Emerging Markets Earnings Roundup: Novartis, Eli Lilly (Part 4)

Novartis posted solid growth of 9% in Q1 in emerging markets, with China sales up 21%; Lilly reports strong sales in China lifted revenues by 11%.

In a recurring feature, PharmAsia News combs through quarterly earnings reports to bring you highlights on emerging markets. In the last installment of this quarterly feature, PharmAsia News looked at the emerging markets strategy of AbbVie Inc., Abbott Laboratories Inc., Johnson & Johnson and GlaxoSmithKline PLC (Also see "Emerging Markets Earnings Roundup: Abbott, AbbVie, J&J, GSK (Part 3)" - Scrip, 2 May, 2013.).

A strong combination of emerging markets growth and eight key regulatory approvals helped Novartis AG deliver solid first quarter performance with sales up 4% and its core operating income up 6% in constant currency, outpacing rivals buffeted by currency fluctuations.

Sales in emerging markets showed China up 21%, India up 14% and Russia up more than 33%. In total, emerging markets growth rose 9%, contributing $3.5 billion, or 25%, to group net sales, the company reported during its April 24 earnings call. Novartis defines emerging markets as those outside of the United States, Canada, Western Europe, Australia, New Zealand and Japan.

CEO Joe Jimenez said the outlook for 2013 remains unchanged, a sharp difference to several other major drug firms such as Pfizer Inc., Merck & Co. Inc. and Sanofi, which cited a combination of a weaker Japanese yen and devalued Venezuelan bolivar among other factors in lowering Q1 earnings and 2013 outlooks.

Excluding the impact of generic competition, which could amount to as much as $3.5 billion, the company said group net sales would grow at least in mid-single digits in 2013.

“I think in the first quarter we strengthened our pipeline in terms of innovation. We accelerated our growth by driving those new products and also driving emerging markets and we also made progress in productivity which contributed to our margin improvement in the quarter,” Jimenez told investors during the earnings call.

Novartis reported a 2% rise in net sales to $14 billion and a 7% increase in net income to $2.4 billion during the first quarter of 2013. Pharmaceutical sales were flat at $7.9 billion compared with the same quarter last year, with a strong 9% volume growth being cancelled out by 6% headwinds from generic competition and 3% from adverse currency movements.

Jimenez highlighted the European approvals of Ilaris (canakinumab) for gout, Bexsero vaccine for meningitis B and Jetrea (ocriplasmin) for macular traction/holes, and noted that new products like the once-daily COPD therapy Onbrez Breezhaler (indacaterol), with sales of $43 million in the first quarter, and Jakavi (ruxolitinib), with sales of $35 million, were starting to contribute to the company.

In a move that caught investors and analysts by surprise, the company also announced CFO Jon Symonds would step down and be replaced by the company's pharmaceuticals division CFO, Harry Kirsch. It is the second high-profile topside change for Novartis in recent months following the resignation of long-term Chairman Daniel Vasella in January. The incoming Chairman Joerg Reinhardt is formerly chairman of the healthcare division of Bayer AG, and before that was chief operating officer of Novartis (Also see "Symonds Steps Down As Novartis CFO, Replaced By Insider Kirsch" - Pink Sheet, 24 Apr, 2013.).

Emerging Markets Strategy

Like all of its peers, Novartis has singled out emerging markets as a key part of its growth strategy (Also see "Emerging Markets Earnings Roundup: Abbott, AbbVie, J&J And Novartis (Part 3)" - HBW Insight, 4 Feb, 2013.).

“One of our strategies is to invest to grow those markets, so it's clearly paying off,” said David Epstein, head of Novartis Pharmaceuticals Division.

“You asked me about an outlook, one thing I'd caution you about emerging markets, these often are tender driven, which means they bounce around quarter-by-quarter so I wouldn't look at any one number in any given quarter. Having said that, there was nothing unusual in the first quarter. So you can take that as you do your extrapolations,” Epstein said.

His comments echo similar remarks by execs in other pharma companies, who often emphasize the volatility in emerging markets from quarter to quarter.

Sandoz, Alcon Show Growth

Novartis said its Sandoz International GMBH generics unit bettered market growth rates in emerging Asia Pacific, the Middle East/Africa and Central/Eastern Europe regions, but slowed down in Latin America to a 6% pace in the first quarter compared to 8% for the market overall.

Sandoz net sales rose 7% in constant currency to $2.3 billion. Volume grew 12 % driven by strong double-digit sales growth in many European and Asian markets, as well as biosimilars, which were up 22% to $94 million.

