Issue Date: November 14, 2011
Pharma Attempts To Generate Value
Although the pharmaceutical industry enjoys consistent sales and earnings growth, even during down times, it is always under pressure from investors to perform even better. For individual companies, these stresses show up in their stock prices. They often respond to sagging share values by announcing cost-cutting programs or stock buybacks that increase their earnings-per-share ratios.
Others take more drastic steps. Concluding that some of its businesses are underappreciated and undervalued, Abbott Laboratories made the surprise revelation when reporting its third-quarter results that it will split into two businesses. The announcement came despite good sales and earnings numbers that continued a track record of double-digit growth in 17 of the past 18 quarters.
Although pleased about the consistent financial performance, Abbott is “taking a significant next step in aligning our long-term strategic goals with our shareholders’ best interest,” said Chief Executive Officer Miles D. White during a conference call with stock analysts. “We’re now ready to separate into two independent, publicly traded companies because the investment identity and the operating model of each enterprise is very different from the other.”
What is to remain as Abbott will have about $22 billion in annual sales of generic drugs and diversified medical products. The other company will be an $18 billion-per-year research-based pharmaceutical business. Of that amount, about 44% will come from sales of Humira, an antibody drug used against autoimmune diseases. Sales of Humira grew 23% during the first nine months of 2011.
Stock analysts have long been concerned about Abbott’s overreliance on Humira and the emergence of competition from other drugs and from generic, or biosimilar, versions within a few years. Abbott is bullish on the drug’s prospects, and White emphasized during the call that “this split is not about confidence around Humira” but instead centers on the identities of the two businesses.
Morgan Stanley research analyst David R. Lewis is among those who see it differently. “We believe Abbott is undervalued, and the primary issue certainly does seem, in the eyes of most investors, to be confusion over Humira,” Lewis commented during the call. In a report to clients, he agreed that aligning shareholders with the appropriate assets may be the first step in achieving value for them.
“The separation of branded pharma from Abbott may not drive earnings, but it will drive investor interest,” Lewis wrote. Although “supportive of strategies that can unlock value,” he doesn’t believe the spin-off is a panacea for all that ails Abbott. Lewis and other analysts are concerned more generally about the company’s R&D pipeline and emerging generics competition for its other products.
Abbott wasn’t alone in making surprise announcements around earnings time. The day before releasing its results, Sanofi said it will consolidate its U.S. R&D operations, a move that will lead to an unspecified number of job cuts. Earlier in the year, the firm had laid out its intentions to generate nearly $3 billion in annual cost savings (C&EN, Sept. 12, page 8).
Sanofi, like many big pharma firms, is looking to biopharmaceuticals and emerging markets for sales growth. At the same time, it faces pricing pressures, intensifying generic competition, and negative economic factors.
For Sanofi, third-quarter sales were up 5.0%. Earnings fell 3.0%, although the company pointed out that earnings were up 4.1% at constant exchange rates. The company’s profit margin declined slightly compared with 2010 but was still 27.4%. “The return to growth in sales and earnings in the third quarter reflects an important milestone as the company progressively puts the patent cliff behind it,” CEO Christopher A. Viehbacher said when reporting results.
Novartis’ earnings report included the announcement that it will cut 2,000 employees in R&D and manufacturing in the U.S. and Switzerland and add jobs in low-cost countries (C&EN, Oct. 31, page 11). The Swiss company posted double-digit sales and earnings growth for both the third-quarter and nine-month periods in 2011. It has used its strong cash flow to repurchase its stock.
“Once again, the breadth of our business and product portfolio allowed us to deliver strong financial results and operating leverage, as well as significantly advancing the pipeline in the quarter,” CEO Joseph Jimenez commented. “To strengthen our future, we have accelerated actions to reduce our cost base over the next few years.”
Two weeks before reporting its earnings, AstraZeneca said it will trim U.S. operations and invest in China. Its third-quarter sales growth was modest, and at constant exchange rates it even declined.
“We continue to invest where we see opportunities to create value, both in research and development and in sales and marketing, but we are also actively reshaping the cost base to improve competitiveness for the long term,” Chief Financial Officer Simon Lowth told analysts during a conference call. “This balanced approach continues to drive strong operating cash flow and has supported increased cash returns to shareholders, with dividends and share repurchases up substantially over last year.”
Sales fell at Roche, which already has a major reorganization program under way, but the company anticipates 10% earnings growth for the year. Likewise, cost cutting helped boost GlaxoSmithKline’s nine-month earnings by 36.8%. GSK also has increased its share repurchasing target to $3.7 billion.
Even the rapidly growing biotech sector isn’t immune to making changes. Just days before releasing its earnings, Amgen announced a 6% workforce layoff of 380 employees to take place within its R&D operations. The firm also increased its stock repurchase plan to $10 billion. Among biotech firms, Amgen is the largest but also the most mature. Its sales grew just 3.4% in the third quarter, and earnings dropped 2.5%.
One of the surprises of the quarter was Pfizer. The company has been slashing jobs and closing operations since its purchase of Wyeth two years ago. It also is working on plans to shed its animal health and nutrition businesses in ways “that will yield the greatest after-tax return for shareholders,” CEO Ian Read told analysts during a call. He also said Pfizer expects to buy back up to $9.0 billion in shares this year.
The surprise was that Pfizer exceeded analysts’ expectations for sales and earnings. Third-quarter sales rose 7.5% to $17.2 billion, and earnings were up 10.8% to $4.8 billion. The change over nine months was more modest, but still positive. Sales of Pfizer’s cholesterol drug Lipitor were down 6% to $7.6 billion for the nine-month period but still higher than expected. Generic versions are emerging in the U.S. this month and soon will emerge in other countries.
As a result of this strong performance, Pfizer was the only company in the Dow Jones industrial average to see a share price increase on Nov. 1, the day the Greek government put the country’s bailout deal into question and stock markets plummeted. Analysts raised their year-end targets for Pfizer’s earnings.
Pfizer can boast new product approvals and promising late-stage candidates, including a competitor to Abbott’s Humira. But investor satisfaction with its performance will likely be short term, and industry pressures will return. “Pfizer is entering an attractive new product cycle; however, the contributions from these assets are not sufficient to mitigate its patent cliff,” Citigroup analyst John T. Boris told clients in a report.
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