Abbott, Eli Lilly, Novartis: Emerging Markets Earnings Round Up (Part 1)

Year-end and Q4 pharma earnings results emphasized emerging markets as one positive in a challenging environment posed by U.S. healthcare reform and European price cuts and austerity measures. Pharma companies stressed cost-cutting actions such as restructuring their businesses and closing facilities in the U.S. and Europe, while simultaneously discussing increased resource allocation for Asia and other emerging markets.

Business diversification was highlighted as companies face additional pipeline and patent pressures in their pharma businesses, and recognize the increased purchasing power in rising new markets for branded generics, diagnostics and devices and OTCs such as nutritionals.

In a recurring feature, PharmAsia News ploughs through pharma earnings calls to bring you the latest emerging markets highlights.

Abbott Scolds Analysts For Not Understanding EM Model

Abbott Laboratories CEO Miles White referred to 2010 as the year "we built for our future by expanding our emerging market infrastructure and investing in and expanding our pipeline."

The Piramal Healthcare acquisition (Also see "Piramal Deal Done, Abbott's India Plunge May Fetch Big Returns, But Integration Challenges, Growth Momentum Critical" - Scrip, 24 May, 2010.) and a licensing agreement with Zydus Cadila for 24 products in 15 emerging markets has catapulted Abbott to the top of the pack in India, which is an $8 billion market expected to double in the next five years, the CEO said (Also see "Abbott Ups Emerging Markets Ante With Zydus Deal, Established Products Unit" - Scrip, 13 May, 2010.).

Abbott's creation of a new stand-alone established product division will "provide focus, structure and resources to optimize the global market opportunity for our strong brand of generics portfolio," the CEO told analysts during the company's Q2 earnings call last summer (Also see "Abbott, Baxter, Bristol-Myers Squibb: Emerging Markets Earnings Roundup (Part 1 of 3)" - Scrip, 2 Aug, 2010.). He told analysts during the Jan. 26 year-end call that he anticipates $5 billion in 2011 sales to come from that new EPD unit.

The company announced full-year ongoing EPS growth of 12% and anticipates delivering double-digit earnings growth again in 2011, White told analysts during the company's year-end earnings call.

Roughly $8 billion, or 25% of Abbott's total sales, came from emerging markets in 2010. This total is expected to exceed $9 billion in 2011 and rise to $14 billion by 2014. Those figures would reflect a compound annual growth rate in emerging markets of more than 15%, according to White.

"In pharmaceuticals we successfully completed the acquisitions of both Solvay Pharmaceuticals and Piramal Healthcare Solutions, which added significant commercial infrastructure in emerging markets, hundreds of new branded generics, as well as two market-leading products, Creon and AndroGel."

With its broad base and diverse mix of businesses and geographies, Abbott appears well poised to deliver strong performance in emerging markets in the years ahead. The CEO said the company now has "the right commercial footprint to become one of the largest pharmaceutical companies in emerging markets, which are expected to grow at three times the rate of developed markets."

Analysts Skeptical About Future Double-digit Growth

Analysts, however, are skeptical about where that double-digit growth would come from in Abbott's mix of products and grilled White to provide a more detailed breakdown. "There seems to be a bit of a disconnect between how management is looking at its long-term outlook and how the Street is modeling Abbott as we go out beyond 2011," JPMorgan analyst Mike Weinstein said during the call.

White responded: "So if I were going to advise analysts where to look for how sustainable is the growth future of Abbott, I would encourage them to look not only at the patented pharma pipeline, which I also think is underappreciated, but I would look at the established products business, nutritionals, the diagnostics, the devices, and in particular, the geographic expansion opportunities, because that is where most of the disconnects are."

White appeared defensive when pressed for more details, chiding analysts for not understanding the growth model for emerging markets: "I think our U.S.-based investors primarily understand patented pharma [but] don't necessarily understand pharma in an emerging world, don't understand diagnostics or other things," White said, adding that it might be up to pharma companies to "educate" and "inform investors and shareholders and analysts ... about what we know about those markets."

The CEO said that in the new pricing-pressure environment, companies will have to continue to adjust cost structures, how they market their products and where they invest. He said that he expects the India deals and acquisitions to pay off in five to 10 years, noting that while prices are "very, very low" in India, margins are "very, very healthy and do not fit "Western models."

He stressed that it takes time to establish products and a presence in emerging markets and growth will not be seen in two- or three-year chunks but, rather, five-, ten-, and 15-year chunks.

"I don't think you're going to be leaders in an emerging market by suddenly deciding to go there once they are established. You have to put your footprint in place early, and it has got to be a big footprint. You've got to put the infrastructure in place, the distribution, etc., and the manpower."

