Animal Pharm Top20 - Reports

Animal Pharms Top 20, 2005 Edition
SR244
T&F Informa UK Ltd, October 2005 All rights reserved: no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publisher or under the terms of a licence issued by the Copyright Licensing Agency (90 Tottenham Court Road, London W1P 9HE) or rights organisations in other countries that have reciprocal agreements with the Copyright Licensing Agency. This report may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publisher. While all reasonable steps have been taken to ensure that the data presented are accurate, T&F Informa UK Ltd cannot accept responsibility for errors or omissions.
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Executive Summary
EXECUTIVE SUMMARY
This report profiles the 20 largest animal health and nutrition companies worldwide. The ranking is based on sales during the 2004 fiscal year, converted to US dollars. The information is compiled from a range of sources, including the PJB Publications newsletter, Animal Pharm World Animal Health and Nutrition News; other trade press sources; company web sites, annual reports and other publications; and interviews with key informants. Each profile analyses: Company background Animal health and nutrition sales Geography of the business Product portfolio R&D Strategy Prospects
The companies profiled are: Adisseo Alpharma BASF Bayer Boehringer Ingelheim Ceva Dainippon Degussa DSM Elanco Fort Dodge Idexx Intervet Merial Novartis Pfizer Phibro Animal Health Schering-Plough Vtoquinol Virbac
Executive Summary
Table of Contents
TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION 1.1 The world market for animal health and nutrition products 1.1.1 Market shares by region 1.1.2 Market shares by product category 1.1.3 Market shares by species 1.1.4 The animal health and nutrition products industry 1.1.5 Leading companies in the animal health and nutrition sector 1.1.6 Market leaders in 2004 1.1.7 Market leaders in 2005 1.1.8 Currencies and exchange rates 15 15 15 16 16 17 19 19 21 23 25 25 26 26 27 27 27 28 28 29 29 30 30 31 32 32 33 33 35 35 36 38 38 39 39 40 41 41 42 42 43 43 44 44 45
CHAPTER 2
ADISSEO 2.1 2.2 Company background Animal nutrition sales 2.2.1 2003 performance 2.2.2 2004 performance 2.2.3 Interim 2005 performance Geography of the business 2.3.1 Europe, Middle East, Africa and CIS 2.3.2 North America 2.3.3 Asia/Pacific 2.3.4 Latin America Product portfolio 2.4.1 Methionine 2.4.2 Vitamins 2.4.3 Other products R&D Strategy Prospects
2.3
2.4
2.5 2.6 2.7 CHAPTER 3
ALPHARMA 3.1 3.2 Company background Animal health sales and operating profit 3.2.1 2003 performance 3.2.2 2004 performance 3.2.3 Interim 2005 performance Geography of the business 3.3.1 North America 3.3.2 International markets Product portfolio 3.4.1 Antibiotics 3.4.2 Anticoccidials 3.4.3 Antibacterials 3.4.4 Porcine somatotropin R&D Strategy Prospects
3.3 3.4
3.5 3.6 3.7
Table of Contents
CHAPTER 4
BASF 4.1 4.2 Company background Animal nutrition sales 4.2.1 2003 performance 4.2.2 2004 performance 4.2.3 Interim 2005 performance Geography of the business 4.3.1 Europe 4.3.2 Americas 4.3.3 Asia/Pacific Product portfolio 4.4.1 Vitamins 4.4.2 Amino acids 4.4.3 Carotenoids 4.4.4 Enzymes 4.4.5 Other products R&D Strategy Prospects
47 47 48 49 49 50 50 50 51 52 52 53 53 53 54 54 55 56 57 59 Company background Animal health sales and operating income 5.2.1 2003 performance 5.2.2 2004 performance 5.2.3 Interim 2005 performance Geography of the business 5.3.1 North America 5.3.2 Europe 5.3.3 Asia/Pacific 5.3.4 Other markets Product portfolio 5.4.1 Antiparasitics . . . Imidacloprid . . . Other ectoparasiticides . . . Anthelmintics and endectocides 5.4.2 Antimicrobials 5.4.3 Other products R&D Strategy Prospects 59 60 61 61 62 62 63 64 64 65 66 66 66 67 67 68 69 69 71 72 73 73 74 74 75 75 75 76 76 77 78
