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Pharma Sees The Start Of The End

Amid slowing growth in 2011, drugmakers took steps to prepare for the year ahead

by Ann M. Thayer
February 27, 2012 | A version of this story appeared in Volume 90, Issue 9

Credit: AstraZeneca
AstraZeneca is counting on emerging markets, such as China, as patents expire in old ones.
Bus with AstraZeeneca ad and purple Nexium coloring on it in China
Credit: AstraZeneca
AstraZeneca is counting on emerging markets, such as China, as patents expire in old ones.

In 2011, pharmaceutical companies got a glimpse of their not-too-distant future, and it isn’t a pretty sight. The level of annual product sales lost to generic competition has been rising since 2007, and it will peak in 2012.

To overcome the resulting slowdown in sales and earnings growth, major drug firms have been shifting their businesses and drastically cutting R&D programs and staffing. Their challenge is to make it through this period, replace lost sales with new products, and expand into new regional markets.

The global market for pharmaceuticals is growing 3–6% annually, according to the market research firm IMS Health. But most of the growth is occurring in emerging markets and not the traditional Western ones where the big drug companies are based. Although demand in developed markets will show some incremental growth, it will be more than offset by the impact of patent expirations.

These dynamics were reflected in 2011 sales and earnings results for the world’s major drug firms. Combined 2011 sales for the 11 companies C&EN tracks rose 3.2% to about $490 billion. In contrast, sales grew by double digits in 2010, although some of this was attributable to mergers.

But combined figures obscure the fact that some firms got hit much harder than others by the patent expirations. Rather than tens of billions of dollars of lost sales spread around evenly, AstraZeneca, Eli Lilly & Co., Pfizer, and Sanofi are bearing the brunt. They have lost, or will soon lose, patent protection on some of the industry’s biggest-selling products. In 2012, patents will expire on drugs whose combined annual sales total more than $40 billion, according to IMS Health.

Among the recent losses was U.S. patent protection in November 2011 on Pfizer’s cholesterol-lowering drug Lipitor. During peak years, Lipitor had annual sales exceeding $12 billion and accounted for about a quarter of Pfizer’s revenues. The full effects of the patent loss haven’t yet been seen, but in the fourth quarter alone Lipitor sales dropped 24%.

Overall, Pfizer lost about $5 billion in revenues in 2011 from expiring patents. The company fought back by reaching its $4 billion cost-reduction target associated with the integration of Wyeth, purchased in late 2009, one year earlier than anticipated. Pfizer is also considering divesting its animal health and nutrition businesses, which would occur between July 2012 and July 2013 if it decides to move ahead.

Pfizer reduced its sales forecast for 2012 by about $2 billion. It now predicts that sales will be about 8% lower than in 2011 because of patent expirations and the effects of currency exchange rates. Looking ahead, efforts to “fix the innovative core” will improve the company’s late-stage portfolio of compounds and lead to successful launches of novel products, Chief Executive Officer Ian Read told analysts in a recent conference call.

But Citigroup stock analyst John T. Boris cautioned clients in a recent report that Pfizer executives may be too optimistic. “We expect Pfizer to see continued deterioration of its base business in the U.S., with execution risk on the pipeline, and potential restructuring issues,” he said. Competition from branded and generic drug firms could also jeopardize Pfizer’s growing business in emerging markets such as China, Brazil, Russia, India, Turkey, and Mexico, Boris added.

Like Pfizer, many big pharma firms are betting on emerging regions for growth. Over the next five years, total spending on medicines in these markets is expected to double, compared with 2010, to reach about $300 billion per year, IMS forecasts. This level will surpass that of Germany, France, Italy, Spain, and the U.K. combined, and approach U.S. spending levels.

GlaxoSmithKline has been working for nearly four years to shift the center of its business away from Western markets. “Our record in 2011 demonstrates that we are succeeding,” CEO Andrew Witty said when announcing annual results. GSK also has been fairly successful in launching new products to balance those lost to generics competition in the U.S. and Europe. The firm’s 2011 sales declined 3.5% to $44.1 billion, although they rose about 4% on a constant exchange rate basis. Net income doubled to $9.6 billion.

As part of its restructuring, GSK has been trying to deliver more from its R&D organization. Earlier this month, it unveiled the results of its 2008 program to form 38 “discovery performance units,” or DPUs, to focus efforts on specific disease and therapeutic areas (C&EN, Feb. 13, page 10). The idea was to create entrepreneurial, biotech-company-like operations that take greater responsibility for results. In the end, the number, size, and funding of the DPUs were juggled somewhat, and 40 will continue for another three years.

