Contributor: Mike Latwis

Bristol-Myers Squibb (BMS) showed consistent, double-digit top-line growth in the third quarter, which more than offset higher spending trends and a jump in its tax rate to deliver 3% non-GAAP earnings growth on a year-over-year (YoY) basis. This was 3-cents a share ahead of consensus expectations for the quarter, and excludes special items relating to restructuring, asset impairments, upfront licensing payments, and in-process R&D charges. The ongoing new product launches of Yervoy and Kombiglyze, along with the addition of Zymogenetic's operations were largely responsible for the increases in SG&A and R&D expenses, while the jump in the tax rate was due to a large tax benefit recorded in the third quarter of the prior year. Although the company has ratcheted down its promotional activity behind its aging Plavix and Avapro brands, its spending to maximize its new product launches has offset these savings. The top-line enjoyed lifts from both pricing (2 ppts) and currency (3 ppts) in the quarter, as well as strong momentum and double-digit growth from its Sprycel, Barraclude, Orencia and Abilify product lines. Its leading Plavix brand also showed solid 8% growth in the quarter, and its newer diabetes treatments Onglyza / Kombiglyze contributed $127 million in sales compared to $47 million a year ago. BMS also enjoyed another stronger-than expected contribution from its recently launched melanoma treatment, Yervoy, with $121 million in sales, +27% sequentially from $95 million recorded in the second quarter.

Overall, the company's strong sales performance in the quarter helped offset increased marketing spending and a higher effective tax rate, as good top-line leverage contributed to YoY improvements on both the gross and operating margin lines (excluding special items). In addition, management estimates that higher rebates and pharmacy fees resulting from US healthcare reform and ongoing austerity measures in Europe, reduced earnings by four-cents a share in the third quarter. As a result of its better-than expected earnings over the first 9-months of the year, management increased the lower-end of its full-year earnings guidance by 5-cents share to a range of $2.25 to $2.30 a share on an adjusted, non-GAAP basis. BMS continues to expects to grow sales at a high single-digit pace for the full-year.

BMS' recent product launches of Yervoy, Nulojix, and Eliquis (apixaban), along with brivanib, dapagliflozin and the young Onglyza product line are intended to help return the company's top-line to growth by 2014, following the downturn from the Plavix patent expiration. The outlook continues to look promising for Yervoy, following its early launch trajectory and Eliquis, with additional strong competitive data from the ARISTOTLE trial. Although dapagliflozin recently received a setback from an FDA advisory committee, BMS and its partner AstraZeneca have submitted additional data, which extends the timing of this FDA decision by another three months to late January 2012. In the meantime, BMS remains focused on the challenge to grow its business over the long-term, and continues to engage in business development activity. During the third quarter, BMS executed five new business development deals with Innate Pharma for IPH2102, Ono Pharmaceuticals for its anti-PD1 antibody, Ambrx for novel biologics in the diabetes and heart disease areas, and Gilead for a fixed-dose combination of BMS' Reyataz with Gilead's cobicistat in the HIV market, as well as closing its acquisition of Amira Pharmaceuticals.

Contributor: Mike Latwis

Eli Lilly encountered an increasingly challenging environment for its pharma business in the third quarter, with the ongoing generic erosion of Gemzar, higher overseas inventory costs with the weak US dollar, and a jump in marketing and development expenses from the Boehringer Ingelheim diabetes alliance. Higher rebates associated with healthcare reform in the US market also provided a drag on growth in the quarter. Overall, these headwinds contributed to margin erosion and negative year-over-year (YoY) comparisons on both the operating and net income lines. Similarly, Lilly’s adjusted (non-GAAP) earnings dropped 7% YoY to $1.13 a share, excluding a $25 million (2-cents per share) severance charge related to its latest restructuring program. This was consistent with consensus market forecasts for the quarter. The company's earnings benefited from a YoY decline on the tax line, which was the result of a favorable IRS settlement of a prior audit that led to a $45 million tax benefit in the quarter.

The majority of Lilly's key brands delivered healthy growth in the quarter though, with double-digit YoY sales gains for Cymbalta, Humalog, Forteo, Strattera, Cialis and Alimta. Volume growth and currency gains equally contributed to the 9% top-line growth in the quarter, with no net benefit from pricing. The company's top-line performance was driven by its international business, with a 15% gain overall, and even faster growth in the Chinese and Japanese markets, with continued momentum from several recent product launches in those regions. Management believes that its ability to leverage its existing portfolio and pipeline in Japan, China and other emerging markets will help support its pharma business through its upcoming patent expiry challenges in the developed US and European markets.

Although Lilly has shown consistent top-line growth in recent quarters, the nearing generic erosion of its largest product line, Zyprexa, will dampen its revenue growth and profitability beginning in the fourth quarter of 2011. As a result, management expects only mid-single digit revenue growth for the full-year and non-GAAP earnings in a $4.30 to $4.35 range in 2011. This quarter, management moved its earnings guidance 5-cents a share higher on the low-end of its prior range, but this still represents a significant downturn on a YoY basis, at an 8% to 9% pace.