4.3
4.4
4.5 4.6 4.7 CHAPTER 5 BAYER 5.1 5.2
5.3
5.4
5.5 5.6 5.7 CHAPTER 6
BOEHRINGER INGELHEIM 6.1 6.2 Company background Animal health sales 6.2.1 2003 performance 6.2.2 2004 performance 6.2.3 Interim 2005 performance Geography of the business 6.3.1 North America 6.3.2 Europe 6.3.3 Other markets Product portfolio
6.3
6.4
Table of Contents
6.5 6.6 6.7 CHAPTER 7 CEVA 7.1 7.2
6.4.1 Pharmaceuticals 6.4.2 Biologicals 6.4.3 Others R&D Strategy Prospects
78 79 81 82 83 84 85
7.3 7.4
7.5 7.6 7.7 CHAPTER 8
Company background Animal health sales and operating profit 7.2.1 2003 performance 7.2.2 2004 performance 7.2.3 Interim 2005 performance Geography of the business 7.3.1 EU 7.3.2 International markets Product portfolio 7.4.1 Companion animal/behavioural products 7.4.2 Reproduction 7.4.3 Anti-infectives 7.4.4 Vaccines R&D Strategy Prospects
85 85 86 87 87 88 88 89 91 91 92 93 93 94 95 96 97 97 98 99 99 100 100 101 101 102 103 104 105 107 107 108 108 109 109 110 111 111 113 113 114 115
DAINIPPON 8.1 8.2 Company background Animal health sales and operating profit 8.2.1 Fiscal 2004 performance 8.2.2 Fiscal 2005 performance 8.2.3 Interim fiscal 2006 performance Geography of the business Product portfolio 8.4.1 Companion animal products 8.4.2 Food animal products R&D Strategy Prospects
8.3 8.4 8.5 8.6 8.7 CHAPTER 9
DEGUSSA 9.1 9.2 Company background Feed additive sales 9.2.1 2003 performance 9.2.2 2004 performance 9.2.3 Interim 2005 performance Geography of the business Product portfolio 9.4.1 Methionine 9.4.2 Other amino acids R&D Strategy Prospects
9.3 9.4 9.5 9.6 9.7
Table of Contents
CHAPTER 10 DSM 10.1 10.2 Company background Animal nutrition sales 10.2.1 2003 performance 10.2.2 2004 performance 10.2.3 Interim 2005 performance Geography of the business Product portfolio 10.4.1 Vitamins 10.4.2 Carotenoids 10.4.3 Feed enzymes 10.4.4 Other products R&D Strategy Prospects
117 117 118 118 119 119 120 120 121 121 122 123 123 124 125 127 127 128 128 129 129 130 130 130 131 132 132 133 133 133 134 135 136 137 139 139 140 141 141 142 142 143 143 145 145 146 147 148 148 149 150
10.3 10.4
10.5 10.6 10.7
CHAPTER 11 ELANCO 11.1 11.2 Company background Animal health sales and operating income 11.2.1 2003 performance 11.2.2 2004 performance 11.2.3 Interim 2005 performance Geography of the business 11.3.1 US 11.3.2 International markets Product portfolio 11.4.1 Tylosin 11.4.2 Tilmicosin 11.4.3 Monensin 11.4.4 Avilamycin 11.4.5 Ractopamine 11.4.6 Other products R&D Strategy Prospects
11.3 11.4
11.5 11.6 11.7
CHAPTER 12 FORT DODGE 12.1 12.2 Company background Animal health sales and operating profit 12.2.1 2003 performance 12.2.2 2004 performance 12.2.3 Interim 2005 performance Geography of the business 12.3.1 US 12.3.2 International markets Product portfolio 12.4.1 Biologicals . . . Companion animal range . . . Food animal range 12.4.2 Antiparasitics . . . Moxidectin . . . Other antiparasitics 12.4.3 Other pharmaceuticals
12.3 12.4
Table of Contents
12.5 12.6 12.7 CHAPTER 13 IDEXX 13.1 13.2
R&D Strategy Prospects
151 152 153 155
13.3 13.4
13.5 13.6 13.7 CHAPER 14
Company background Sales and income 13.2.1 2003 performance 13.2.2 2004 performance 13.2.3 Interim 2005 performance Geography of the business 13.3.1 North America 13.3.2 International markets Product portfolio 13.4.1 Companion animal group . . . Immunoassays . . . Veterinary instrument systems . . . Laboratory and consulting services . . . Information products and services . . . Veterinary pharmaceuticals 13.4.2 Water products and services 13.4.3 Food diagnostics group R&D Strategy Prospects