Alcon Inc., the eye care subsidiary of Novartis, delivered net sales of $2.6 billion, up 3%, with operating income up 24% to $412 million driven by revenue growth and continued productivity improvements and cost containment measures. Although not broken down by geography, the company has a strong manufacturing presence and sales presence in the Asia Pacific.

Eli Lilly Performs Well In China Although Worldwide Revenue Flat

Meanwhile Eli Lilly & Co. did relatively well in China although its worldwide revenue was flat as growth in key products offset lower Zyprexa (olanzapine) revenue following patent expirations. Cymbalta (duloxetine) revenue increased 19% while Cialis (tadalafil) increased 11%.

In the first quarter, worldwide total revenue was $5.602 billion, which was flat compared with a year ago.

Lilly is taking further measures to cut costs as revenues stay flat. The big pharma has been downsizing its sales force in an effort to further align its current structure with the realities of its product portfolio as it makes big bets on a late-stage pipeline that so far has not been performing. During a first quarter earnings call on April 24, Lilly told investors it is continuing to restructure the company – particularly through the reduction of its sales force. Lilly is not releasing the specific numbers related to layoffs (Also see "Lilly Right-Sizes Sales Force As It Pushes Its Pipeline Forward" - Pink Sheet, 24 Apr, 2013.).

In the first quarter, Lilly said its revenue in the emerging markets rose 6% in constant currency, with China continuing to register double-digit revenue growth, up 11% driven by strong volume growth of 18%.

Despite the post-patent decline in Zyprexa, a weaker Japanese yen and a slowdown in parts of its animal health business, Lilly said it delivered solid financial results in the first quarter of 2013.

Lilly expects overall revenue growth to continue in emerging markets like China, while it expects a continued weakening of the yen could dampen revenue growth in Japan.

Lilly CEO John Lechleiter said the company continued to maintain strict expense controls during the first quarter while it has remained focused on advancing its late-stage pipeline.

And while it may be scaling back in some areas, Lilly remains bullish in the diabetes space. It expects to submit a regulatory filing in the U.S. for its insulin glargine product – a generic version of Sanofi‘s blockbuster Lantus.

“[Lilly] expects to be competitive because of their manufacturing capabilities and experience with diabetes,” wrote Bernstein analyst Tim Anderson in a same-day research note. Lilly “believes its biosimilar glargine can capture 50% of the market (this is much higher than what Sanofi thinks; that said, Sanofi recently announced that it too will be entering into the biosimilar insulin market, going after products like LLY's Humalog).”

The company has high hopes for China in diabetes and has added to its China sales force as well (Also see "Diabetes Plus China Equals Lilly’s Emerging Markets Strategy" - Scrip, 14 Sep, 2012.) and (Also see "China’s Diabetes Race Heats Up As Novo Pins Hopes On Human Insulin EDL Inclusion; Lilly Calls For Faster Coverage" - Scrip, 5 Dec, 2012.). The company also opened an R&D facility in China focused on diabetes in Asian populations (Also see "New Diabetes R&D Center Arms Eli Lilly For Battle In China" - Scrip, 4 Jun, 2012.).

Animal Health Business In China

Of the key events during the first quarter, Lilly noted that its Elanco animal health business announced it will invest roughly $100 million to purchase a minority equity stake in China Animal Healthcare Ltd. The parties have also agreed to a framework to allow for future commercial collaboration activities (Also see "Lilly's Elanco Buys $100 Million Minority Stake In China Animal Healthcare" - Scrip, 11 Apr, 2013.).

“The investment expands Elanco's commitment to China with the goal of providing innovative, safety-enhancing food production solutions to help meet the growing food demands, nutritional needs of the Chinese people,” said Investor Relations VP Phil Johnson.

“Our recent investment in China animal healthcare will bring us closer to that marketplace, which will help us understand that marketplace, which is a key marketplace,” said Jeff Simmons, president of Elanco Animal Health.

Lilly’s worldwide sales of animal health products in the first quarter were $499.1 million, an increase of 2% compared to the first quarter of 2012.

Animal health sales outside the U.S. decreased 8%, to $203.9 million, driven primarily by decreased volume in food animal products. The volume decrease in food animal products outside the U.S. was due to transition stocking in 2012 associated with the Janssen Products LP acquisition, as well as weakness in demand in many emerging markets consistent with broader industry trends. Still, Lilly expects to see growth in animal health exceed the industry growth rates.