In order to manage through this period following the Zyprexa patent expiration, Lilly continues to progress its in-house pipeline and expand its new product opportunities through business development deals. The company now has 66 NMEs in clinical development and reached its R&D goal with 10 projects in Phase III development by the end of 2011. This is expected to allow the company to upgrade its new product launch schedule to two projects a year by 2013. In the near-term, Lilly expects regulatory decisions on Erbitux in its first-line head and neck cancer indication and its Bydureon diabetes treatment in the US, but longer-term the company is under pressure to add even more new product opportunities and accelerate its geographic expansion in order to revive the growth of its business.

Contributor: Mike Latwis

Abbott CEO, Miles White, made another bold strategic move with the decision to split the company into two separately-traded public entities, which essentially splits-off its proprietary pharmaceutical business. The Diversified Medical Products Company, which will retain the Abbott name and Mr. White as CEO, will include the Medical Device, Established Pharmaceutical, Nutritional, and Diagnostic business segments. The Proprietary Pharmaceutical Company will include the company’s branded portfolio and pipeline, and will be led by Abbott’s current Head of Pharma, Richard Gonzalez. Each of the four businesses within the Medical Product Company are approximately of equal size (in terms of revenue) with $22b in total sales, while the Pharmaceutical company is expected to generate nearly $18b in sales in 2011. The strategic rationale for this move was the desire to unlock greater value for shareholders, as two independently-traded businesses, since the size of the pharma business and concerns over the sustainability of the Humira franchise have overshadowed the growth prospects and market opportunities in its other businesses.

The key question is why Abbott decided to split-out its branded pharmaceutical business, instead of one or more of its smaller, less profitable businesses, and why its Established Pharmaceutical business, which includes its branded generic drug sales in emerging markets, remains with the Medical Products Company, instead of Pharmaceuticals. Management explained that its research-intensive Proprietary Pharmaceutical business, which generates the bulk of its revenue from developed markets in the US and Europe, is a very different business model than its other consumer-oriented businesses. The company specifically highlighted the difference in payers for these two types of products, with Pharmaceuticals dominated by a few large government payers, and its other business, including its Established Pharmaceuticals (branded generics in emerging markets) dominated by out-of-pocket consumer purchases. The cash flow and investment required to fund the R&D operations of its Proprietary Pharmaceutical business are also significantly greater, and over a much longer time horizon than its other businesses. In addition, the growth profile of its Diversified Medical Products business appears much greater than Pharmaceuticals, because it intends to focus on opportunities in high-growth emerging markets.

Overall, this move by Abbott reflects the changing dynamics of the global healthcare markets, with ongoing pricing and reimbursement pressure creating a more challenging operating environment for branded pharmaceutical products in the developed US and European markets. At the same time, the growth opportunities have become much greater for lower-cost healthcare products that can be marketed to a growing number of healthcare consumers in many of the world’s emerging markets. The choice by Abbott to stick with its Diversified Medical Products Company over its Proprietary Pharmaceuticals business clearly highlights their preference for product diversity and market growth over the blockbuster pharma business model. For the stand-alone Pharmaceutical Company the reliance on Humira will increase even further, which intensifies the pressures on the company’s pipeline to deliver significant new product opportunities to help support growth by the time of anticipated biosimilar competition to Humira in 2017.

Contributor: Mike Latwis

J&J’s business has faced a number of challenges during 2011, ranging from ongoing over-the-counter (OTC) product recalls and remediation efforts in its Consumer business, to the exit from its stent business in its Medical Device segment, and recurring generic competition in Pharmaceuticals. This is in addition to the tough macro environment that all of the large pharmaceutical companies face from the costs associated with healthcare reform in the US and pricing pressures from austerity measures throughout Europe. J&J has shown the flexibility to be able to skillfully manage its financial results in recent quarters and the third quarter was no exception. Overall, J&J’s earnings were three-cents above consensus forecasts at $1.24 a share, representing a modest 0.8% year-over-year (YoY) increase. The company also delivered $16.0 billion in quarterly sales for 6.8% YoY growth, but this was helped by a 4.2 percentage point contribution from favorable currency movements. As a result of this performance, management moved the lower-end of its prior earnings guidance five-cents higher and narrowed its full-year guidance range to $4.95 to $5.00 per share, representing 4% to 5% YoY growth. This is expected to lead to some modest upside from the current $4.96 consensus estimate for 2011.