155 156 156 157 157 158 158 159 160 160 161 161 162 162 162 163 163 164 165 166 169 169 170 170 171 172 173 173 174 175 175 176 178 179 180 180 181 182 185 185 186 187 187 187 188 188
INTERVET 14.1 14.2 Company background Animal health sales 14.2.1 2003 performance 14.2.2 2004 performance 14.2.3 Interim 2005 performance Geography of the business 14.3.1 Europe 14.3.2 Americas 14.3.3 Asia/Pacific Product portfolio 14.4.1 Biologicals 14.4.2 Antiparasitics 14.4.3 Anti-infectives 14.4.4 Other pharmaceuticals 14.4.5 Feed additives R&D Strategy
14.3
14.4
14.5 14.6
CHAPTER 15 MERIAL 15.1 15.2 Company background Animal health sales 15.2.1 2003 performance 15.2.2 2004 performance 15.2.3 Interim 2005 performance Geography of the business 15.3.1 North America
15.3
Table of Contents
15.4
15.3.2 15.3.3 15.3.4 Product 15.4.1
15.5 15.6 15.7
Europe South America Other markets portfolio Avermectins . . . Ivermectin . . . Abamectin . . . Eprinomectin 15.4.2 Fipronil 15.4.3 Biologicals 15.4.4 Other products R&D Strategy Prospects
189 189 190 191 191 192 194 194 194 195 197 198 200 201 203 203 204 205 206 206 207 208 208 209 209 210 210 210 212 213 214 216 216 218 219 221 221 222 223 224 224 225 225 226 227 228 231 231 232 232 233 233
CHAPTER 16 NOVARTIS 16.1 16.2 Company background Animal health sales and operating profit 16.2.1 2003 performance 16.2.2 2004 performance 16.2.3 Interim 2005 performance Geography of the business 16.3.1 US 16.3.2 Other Americas 16.3.3 Europe 16.3.4 Other markets Product portfolio 16.4.1 Antiparasitics . . . Companion animal parasite controls . . . Livestock parasite controls 16.4.2 Anti-infectives 16.4.3 Other pharmaceuticals 16.4.4 Vaccines R&D Strategy Prospects
16.3
16.4
16.5 16.6 16.7
CHAPTER 17 PFIZER 17.1 17.2 Company background Animal health sales and operating profit 17.2.1 2003 performance 17.2.2 2004 performance 17.2.3 Interim 2005 performance Geography of the business 17.3.1 US 17.3.2 International markets Product portfolio 17.4.1 Anti-infectives 17.4.2 Antiparasitics . . . Doramectin . . . Selamectin . . . Others 17.4.3 Vaccines . . . Livestock vaccines
17.3 17.4
Table of Contents
17.5 17.6 17.7
17.4.4 R&D Strategy Prospects
. . . Companion animal vaccines . . . CSL products Other pharmaceuticals
234 235 235 237 238 239 241 241 242 243 243 244 245 245 246 247 248 248 249 249 251 252 253 254 254 255 255 256 257 257 258 260 262 263 263 264 267 267 267 268 268 269 269 270 271 271 271 272 273 274
CHAPTER 18 PHIBRO ANIMAL HEALTH 18.1 18.2 Company background Animal health and nutrition sales and operating profit 18.2.1 Fiscal 2003 performance 18.2.2 Fiscal 2004 performance 18.2.3 Interim fiscal 2005 performance Geography of the business Product portfolio 18.4.1 Phibro Animal Health 18.4.2 Koffolk 18.4.3 Prince Agri Products R&D Strategy Prospects
18.3 18.4
18.5 18.6 18.7
CHAPTER 19 SCHERING-PLOUGH 19.2 Animal health sales and operating profit 19.2.1 2003 performance 19.2.2 2004 performance 19.2.3 Interim 2005 performance Geography of the business 19.3.1 US 19.3.2 International markets Product portfolio 19.4.1 Antiparasitics 19.4.2 Anti-infectives 19.4.3 Vaccines 19.4.4 Other products R&D Strategy Prospects
19.3 19.4
19.5 19.6 19.7
CHAPTER 20 VETOQUINOL 20.1 20.2 Company background Animal health sales 20.2.1 2003 performance 20.2.2 2004 performance 20.2.3 Interim 2005 performance Geography of the business 20.3.1 Europe 20.3.2 North America 20.3.3 Other markets Product portfolio 20.4.1 Anti-infectives 20.4.2 Other products R&D
