Profit Squeeze Hits Drugmakers as Europe Crisis Leads to Cuts

Europe’s financial crisis is leading Johnson & Johnson, Sanofi-Aventis SA and Merck & Co. to lower forecasts and reduce spending, adding pressure on drugmakers already squeezed by generic competition.

Germany, Greece and Spain have cut or plan to reduce their health spending after European Union policy makers agreed to an almost $1 trillion rescue fund in May to prevent the fiscal collapse in Greece from spreading. Germany implemented a price freeze on drugs through 2013, while Spain introduced a 7.5 percent rebate on most branded products. Greece ordered drugmakers in May to cut prices by as much as 27 percent.

Annual price cuts of 1 percent to 2 percent on medicines mandated by European governments have been “commonplace,” Phil Johnson, Eli Lilly & Co.’s vice president of investor relations, said last month. What’s new is that more countries are demanding deeper price reductions involving a wider range of products.

“Based on what we’ve seen so far, the pricing erosion in Europe in 2010 could be the greatest it has ever been,” Tim Anderson, an analyst at Sanford C. Bernstein & Co. in New York wrote in a July 13 research note.

Industrywide, medicines that generate more than $142 billion in sales will face generic competition in the next five years, according to IMS Health Inc., providing countries with more leverage to press for price cuts from drugmakers. If European economies continue to struggle, pressure will mount on companies to further cut expenses, said Joshua Schimmer, an analyst at Leerink Swann & Co. in New York.

‘Bang for Their Buck’

“The industry as a whole needs to be a little bit more productive with their investments in R&D, and get a little more bang for their buck,” Schimmer said in a telephone interview. “It ultimately pushes the pharmaceuticals industry to innovate, to bring new and better drugs to the market as the old, more mature ones start to fade off.”

J&J gained 63 cents, or 1.1 percent, to $58.72 at 4 p.m. in New York Stock Exchange composite trading. Merck increased 61 cents, or 1.8 percent, to $35.07, and Lilly rose 74 cents, or 2.1 percent, to $36.34.

Sanofi-Aventis in 2012 may lose revenue generated by Plavix, the best-selling blood thinner it markets with Bristol- Myers Squibb Co. The medicine generated 2.62 billion euros ($3.42 billion) in sales last year for the company, France’s largest drugmaker. To ensure earnings in 2013 are at least equal to those in 2008, Chief Executive Officer Chris Viehbacher has shut or sold plants and canceled the least promising research projects to try to trim 2 billion euros in costs.

Shrinking Sales Force

Now, pushed by the European price cuts, the Paris-based company is seeking to further reduce expenses, said Jerome Contamine, Sanofi-Aventis’s chief financial officer, in June. In the first half of 2010, the company shrank its sales force in the U.S. by 1,400, and in western Europe by 400, compared with the first half of 2009.

At the same time, it increased its sales force in emerging- market countries by 600.

“We are changing our marketing model,” Contamine said at a Goldman Sachs Group Inc. conference in Los Angeles in June. “We are merging sales forces, we are reducing sales forces, having a multiproduct sales force. We will continue to do that.”

Effect on Merck

Merck, the second-largest U.S. drugmaker, sees the European measures cutting into revenue by about $300 million in the second half, Chief Financial Officer Peter Kellogg said last week on a conference call with analysts. The Whitehouse Station, New Jersey-based company has sought to control expenses to help “manage a tighter environment in Europe,” he said.

“We have worked with many of the industry groups and governments to help develop solutions for our customers to improve their budget positions and address the short-term economic issues,” Merck President Kenneth Frazier said on the call. “While we are taking steps to mitigate the immediate impact in the EU, we anticipate that the austerity measures will affect our revenue performance going forward.”

Merck isn’t alone in seeing revenue fallout ahead. Lilly, based in Indianapolis, projected last month that the European measures will reduce its revenue by $90 million in 2010 and by $150 million in 2011. The company, whose top-selling antipsychotic, Zyprexa, loses patent protection next year, drew 24 percent of its 2009 revenue from Europe, or $5.23 billion.

J&J in Europe

J&J last month estimated the European cuts would reduce 2010 sales by about $200 million, and said it expected the moves to accelerate through year-end. The New Brunswick, New Jersey- based company, the world’s largest maker of health products, derives about a quarter of its revenue from Europe, and has forecast total 2010 sales of $62.5 billion.

“Some companies will likely be able to absorb these cuts because of offsets elsewhere,” said Sanford C. Bernstein’s Anderson. “For others it may in fact cause their guidance to go lower.”

Pfizer Inc., the world’s largest drugmaker, faces generic competition next year to its top-seller, the Lipitor cholesterol pill. The New York-based company got 29 percent of its $50 billion in 2009 sales from Europe. It plans to report second- quarter financial results tomorrow.

The price cuts, while widespread, affect some areas more than others, said Leerink’s Schimmer.

‘Most Vulnerable’

“The drugs that are going to be most vulnerable are the ones that add the least value or are the least innovative,” Schimmer said. On top of coming patent expirations, price cuts to older medicines make development of new drugs even more important, and may drive companies to form more partnerships or make acquisitions to get access to new products, he said.

Orphan drugs and the companies that make them may become particularly appealing, as some European countries didn’t reduces prices as severely on medicines that treat rare diseases, making them “a good place to hide,” Schimmer and colleagues said in a May presentation.

That protection may contribute to Sanofi-Aventis’s reported interest in acquiring Genzyme Corp., the largest maker of medicines for genetic diseases, Schimmer said.

“Genzyme brings some strategic assets to the board for Sanofi, or really anyone,” he said. The potential to avoid the price cuts in Europe “make a company like Genzyme even more strategic.”

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net.

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