Other companies have taken drastic steps to increase R&D productivity while also trying to cut costs. Since 2007, AstraZeneca has been working to improve its long-term competitiveness. An initial restructuring phase delivered $2.4 billion in annual savings by the end of 2010, and reduced the company’s headcount by about 12,600. A second phase, started in 2010, brought another $1 billion in cuts by the end of 2011 and should result in $1.9 billion in savings by the end of 2014. During this process another 9,000 jobs were eliminated. At the end of 2011, AstraZeneca had 57,200 employees.

In 2011, AstraZeneca lost nearly $2 billion in sales to generics competition and another $1 billion from the impact of government price interventions. Sales rose just 1.0% to $33.6 billion but were down about 2% in constant currency terms. The company’s earnings increased 2.8% to $9.9 billion.

The outlook for 2012 is grim. Later this year, AstraZeneca will lose patent protection on the bipolar disorder drug Seroquel IR in the U.S. and the cholesterol drug Crestor in Canada. Losses in other countries are on the horizon for the next few years. Both drugs are among the world’s top 10 drug products, according to IMS.

And because of recent regulatory setbacks—such as for the diabetes treatment dapagliflozin, in development with Bristol-Myers Squibb—AstraZeneca has lowered its expectations for this year’s revenues from recently launched and pipeline products to about $3 billion. The company anticipates that its 2012 revenues will decline by a low-double-digit percent on a constant-currency basis, despite double-digit gains in emerging markets. Earnings are also expected to be down about 16%.

“While the further expected losses of market exclusivity make for a challenging 2012 outlook, we remain committed to a long-term, focused, R&D-based strategy,” CEO David Brennan said when announcing the company’s results earlier this month. At the same time, AstraZeneca announced yet another set of restructuring moves, which are expected to yield $1.6 billion in annual savings by the end of 2014. The company will cut 7,300 employees, including about 2,200 in R&D.

Meanwhile, Novartis and Sanofi both outlined new strategies for growth and cost savings in 2011. Novartis achieved savings of $2.6 billion, or about 30% more than it did the previous year. The company also will divest, halt, or reduce operations at 10 manufacturing sites. Novartis was the only major drug firm to post double-digit sales and earnings growth in 2011.

Despite substantial growth in new product sales, 2012 will be an inflection point for Novartis. The company expects to lose about $2.6 billion in sales—$1.5 bil­lion connected to its blood pressure medication Diovan and the rest from the cancer drug Femara. The net result is expected to be a 2% decline in sales. This year, Novartis is shedding some 1,960 jobs in the U.S. to help generate $450 mil­lion in savings. Despite these setbacks, Novartis expects 2012 results to be in line with 2011.

Sanofi also exceeded some of its cost-cutting goals, but it similarly faces some transitions. In 2011, two years ahead of schedule, the company met a $2.8 billion cost-cutting goal set in 2009. Some savings came from a 22% reduction in employees and the closure of 12 out of 26 R&D sites. Sales in 2011 rose 3.2% to $43.2 billion, but earnings were down 4.5% to $11.4 billion, despite the acquisition of Genzyme.

Sanofi lost almost $3 billion in sales to generics last year, CEO Christopher A. Viehbacher told analysts in a conference call. This year, Sanofi and partner Bristol-Myers will lose patent protection for the anticoagulant Plavix, which ranks as the world’s second-largest drug with annual sales of about $10 billion, and the blood pressure drug Avapro.

But Sanofi has started to shift away from its older blockbuster products. New growth vehicles—including emerging markets, diabetes, vaccines, and consumer and animal health—accounted for 65% of sales last year, up from 43% in 2009. By 2015, 80% of the company’s business will be in these areas, Viehbacher predicted. In a recent report, Morgan Stanley stock analyst Peter Verdult told clients that Sanofi has a “well-diversified business emerging from its patent cliff in 2013 and set to deliver high-single-digit earnings-per-share growth.”

Also on the cusp is Lilly. Although its 2011 sales were up 5.2% to $24.3 billion, sales fell about 2% in the fourth quarter as a result of patent expirations on the schizophrenia drug Zyprexa and the cancer treatment Gemzar that were only partially offset by growth in other products and in emerging markets. This year, the company expects, sales will decline about 8% and earnings will drop about 29%. Contributing to the decline will be about $3 billion less in Zyprexa sales.

“By the end of 2011, Lilly had either met or exceeded several of the strategic goals we had previously outlined,” Chief Financial Officer Derica W. Rice said in a call with analysts. Since mid-2009, the company has cut $1 billion in spending and more than 5,500 positions from its workforce. “In addition, the 12 molecules currently in Phase III surpassed our goal of 10 by the end of 2011,” he said. “We remain focused on delivering on our commitments.” ◾


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