The European Pharmaceuticals Economy at Halftime 2012

25.09.2012 -

A Pill a Day - Unlike chemicals, the pharmaceuticals sector does not have cycles. Even in a sluggish economy, sick people will still need medicine. But the widening European debt and currency crisis seems to prove that a sick economy can indeed infect an otherwise healthy industry. Drug makers traditionally spoiled by success are now facing unprecedented hurdles as governments rein in healthcare spending and many of the region's southern countries cannot pay at all.

The crisis hit pharmaceuticals earlier than chemicals, and quarterly reports of Europe's "Big Pharma" players showed that some were better able than others to absorb the resulting income shortfall. While for France's Sanofi a projected 2012 sales loss of €300m from European austerity measures will be balanced by growth elsewhere, the UK's Glaxo SmithKline (GSK) has trimmed its outlook.

The problems already visible at the beginning of the year, worsened as 2012 progressed. Greek hospitals have faced drug shortages for months as some international suppliers have pulled the plug after unpaid bills piled up. The misery has spread to Portugal, where missed payments from January and July were said to total €1.5 billion. In Spain, the pharmaceutical industry believes it is owed a similar sum.

The Spanish industry association Farmaindustria has predicts that the country's consumption of pharmaceuticals will fall 15-20% in 2012 against 2011. It adds that the industry has borne the brunt of government austerity measures. Many drug producers are reported to be in a very difficult financial situation and are taking steps to restructure and reduce staff, says Farmaindustria.

Drug pricing issues compound industry's problems

Company executives say drug pricing is becoming an equally important issue. "It's been a higher level than we had expected," Tony Zook, head of AstraZeneca's commercial organization, told the press in July. Novartis pharmaceuticals head David Epstein told financial analysts that Europe has become the toughest pricing market "anywhere in the world."

Italy's national health budget has been slashed by €11 billion over the past five years, and leaks of a recent government plan suggest further cuts of €1billion. The pharmaceutical industry association Farmindustria fears that 10,000 industry jobs could be lost in the next five years. Some 61% of drug manufacturers in Italy are foreign-owned, and the European pharmaceutical business association EFPIA says the budget cuts will make it harder for them to stay in business there.

This month, the government of France will reveal details of its new healthcare budget, which is expected to call for cuts of around €2 billion in 2013. In 2012, the French drug market is forecast to shrink for the first time.

The European pharmaceutical industry says the impact of price reductions is magnified because governments across the continent peg their reimbursement prices to southern Europe's level. This exacerbates any shortages as products are sucked out of the south and re-exported north to countries such as Germany, where prices are higher.

European drug companies feel the pressure

In Q2, Glaxo SmithKline saw turnover recede by 4%, to pounds 6.5 bn, while per-share core profit declined 5% to 26.4 pence. The earnings tally thus fell short of analysts' expectations for the second consecutive quarter. GSK's sales in Europe fell by 8%, reflecting a 1% decline in volume and a 7% slip in selling prices. Due to the disappointing performance, CEO Andrew Witty has revised the full-year outlook downward. He now expects the operating margin in 2012 to be flat at the 2011 level of 32.1%.

Swiss pharmaceutical giant Novartis saw net sales fall 4% to $14.3 billion in Q2. Sales growth in recently launched products -- which contributed 29% to the group total -- more than offset lost income from a patent expiration. Core operating profit fell 3% to $3.9 billion. But Novartis' 2012 performance is still on track and the outlook for the full-year unchanged, said CEO Joseph Jimenez.

Bayer's healthcare sub-group, Germany's largest pharmaceuticals player, saw Q2 sales revenue rise 10% year-on-year to €4.6 billion, with volume sales up 3.3% and prices up 0.8% Currency effects accounted for 6.2% of the rise. The pharmaceuticals segment lifted turnover 10.5% to €2.7 billion boosted by portfolio changes and foreign exchange shifts. North American sales added 24%, Asian sales 22%, while European revenues sank by 2.4%. Pharmaceuticals EBITDA before special items rose 12% to € 809 million.

With forward visibility unclear, Bayer CEO Marijn Dekkers now expects revenue growth in pharmaceuticals to be "only in the low single-digit range." While demand in emerging markets, especially China, is seen to continue robust, US growth could sink into the low single-digits. In Europe, negative growth is likely in some markets.

AstraZeneca reported Q2 revenue down 21% to $6.7 billion. Loss of exclusivity on several key brands accounted for 15 percentage points of the decline, the company said. Operating profit slipped 37% to $1.9 million, due to negative foreign exchange parities. Core earnings per share (EPS) were down 6% to $1.53. For the full year, interim CEO Simon Lowth is maintaining core earnings guidance at $5.85 to $6.15 per share.
In the 2012 first half, Sanofi reported a year-on-year net sales increase of nearly 8% to €17.4 million. Operating profit rose 55% to €3.8 billion, EPS to €2.26 from €1.70. For the full year, CEO Christopher A. Viehbacher said EPS may be 12% to 15% below 2011 at constant exchange rates. The guidance takes into account, among other things, the expiration of two US patents, the performance of key drug platforms, cost control measures and national healthcare reimbursement policies.

Strong dollar hits U.S. pharma profits

U.S. drug makers do not face pricing constraints on a national level as a public healthcare system is still a "foreign" concept. However, a sluggish economy hurts companies in their home market and abroad. Most recently, the stronger dollar has also been a hindrance.

For Q2, U.S. giant Pfizer reported higher-than-expected earnings, thanks in part to research budget cuts. Net quarterly income was $3.25 bn, or $0.43/diluted common share, compared to a net profit of $2.61 bn or $0.33 per diluted common share a year earlier. Global sales revenue fell 9% year-on-year to $15 million. U.S. revenue decreased by 15% to $5.7 billion, due to a patent expiration, international revenue by 5% to $9.3 billion, reflecting unfavorable foreign exchange parities.

U.S. umber two, Merck & Co, reported better-than-expected earnings in Q2, thanks to strong revenue from vaccines and treatments for diabetes and HIV. As sales rose 1% to $12.3 billion, net profit totalled $1.8 billion, or 58 cents per share, compared with $2 billion or 65 cents per share in the 2011 quarter. Despite the negative foreign exchange impact, Merck is holding its full-year earnings forecast at a flat $3.8 billion.
At Bristol-Myers Squibb, second-quarter net sales fell 18% to $4.4 billion due to a patent expiration. U.S. sales dropped back 27% to $2.6 billion for the same reason, with pre-tax earnings down 41% to $1.06 million. Quarterly EPS declined 27% to $.038. The company has adjusted its EPS guidance under U.S. GAAP downward to $1.78-1.88 from $2.00-1.90. The figure does not reflect the planned acquisition of Amylin.