Business Segment Highlights

Devices and diagnostics will continue to be a strong growth driver for Abbott. Worldwide vascular sales for the year increased nearly 14% with international vascular sales growing 37%, driven by the success of Abbott's drug-eluting Xience stents.

Worldwide diagnostics sales were up 4% in Q4, with China sales up more than 50% as Abbott introduced its Architect systems.

After pharmaceuticals, nutritionals is Abbott's second-largest business segment in emerging markets, and the company anticipates sales will double in emerging markets over the next five years, with sales in China alone approaching $1 billion by 2014.

Abbott's global pharma business reported worldwide sales in Q4 increased more than 22%, driven by 30% growth in its international pharma business. Worldwide pharma sales for the year increased more than 20%.

With recent approvals for Humira for ankylosing spondylitis and Crohn's disease in Japan, Abbott anticipates continued growth for its tumor necrosis factor inhibitor, and is forecasting 2011 global sales growth in the low teens.

Approved for rheumatoid arthritis, psoriasis, Crohn's disease, psoriatic arthritis and juvenile idiopathic arthritis, the biologic has been on a long, steady growth trajectory, but faces threats down the road from biosimilar competition in the anti-TNF space or the approval of a new class of oral drugs for RA, JAK3 inhibitors (Also see "Abbott Shaves U.S. Pharma Costs With Restructuring" - Pink Sheet, 26 Jan, 2011.).

Credit Suisse analyst Catherine Arnold said in a Jan 30 note that "uncertainty exists on the Street regarding [Abbott's] ability to drive sales and earnings growth in the 2013 and beyond timeframe when there will be increased pressures on [Abbott's] blockbuster Humira."

The analyst lowered 2011 EPS from $4.65 to $4.61 and 2012 from $5.04 to $4.74, and reduced Abbott's target price from $53 to $50, maintaining a "Neutral rating."

Lilly Sees Emerging Markets As Saving Grace From Patent Cliff Nosedive

As Eli Lilly & Co. faces one of the steepest patent cliffs in the industry, it is counting on strong performance in what it is calling "three countercyclical growth engines" - Japan, emerging markets and animal health, CFO Derica Rice told investors during the company's Jan. 27 earnings call.

Revenue in emerging markets grew 10% in 2010, and Lilly has been targeting China, Russia, Turkey, Korea, Brazil and Mexico.

"And these investments are paying off," Rice said, "with volume growth accelerating in each of the targeted markets, with the exception of Brazil." From 2009 to 2010, volume growth accelerated from 18% to 21% in China, from -7% to 21% in Russia, from 4% to 20% in Turkey, from a -2% to 19% in Korea, and from 1% to 7% in Mexico.

"More broadly, for the 12 months ending September 2010, IMS showed that Lilly ranked first in sales growth at 12% among the 10 leading multinational companies across five emerging markets - China, Turkey, Korea, Brazil and Mexico," the CFO highlighted.

The company sees significant opportunities in emerging markets for its core products including anti-depressant Cymbalta (duloxetine), erectile dysfunction drug Cialis (tadalafil), diabetes medication Humalog (insulin lispro) and oncology agent Alimta (pemetrexed).

Lilly has also been aggressively reducing headcount and controlling expenses and will continue along that path in 2011 and beyond. At year end, excluding additions in key emerging markets and Japan, Lilly had reduced headcount by 3,450 or nearly two-thirds of its goal of 5,500, and is on track to meet its goal of reducing 2011 costs by $1 billion.

Japan Sales See 25% Growth

In Japan, sales grew 15% in 2009 and 25% in 2010, fueled by the launch of products and indications that were launched previously in the U.S. and Europe.

The first atypical antipsychotic approved in Japan for bipolar mania, Zyprexa (olanzapine) is Lilly's biggest seller in Japan, and grew 8% in 2010. The company expects continued growth as it gets ready to submit an application for bipolar depression. Lilly has patent exclusivity in Japan for Zyprexa until December 2015; the drug loses patent exclusivity this year in the U.S.

Approved in Q2 2009 for non-small-cell lung cancer in Japan, Alimta "achieved the best share of market uptake in the first-line non-squamous segment of any market in the world," and is "our second-largest product in Japan," Rice said.

International sales account for about 45% of Lilly's total revenue, Rice told analysts, with 26% volume growth in Japan.

"And so when we look forward, we really see those markets like the emerging markets and Japan really acting in a countercyclical manner compared to what we're going to see in the U.S. in 2011, as well as in Europe major markets in 2011 with the Zyprexa effect," she said.

Credit Suisse analyst Catherine Arnold drew attention to Lilly's "limited pipeline" in a Jan. 30 research note and said "the lack of near-term catalysts combined with a daunting patent cliff limits the attention that investors seem to pay to the name." She lowered 2011 EPS from $4.24 to $4.23 and 2012 from $3.52 to $3.47.