This company’s earnings performance was particularly surprising this quarter because of the increasing pressures on margins and profitability that J&J’s business has encountered. Specifically, J&J’s gross margin deteriorated with higher manufacturing and compliance costs in its Consumer business that are required as part of its operation under an FDA consent decree. The hit from the first quarter of generic erosion for its large Levaquin product line and the recent addition of its acquired Crucell business further hurt gross profitability in its Pharma business. The company’s SG&A spending also rose sharply, outpacing sales growth on a YoY basis, due to promotional activity behind several recent pharma product launches and user fees associated with US healthcare reform. The company was able to hold its R&D spending steady on a YoY basis, and enjoyed a slightly higher contribution from other income, due to recent divestments. The net result was a YoY decline in the operating margin and income, despite healthy top-line growth in the quarter. By excluding $316 million in the mark-to-market adjustment of a currency option and costs related to the acquisition of Synthes, which represented 9-cents a share, the company was able to deliver its $1.24 adjusted earnings figure.

All three of the company’s business segments provided positive contributions to sales growth in the quarter, with foreign exchange contributing about one-half of the 16.4% growth recorded internationally. The international performance was also helped by the additional overseas territories for Remicade and Simponi gained from its arbitration settlement with Merck, and more than offset its 3.7% sales decline in the US market. The weakness in the US market was due to Consumer business, which remains hampered by recalled OTC products that remain off the market, and the domestic Pharmaceutical business, which suffered from generic competition to its large Levaquin and Concerta brands. Management expects the majority of its consumer brands to return to the market and recapture share in 2012, while newly launched and recently approved products support an improving outlook for its Pharma business. New product contributions were recorded by psoriasis treatment Stelara, its next-generation anti-TNF agent Simponi, long-acting anti-psychotic Invega Sustenna, and Zytiga for prostate cancer. In addition, recently approved products like Xarelto for the prevention of deep vein thrombosis, Incivio for hepatitis C, and Nucycnta ER for pain are also expected to support the longer-term growth of its pharma business, as well as the overall company.

Contributor: Allison Thrower

Dinner and a show have long defined a quintessential night-on-the-town in any city, but nowhere more so than New York. A full week of work (or a day attending the October 13 Managed Markets seminar) will undoubtedly inspire an evening out and about in the City. Since dining options in NYC’s Theatre District are as abundant as the lights on Broadway, here are some popular area restaurants for a pre-show meal to help set the tone for three of this season’s most popular productions:

The Book of Mormon
The musical brain-child of South Park creators Trey Parker and Matt Stone, The Book of Mormon tells the story of two wide-eyed missionaries who travel to Uganda with the intent of converting locals to the Mormon faith, but instead find a world ridden with poverty, famine, AIDS and war. With the help of Avenue Q composer Robert Lopez, Parker and Stone have the cast singing and dancing along the thin line between comically irreverent and outright offensive in this Tony-winning comedy that lampoons organized religion, traditional musical theater and everything in between.
Best bet before whetting your comedic appetite: Braai
While South African cuisine doesn’t tend to fall in the same realm as Ugandan/East African, the restaurant’s “tribal” ambience is reminiscent of The Book of Mormon’s own African stereotyping and, like the musical’s content, the quality of the food completely makes up for any oversight. Authenticity aside, the location can’t be beat – less than half a mile from the musical’s playhouse. Try the African Road Runner (ostrich) steak, which tastes like beef only more lean and tender, and the malva pudding (apricot sponge cake) for dessert.

Sister Act: A Divine Musical Comedy
Centering on a lounge singer who comes to live in a convent under the witness protection program, Sister Act follows the same basic premise as its 1992 film counterpart. With an original score by Alan Menken of Disney fame and lyrics by Glenn Slater, the music reflects the show’s 1970’s Philadelphia setting, evoking soul, Motown, funk and disco, and propelling the otherwise familiar storyline from a slightly restrained and gawky comedy to a full-on Broadway spectacular.
Guaranteed to make you sing the chef’s praises: John’s Pizzeria
Housed in a converted church within walking distance of the theater, this famous NYC eatery is an obvious choice to prepare you for a night of pseudo-religious revelry. Dine on traditional New York pizza with stained glass, wooden pews and tall domed ceilings as your backdrop.

Anything Goes
Anything Goes is a revival of the 1930s Broadway classic by the same name in an adaptation that manages to live up to the original’s standards. Following the 1987 Broadway rewrite, the story unfolds on an ocean liner bound for England, where a nightclub singer aids her stowaway friend in his quest to win the heart of an affluent (and engaged) passenger. Wholesome, campy and musically enduring, Anything Goes epitomizes the glory days of musical theater and reinvigorates one of the genre’s best-loved classics.
Worth the voyage: PJ Clarke’s
PJ Clarke’s has been a New York institution since 1884, and this establishment’s food, service and charm are a testament to its staying power. The décor heralds back to the earlier half of the 20th century, which helps set the stage for an evening on board the Depression-era S.S. American. Despite being a little farther away than some of the other restaurants, their famous hamburgers more than compensate for the 10-minute cab ride.

Check out Broadway.com for more information on these shows and others playing the weekend of the Decision Resources Group Managed Markets seminar.