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Drugmakers post lower third-quarter net income
2008-10-22
TRENTON, N.J. - Drugmakers Merck & Co., Wyeth and GlaxoSmithKline PLC all posted lower profits for the third quarter on Wednesday, partly due to the intensifying generic competition weighing on the entire pharmaceutical industry. And in what it characterized as an advance strike to counteract that and other problems, Merck said it will slash about 7,200 jobs, or nearly 13 percent of its workforce, in its second major restructuring in less than three years. The companies managed to meet or slightly beat analysts' expectations, in part because of benefits from currency exchange rates. But on a day in which world markets fell, their shares all did as well: Merck's dropped $1.96, or 6.5 percent, to $28.01; Glaxo's fell $1.21, or 3.2 percent, to $36.63, and Wyeth's fell $3.72, or 10.7 percent, to $31.06. Analysts said the Wyeth drop was mainly because of news that a promising Alzheimer's drug could be delayed. Merck's third-quarter profit plunged 28 percent, mainly due to a $612 million after-tax restructuring charge. That lowered net income to $1.09 billion, or 51 cents per share, from $1.53 billion, or 70 cents per share, a year earlier. The after-tax charge includes a $720 million pretax charge for the new restructuring program, much of it for severance costs, plus $127 million for the prior restructuring. Excluding the $612 million charge, equal to 29 cents per share, earnings per share would have been 80 cents, 1 cent better than Wall Street expected. The restructuring is "not a reaction to our performance in 2008 or the economy," Chief Executive Richard Clark said in an interview. "I think it's a competitive advantage" to make the company leaner and more flexible. Clark said 60 percent of the job cuts will come overseas, and they'll affect workers in sales and marketing, manufacturing, administration and even basic research, where more spending will be shifted to outside collaborations. Three basic research centers will be closed -- in Seattle, Japan and Italy -- and the company is evaluating which factories will be closed in a few years as it outsources more "non-core manufacturing." "This is the new reality for the pharmaceutical companies. They're going to have to right-size the business ... related to the revenues," said Edward Jones analyst Linda Bannister. She said she was disappointed Merck reduced its often-repeated financial forecast for the 2005-2010 period, dropping from double-digit growth in earnings per share down to mid- to high-single-digit growth. Despite a 4 percent boost from the favorable exchange rates, Merck's revenue was down 2 percent at $5.9 billion; analysts were expecting $6.1 billion. Sales were hurt by the continuing decline of Merck's cholesterol drugs Vytorin and Zetia, lower sales for nearly all its vaccines, partly related to manufacturing problems, and generic competition for former blockbuster osteoporosis drug Fosamax, which saw sales cut in half this quarter to $354 million. Wyeth reported a slight drop in its third-quarter profit as it continues with a restructuring program meant to brace for generic competition. "I think it's more of what you'll see from all of these (pharmaceutical) companies," David Heupel, pharmaceuticals portfolio manager at Thrivent Large Cap Growth Fund, said of such restructurings. "They're all looking for ways to grow their top line again but it certainly isn't as easy as cutting costs." Profit fell to $1.14 billion, or 84 cents per share, from $1.15 billion, or 84 cents per share. Revenue rose 4 percent to $5.83 billion. Excluding charges, the company earned 90 cents per share. Analysts polled by Thomson Reuters expecting profit of 90 cents per share on revenue of $5.9 billion. Still, the company tightened its full-year profit guidance, excluding charges, to between $3.49 and $3.55 per share, from a prior range of $3.47 to $3.55 per share. Earlier this year, blockbuster heartburn drug Protonix lost patent protection, and top-selling antidepressant Effexor will soon face generic competitors as well. So like other drugmakers, Wyeth has been focusing on international expansion and diversifying to increase revenue. Wyeth pharmaceutical sales rose 5 percent to $4.89 billion, despite a 45 percent decline in Protonix sales. Expectating that, Wyeth has already begun a cost-cutting program that could slash up to 10 percent of its 50,000 employees by 2011. Effexor sales rose 3 percent to $982 million. Sales of Prevnar, a children's pneumococcal vaccine, rose 13 percent to $717 million, but sales of consumer health products fell 5 percent to $679 million as the U.S. economy soured. Animal health care product sales rose 11 percent to $261 million. GlaxoSmithKline, the world's second-largest drug maker, posted better-than-expected results as the weak British pound boosted revenue and helped outweigh the impact of increased generic competition in the United States. Net profit dipped 1.8 percent to 1.29 billion pounds (US$2.1 billion) from 1.31 billion pounds in the third quarter of 2007. However, revenue jumped 7 percent to 5.88 billion pounds (US$9.6 billion). Earnings per share beat analyst expectations with a 6 percent rise to 25.2 pence (41 cents U.S.) from 23.7 pence. Chief Executive Andrew Witty said Glaxo will lose a total of around 3 billion pounds (US$5 billion) of sales as demand falls for treatments like its diabetes drug Avandia, its antidepressant Wellbutrin and heart medication Coreg. Witty added that controversy surrounding Avandia meant that the outlook for sales of the drug "remains negative."
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