Yet Bernstein Research analyst Tim Anderson pointed to Lilly's "additional color" on key geographies, reiterating Lilly's claim that it is the "fastest growing multinational in Japan, the world's second largest market behind the U.S."

Anderson had earlier chided pharma companies for not releasing more specific emerging markets data in an Oct. 12, 2010 research note, and said that Lilly appeared to be the "worst positioned" Big Pharma in the nine companies that Bernstein covers (Also see "Eli Lilly, J&J, Novartis: Emerging Markets Earnings Roundup (Part 1 of 2)" - Scrip, 25 Nov, 2010.).

Oppenheimer & Co. equity analyst Katherine Lu noted that Lilly's China volume sales growth also increased from 18% year over year in 2009 to 21% year over year in 2010.

Overall, Lilly reported a worldwide revenue increase of 6% to $23.1 billion for the full year 2010. Profit increased to $5.0 billion, with Q4 sales driven by Zyprexa, Cymbalta, and its animal health business (Also see "Lilly Prepares for Sales Pressures in 2011 to 2014" - Pink Sheet, 27 Jan, 2011.).

Novartis Banks On Diversity With Vaccines, Generics And Biosimilars

Novartis AG is also banking on its diversity and emerging markets to grow its business. It is particularly well poised for emerging markets with its vaccines business and generics and biosimilars offerings from its Sandoz division.

Novartis CEO Joseph Jimenez said during a Jan. 27 earnings call that the Swiss pharma grew 12% in 2010 and each of the company's businesses is focusing on driving emerging markets growth. "In our top six markets we delivered close to $5 billion in sales, so this is not a small piece of business. We continue to drive and I expect that that growth rate in those emerging markets will increase in 2011."

Sandoz had strong performances in emerging markets in 2010, with double-digit growth in Central and Eastern Europe, Asia-Pacific, Middle East, Turkey and Africa.

Sandoz achieved 15% sales growth, which was driven by significant volume expansion by new product launches. Biosimilars should be a strong revenue driver for the company in the years ahead as biologics go off patent.

"The focus on differentiated and difficult-to-make generics is paying off and really generating significant growth for Sandoz," Jimenez said during the call. "Biosimilars was up 63% versus a year ago and further strengthened our number one global position."

In particular, Novartis recently expanded its footprint in Russia, announcing a $500 million commitment to build a manufacturing site in St. Petersburg and to collaborate with local regions in Russia on "health awareness" (Also see "Russia Pledges $3.9 Billion For Local Pharma Growth, As Big Pharma Scrambles To Set Up Shop" - Scrip, 22 Dec, 2010.).

New oral MS therapy Gilenya (fingolimod) is starting "to get some good traction," Jimenez said. The product was approved in the U.S. last year and Novartis plans to launch in Russia and Australia in early 2011. Gilenya is also under regulatory review in Turkey and Brazil.

Analysts Remain Positive But Question Slowdown In EM

Analysts questioned Novartis' growth rate in emerging markets, noting that growth was down compared to 19% growth the company announced in 2009.

The CEO said that total emerging markets business in 2010 was $4.6 billion and it grew 12%, which he said was good but "not great," and expects growth to be closer to the 19-20% range in 2011.

He pointed to a slowdown in China when the company "moved from a very centralized structure to a regional structure," which caused some disruption, but was "the right thing to do."

He also said that the company's business in Turkey took a hit due to price reductions (Also see "Dusk And Dawn In Emerging Markets? Pharmas Find Growth Elsewhere Offset Turkish Price Cuts" - Scrip, 4 May, 2010.).

However, the CEO pointed to Japan with 30% growth and noted that in emerging markets, "three of our four regions grew at two to four times market growth rate and we continue to see tremendous potential in Asia-Pacific, the Middle East, Central and Eastern Europe, and even Latin America where our business was softer in 2010," he said.

And it's in emerging markets - more specifically, Venezuela - that Jimenez claims Novartis is seeing the first signs of the benefits that may accrue from marketing its full, group-wide portfolio of products (innovative drugs, generics and vaccines/consumer products) to certain customers. "We started [marketing one portfolio] to key customers about 18 months ago," said Jimenez during the Q&A session. "That's led to about $150 million in incremental sales so far," he continued. That momentum looks likely to build up further, he says, albeit slowly.

"Novartis Pharma is one of the few drug companies where recently-launched pipeline products (Gilenya, Tasigna, Ilaris, Afinitor), combined with Emerging Markets growth, are able to replace revenues lost from patent expiries," wrote Credit Suisse Analyst Luisa Hector in a Jan. 28 note.

- Tamra Sami ([email protected])

[Editor's note: This is part one of a recurring feature; look for part two in an upcoming issue of PharmAsia News.]