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Drug Roundup – April 18, 2011
There have been several noteworthy developments in the drug space recently, which will likely have a material impact on the companies in this sector and the markets they serve. Companies featured in this review include Eli Lilly & Co. (LLY), Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report), Abbott Laboratories (ABT), Forest Laboratories (FRX), GlaxoSmithKline (GSK), Sanofi-Aventis (SNY), and Merck & Co. (MRK - Free Merck Stock Report).
U.S. Drugmakers Poised to Report Profit Declines
With first-quarter earnings season now upon us, several U.S. pharmaceutical companies may post some of their largest bottom-line declines in nearly five years. The likely drop off can be primarily attributed to the record amount of patent losses set to hurt industry sales during the course of 2011. Estimates indicate that the branded side of the business will face generic competition on products with roughly $34 billion in annual revenues, up 35% from 2010. In preparation, the managements at these respective companies have been shedding jobs, cutting costs, and divesting business units to help offset the declines in sales. However, it does not appear these efforts will be sufficient in mitigating the full impact of high-profile patent losses in the near term. Indiana-based Eli Lilly kicked off the season on April 18th, reporting a net profit decline of 15% year over year. Several others are scheduled to report later this week including, Johnson & Johnson, Forest Laboratories, and Abbott Laboratories.
GlaxoSmithKline to Divest its Over-the-Counter Brands
Their London-based pharmaceuticals company announced plans to shed roughly 20 over-the-counter products as it pares down its consumer health-care business. GSK is currently in talks with potential buyers with the goal of divesting these products by the end of 2011. Management indicated it does not intend to abandon consumer health products completely, but instead will focus on high-growth brands, particularly those sold in emerging markets. The majority of the OTCs being divested are sold in the United States and Europe.
Sanofi-Aventis Seeks to Sell U.S. Dermatology Business
France-based Sanofi-Aventis announced it was considering “strategic alternatives” in regard to its U.S. dermatology unit, which recently has been valued at $400 million to $450 million. Management indicated it wants to refocus its business on growth areas, such as cancer treatments and diabetes.
Merck and Johnson & Johnson End Drug Rights Dispute
On April 15th, drugmakers Merck and Johnson & Johnson announced they had reached an agreement that would end the multibillion dollar arbitrage dispute over the rights to popular arthritis treatments, Remicade and Simponi. The dispute materialized following Merck’s 2009 acquisition of Schering-Plough. J&J and Schering-Plough had a revenue-sharing agreement in place for Remicade and Simponi that would give J&J full control had Schering-Plough ever been bought out. However, Merck structured its buyout in a way designed to sidestep this provision allowing it to keep a share in the profits, a move J&J claimed was a violation.
Under terms of the recent agreement, Merck will retain income from 70% of the territories where it currently sells the drugs while increasing J&J’s share of the profits from 42% to 50%. Merck will also make a one-time payment of $500 million. Furthermore, beginning July 1st J&J will receive exclusive marketing rights in Canada, Central and South America, Africa, and the Asia-Pacific region, while Merck will keep the rights in Europe, Russia, and Turkey. Combined, the drugs generated about $2.8 billion in revenues for Merck in 2010 and $4.8 billion for J&J. In our view, resolution of the dispute will be viewed as a positive for both parties. Johnson & Johnson will receive increased compensation for its top-selling drug, while Merck will be relieved of the overhang that has contributed somewhat to the decline in its stock price during the past year.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.