Strategy & Management

International Drugmakers Meet Challenges

Loss of Exclusivity, Spending Cuts and Generics Impact Earnings of Global Pharma Companies

08.05.2014 -

In contrast to chemicals, the global pharmaceutical industry is little plagued by market cyclicality or general economic swings. But it faces equally daunting challenges, as the 2013 financial performance of Europe's and North America leading players demonstrated.

Along with the perpetual threat of missteps in clinical trials or the failure to get a New Molecular Entity (NME) approved, other dark clouds always looming on the horizon are loss of patent protection, healthcare spending cuts or generic competition.

With the race to meet the challenges and score big with new treatments for life's ills growing tougher, companies are increasingly seeking collaborations and portfolio swaps as a means of remaining profitable.

Taking the hurdles may be easier than in other industries, as the sector's leaders often are no strangers to each other or their competitors - many have worked for more than one brand. What's more, they speak the same language, despite their different native tongues.

Just before press time, European pharmaceutical giants Novartis and Glaxo SmithKline (GSK) agreed to swap assets worth $20 billion (c.f. the news clip on the previous page). Coming on the heels of reports that AstraZeneca had turned down a $101 billion bid approach from Pfizer, the news seemed to underscore that no matter where a company is located, the challenges remain the same.

Europe's Drugmakers Weather the Storms

One of the objects of current media attention, the UK's Glaxo SmithKline (GSK), met its guidance for both sales and earnings in 2013, despite "unexpected challenges," said CEO Andrew Witty. Reported sales were flat at £26.5 billion but 1% higher at constant exchange rates (CER).

Core earnings per share (EPS) were up 4%, although operating profit was down 3% to £8 billion and reported operating profit down 4% to £7 billion. For 2014, the group is targeting growth in core EPS of 4-8%.

With approvals gained for six major products, last year was the most productive period of R&D in company history, Witty said. New product launches strengthened business in the respiratory, vaccines, HIV and oncology drug markets.

The London group continued to reshape its portfolio, divesting businesses worth £2.5 billion. For 2014, the CEO said the pipeline "remains extensive," with around 40 NMEs in Phase II/III clinical development.

This year and next, GSK expects Phase III read-outs for six NMEs and the start of Phase III for about ten new products in key areas such as respiratory, oncology and immuno-inflammation. This continues the strategy of multiple product launches to promote portfolio diversification and "reduce reliance on any one drug," Witty added.

Another London-based player, AstraZeneca, was not as upbeat about last year's numbers. Figures show sales down 8% to $25.7 billion, or 6% in CER terms. Core operating profit came in at $8.4 billion, but reported operating profit plunged by 54% to $3.7 billion.

CEO Pascal Soriot pointed to the lingering impact of loss of exclusivity for several key brands. While "in the near term, these headwinds will remain challenging," he said management is "confident that we can return to growth faster than expected."

The French national who recently completed his first full year as head of the UK company said he is pleased with the momentum built in 2013 toward implementing strategic priorities, "in particular our objective of achieving scientific leadership."

AstraZeneca will continue to focus on areas that will drive growth, while redeploying resources to fund its promising late-stage platform, Soriot said. The acquisition of Bristol Myers Squibb's share of the joint diabetes alliance "strengthens our position in this important area," he added. At the end of 2013, the pipeline included 11 NMEs in Phase III or registration, nearly twice the 2012 figure.

As part of its drive to restore growth, AstraZeneca is also proceeding with a restructuring scheme announced in March 2013. This foresees a headcount reduction of about 5,050 over the 2013-2016 period.

In Switzerland, Novartis reported "a strong net sales performance" for 2013, which more than offset the impact of generic competition. Group revenue increased 2% to $57.9 billion. In CER terms, the rise was 4%.

Excluding the generics factor, underlying sales at the Swiss group grew 8% in constant currencies (CC), said CEO Joe Jimenez, an American who once served as a non-executive director at AstraZeneca. The loss of exclusivity for two major products took a $2.2 billion bite.

Group operating income fell back 3%, or 5% in CC terms, to $10.9 billion. Jimenez said negative currency movements hurt earnings more than sales. The operating margin declined by 1 percentage point to 18.8% of net sales, but improved by 0.1 percentage points in constant currencies.

Sales of Novartis' Pharmaceuticals segment were flat at $32.2 billion. The Basel group's generics arm, Sandoz, increased net sales by 5%, both in reported and CC terms, driven by double-digit retail generics and biosimilars sales in most western European markets and Japan as well as emerging markets.

At another Basel-based global player, Roche, CEO Severin Schwan said 2013 was "a very good year." Sales increased 6% to 46.8 billion Swiss francs and EPS by 10% to 14.27 francs. Core operating profit of 17.9 million francs was up 4% against 2012.

Driven by cancer drugs, Roche's pharmaceuticals arm lifted sales by 4% (7% CER) to 36.3 billion francs, The diagnostics arm, which contributed 10.5 billion francs,  2% more (4% CER) than in 2012, grew ahead of the in-vitro market. The environment for diabetes care - where the group is continuing the restructuring program begun in 2012 - remained "challenging."

Over the course of 2013, the Austrian-born CEO said Roche "made significant progress" in its pharmaceutical R&D pipeline, with 66 NMEs in clinical development, with 15 in late-stage development.

For 2014 the Swiss group expects growth in the "low- to mid-single digit range" at constant exchange rates, with core EPS growing ahead of sales. In Q1 2014, sales rose 5% in CER terms, but shrank by 1% in Swiss francs to €11.5 billion.

France's leading drugmaker, Sanofi, saw a return to growth in late 2013, CEO Christopher A. Viehbacher said. More precisely, he said, this was "growth by subtraction," as the company put the patent cliff behind it from the end of August.

