer rule out acquisitions of scale.



Cutbacks At Big Pharma

In 2008, major drug companies announced plans for more than 21,000 job cuts, including many in R&D

Wyeth announces plans to cut up to 5,000 jobs—or 10% of its workforce—over three years.

Eli Lilly & Co. says it will eliminate up to 500 manufacturing and R&D jobs at its Indianapolis headquarters.

Merck & Co. ends natural products drug research in Spain, affecting 50 R&D jobs there and some positions in Rahway, N.J. The company says it will cut 1,200 sales jobs in the U.S. by the end of the year.

Pfizer ends research in anemia, bone health, obesity, gastrointestinal disease, and some cardiovascular diseases.

GlaxoSmithKline plans cuts in preclinical development and molecular discovery research, impacting up to 850 jobs—or 6% of its R&D staff.

Novartis revamps sales approach, eliminating 550 positions from its U.S. sales force.

Merck says it will shed 12% of its workforce—or about 7,200 employees—in a program designed to save $4 billion through 2013. Research facilities in Seattle; Tsukuba, Japan; and Pomezia, Italy, will be shuttered.

GSK says it will cut its U.S. sales force by 12%, or about 1,800 positions.

Bristol-Myers Squibb unveils plans to eliminate about 3,700 jobs—or 10% of its workforce—by 2010. A cost-savings program initiated in 2007 already targeted 4,350 jobs.

Pfizer sheds 700 jobs in France.

SOURCE: Company reports

Sanofi-Aventis is also reportedly on the lookout for acquisitions. Like Pfizer, the French drug firm is facing a sales cliff in 2011 when a key product, the blood thinner Plavix, loses patent protection. Lovenox, another blockbuster blood thinner, is scheduled to face generic competition the following year, if not earlier.

Sanofi is already having a hard time sustaining growth as generics eat away at sales of the controlled-release formulation of the sleep aid Ambien. The firm's sales increased 2.6% to $10.0 billion and earnings were up 17.1% to $2.4 billion for the fourth quarter.

In announcing the results, Chris Viehbacher, Sanofi-Aventis' CEO, said the company will likely pursue midsized acquisitions. The former GlaxoSmithKline executive also laid out a diversification strategy that is strikingly similar to ones recently unveiled at Merck and Pfizer: Sanofi-Aventis will look to bolster existing activities in emerging markets, generics, vaccines, and prescription drugs.

Not everyone is accomplishing diversification with megamergers. In a video message linked to GSK's year-end results, CEO Andrew Witty advocated discipline in deal-making and said he would look for targeted transactions that require little up-front cash and don't dilute shares, such as the company's deal with South African generic drugmaker Aspen Pharmaceutical. "We're not going to go off and do a classic pharmaceutical megamerger type of transaction," he said.

GSK's fourth-quarter sales increased 15.7% to $10.0 billion, but earnings were down 5.5% to $1.5 billion. For the full year, sales rose 7.2% to $35.3 billion but earnings dropped 11.3% to $6.8 billion. GSK, which cut sales and R&D jobs in 2008, expects to ramp up its cost-saving measures this year. Although the British drug firm has yet to detail how many jobs it will shed, Witty did say that headcount would primarily be reduced outside the U.K., across manufacturing, commercial operations, and R&D.

Unlike the big pharma firms, the big biotech companies did not implement dramatic job cuts in 2008, but they could get wrapped up in merger activity in the coming year. Genentech is already poised to fall to Roche, and many industry watchers believe that Amgen had been on Pfizer's wish list before it settled on Wyeth. Biogen Idec, after putting itself up for sale only to take itself off the market, is once again under pressure from the activist financier Carl C. Icahn to take action.

Amgen had a healthier 2008 compared with the rocky 2007, although it still needs new engines for growth. Fourth-quarter earnings were up 3.3% to $1.1 billion, based on nearly flat sales of $3.8 billion. For the year, earnings increased 1.7% to $4.9 billion on a 1.6% rise in sales to $15.0 billion.

Fourth-quarter sales of Aranesp, an erythropoietin-stimulating agent (ESA) that has been the subject of safety concerns at high doses, were down 15% to $706 million. Meanwhile, sales of Amgen's other ESA, Epogen, appear to have stabilized. Epogen brought in $645 million in the quarter, up a modest 1%.

Going forward, renewed growth at Amgen will depend on the success of the osteoporosis treatment denosumab. Amgen filed a biologics license application for the drug at the end of 2008 and could get a decision from the Food & Drug Administration by October.

DENOSUMAB WILL bring in $3.6 billion in sales in 2012, forecasts Leerink Swann analyst Jonas V. Alsenas. "We believe that Amgen is undergoing a period of major transformation, similar to Genentech in the late 1990s, when it transitioned from being a producer of first-generation recombinant products to an antibody-based oncology company," Alsenas says. "Denosumab is set to transform Amgen into an osteoporosis company."

Genentech, although now a full-blown oncology company, is having trouble moving beyond its existing cache of products. The company continues to post relatively strong results, but some worry that its growth trajectory is unsustainable without new drugs. Fourth-quarter earnings were up 37.6% to $1.0 billion, based on a 13.5% rise in sales to $2.5 billion. For the year, earnings increased 15.9% to $3.6 billion, on an 11.3% rise in sales to $9.5 billion.

Genentech's biggest growth driver in recent years, the colon, breast, and lung cancer treatment Avastin, brought in $731 million in fourth-quarter sales, up 21%. After a strong surge in sales in recent years following new trial data, the breast cancer treatment Herceptin is experiencing more modest growth. Fourth-quarter sales came in at $336 million, a 3% increase. The lung cancer drug Tarceva is similarly challenged to grow, with sales of $118 million also up just 3%.

Bill Tanner, another Leerink Swann analyst, says weaker results in the second half of 2008 suggest Genentech's "best days may be over." He concedes, however, that many investors are anxiously waiting for results of a trial testing whether following up traditional therapy with Avastin can prevent colon cancer from recurring, a finding that could significantly boost sales of the drug.

In the meantime, Genentech continues to try to stave off Roche's advances, saying the offer price—recently lowered by $1.6 billion to $42 billion—is insufficient. Roche has approached Genentech shareholders directly, and the future of the deal is uncertain.

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Biogen Idec is also being dogged by a shareholder pushing for change. The company had a strong quarter in which earnings increased 3.0% to $274 million and revenues rose 19.7% to $1.1 billion. Sales for the full year totaled $4.1 billion, a 29.2% improvement, while earnings were up 23.0% to $1.1 billion.

Perhaps seeing an opening, Icahn last month nominated three members to Biogen's board. The move is widely viewed as an attempt to pressure the company to put itself back up for sale after an earlier aborted attempt.

With Biogen and Genentech in play and big drug firms such as Sanofi-Aventis and Merck open to large acquisitions, 2009 promises to be a year of redrawing the pharmaceutical landscape.

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