Full-year sales were down 0.5% to just under €33 million, but Q4 saw a 6.5% rise to €8.5 billion. Business operating income for the full year was down 18.6% to €9.3 billion.

Sanofi took "decisive action" last year to remedy "temporary operational challenges," said the German-Canadian Viehbacher. At the year's end, growth platforms accounted for 73% of sales.. The company had nine high potential late-stage projects. Its emphasis on biologics appeared to be paying off, as 45% of sales were in this category, along with 80% of developmental pipeline projects.

The Sanofi chief said 2013 was "a solid year" for new approvals and regulatory submission. Seven products - including vaccinations and treatments for multiple sclerosis, diabetes, and cancer - were approved and two were in registration. For 2014, he expects business earnings per share to be 4-7% higher than 2013 at constant exchange rates.

Germany's Boehringer Ingelheim, one of the country's few major pure-play pharmaceutical producers, was pleased with its 2013 financial performance, despite "some challenges," CEO Andreas Barner said. Sales increased 1.4% to €14.1 billion, but declined 4% in currency-adjusted terms. Operating profit rose to €2.1 billion and the return on net sales improved by 2.4 percentage points to 15%.

Barner, a German who has worked in Switzerland, said the privately owned drugmaker that counts itself among the global top 20 players "successfully entered the oncology market" last year. A new lung cancer treatment was launched as Gilotrif in the U.S. and in early 2014 in Europe as Giotrif.

Over the next two years, Boehringer plans more than ten new launches in eight indications, including diabetes, COPD, asthma, lung cancer, pulmonary fibrosis and a rare form of leukemia. Due to the lack of pharmaceutical market growth, Barner predicted that 2014 sales will be comparable to 2014.

U.S. Pharma Players Show a Mixed Performance

Among U.S. players, healthcare giant Johnson & Johnson (J&J) reported "strong results" for 2013, said CEO Alex Gorsky, an American who once worked for Novartis. This was thanks to an outstanding performance by the pharmaceuticals division, the strength of key OTC brands and other consumer products, along with progress in integrating a recent acquisition.

Sales increased 6% to $71.3 billion, earnings per share by 8% to $5.52. The net result was $13.8 billion. Global sales of Pharmaceuticals rose nearly 11% to $28.1 billion. The almost equally large Medical Devices and Diagnostics segment saw revenues rise nearly 4% to $28.5 billion, and sales of Consumer Products by 1.7% to $14.7 billion.

Primary growth drivers were new group company Synthes, a medical devices producer, and joint reconstruction projects in the orthopedics business. Revenues were negatively impacted by loss of exclusivity for Aciphex/Pariet (rabeprazole), a proton pump inhibitor for gastrointestinal disorders, and Concepta (methylphenidate HCI) for treatment of attention deficit hyperactivity disorder.

After a strong first quarter, J&J lifted its earnings forecast for 2014 to $5.80-$5.90 per share, before exceptional items - up from the $5.75-5.85 predicted earlier.  For Q1, it reported a sales rise of 3.5% to $18.1 billion, with operating profit up 5.3%.

Another U.S. drugs titan, Merck & Co. (trading outside North America as MSD), reported a 7% decline in 2013 sales to $44 billion, which it blamed on expiration of patents and unfavorable currency exchange rates. Revenues of Pharmaceuticals sank by 8% to $37.4 billion, while sales of Animal Health were flat at $3.4 billion. Consumer Care saw a 3% decrease to just under $1.9 billion. Net income plunged by 28.5% to $4.4 billion.

The pharmaceutical business was driven by the human papillomavirus drug Gardasil, which posted a 12% rise for the full year, as well as by combined sales of the inflammatory disease treatments Remicade (infliximab) and Simponi (golimumab), the herpes zoster vaccine Zostervax, the HIV medication  Isentress (raltegravir) and the combined diabetes franchise, Januvia (sitagliptin) with Janumet

CEO Kenneth C. Frazier, the first African-American to lead a major pharmaceutical company, said Merck's performance "was tempered by ongoing business challenges, including patent expiration and global healthcare cost containment initiatives.

The loss of exclusivity for three major products, which led to a "significant and rapid decline in sales," was partially offset by higher sales of vaccines, immunology, diabetes and HIV products.

In 2013, Merck continued its cost-cutting regime, and in October announced a multi-year global initiative to sharpen its R&D focus. Geographically, it will concentrate on ten priority markets - led by the U.S., Japan and France - which account for the largest share of revenue. In the portfolio, priority will be given to diabetes, acute hospital care, vaccines and oncology.

At another American behemoth, Pfizer, British-born CEO Ian Read described the 2013 performance as "solid." As the drugmaker strengthened its innovative core and gave itself a new commercial structure aimed at focusing each business on "distinct market opportunities," Read said it entered 2014 with confidence.

Chief financial officer Frank D'Amelio noted that Pfizer "achieved or exceeded" all elements of its financial guidance last year, despite the 6% decline in sales to $51.6 billion and the 3% decline in adjusted income to $15.3 billion. Net income improved by 51% to $22 billion. The company also completed the separation of its animal health business.

The weaker 2013 revenue is blamed in particular on the "continued erosion" of the cholesterol compound Lipitor in the U.S. and Europe and repercussions from the loss of patent protection for another drug in 2012. This could be offset only partially by growth in other franchises.

For 2014, Pfizer is forecasting sales of $49.2-51.2 billion, down slightly against 2013. This takes into account the loss of $3 billion in revenue due to the loss of exclusivity and the expected termination of collaboration agreements with other pharmaceutical producers.