20.3
20.4 20.5
Table of Contents
20.6 20.7 CHAPTER
Strategy Prospects
275 276 277 277 278 279 280 280 281 281 282 283 283 283 284 285 286 286 287 288
21 VIRBAC 21.1 21.2 Company background Animal health sales and operating profit 21.2.1 2003 performance 21.2.2 2004 performance 21.2.3 Interim 2005 performance Geography of the business 21.3.1 Europe 21.3.2 North America 21.3.3 Other markets Product portfolio 21.4.1 Antiparasitics 21.4.2 Anti-infectives 21.4.3 Biologicals 21.4.4 Other products R&D Strategy Prospects
21.3
21.4
21.5 21.6 21.7
List of Tables
LIST OF TABLES
Table Table Table Table Table Table 1.1 1.2 1.3 1.4 1.5 1.6 Geography of the world market, 2004 World market structure by major product sector, 2004 World market structure by species, 2004 Merger and acquisition activity in the animal health sector Top 20 rankings, 2004 Top 20 ranking forecasts, 2005 Adisseos animal nutrition sales, 2000-2004 Adisseos sales by operating region, 2004 Alpharmas Alpharmas Alpharmas Alpharmas Alpharmas revenues by division, 2004 animal health sales, 2000-2004 animal health operating income, 2000-2004 first-half animal health sales, 2004 and 2005 animal health sales by region, 2004 1
1
15 16 17 18 21 22 26 28 36 37 38 39 40 48 48 60 60 61 62 63 70 71 74 74 76 78 80 82 86 86 88 98 99 101 108 108 118 128 128 129 130 140 140
Table 2.1 Table 2.2 Table Table Table Table Table 3.1 3.2 3.3 3.4 3.5
Table 4.1 Table 4.2 Table Table Table Table Table Table Table Table Table Table Table Table Table 5.1 5.2 5.3 5.4 5.5 5.6 5.7 6.1 6.2 6.3 6.4 6.5 6.6
BASFs sales by operating segment, 2004 BASFs animal nutrition sales, 2000-2004 Bayers Bayers Bayers Bayers Bayers Bayers Bayers
sales by operating segment, 2004 animal health sales, 2000-2004 animal health operating income and margins, 2000-20041 first half sales, 2004-2005 animal health sales by region, 2004 animal health R&D spending, 2001-2004 late-stage animal health product development pipeline 1
Boehringer Ingelheims sales by business area, 2004 BIVs sales, 2000-2004 BIVs sales by region, 2004 BIVs sales by product segment, 2004 Leading contributors to BIVs vaccine sales, 2004 BIVs spending on R&D, 2000-2004 Cevas animal health and nutrition sales, 2000-2004 Cevas operating profit and margins, 2000-2004 Cevas animal health sales by region and activity, 2004 Dainippons sales by division, fiscal 2005 1 Dainippons animal health sales, fiscal 2001-2005 1 Dainippons animal health sales by product sector, fiscal 2005 1 Degussas sales by division, 2004 Degussas feed additive sales, 2000-2004 DSMs sales by operating segment, 2004 Elancos Elancos Elancos Elancos animal health sales, 2000-2004 operating income and margin, 2000-2004 interim 2005 sales performance US/international sales split, 2000-2004
Table 7.1 Table 7.2 Table 7.3 Table 8.1 Table 8.2 Table 8.3 Table 9.1 Table 9.2 Table 10.1 Table Table Table Table 11.1 11.2 11.3 11.4
Table 12.1 Table 12.2
Wyeths sales by reportable segment, 2004 Fort Dodges animal health sales, 2000-2004
List of Tables
Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table
12.3 12.4 12.5 12.6 13.1 13.2 13.3 13.4 13.5 13.6 14.1 14.2 14.3 14.4 14.5 15.1 15.2 15.3 15.4 15.5 15.6 15.7 16.1 16.2 16.3 16.4 16.5 16.6 16.7 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 18.1 18.2 18.3 18.4 19.1 19.2 19.3 19.4 19.5
Fort Fort Fort Fort
Dodges Dodges Dodges Dodges
operating income and margins, 2001-2004 first half sales, 2004-2005 US/international sales split, 2000-2004 sales by species, 2004
140 142 143 145 156 158 158 160 161 164 170 170 172 173 176 186 186 188 191 191 192 195 204 205 205 207 210 212 217 222 222 223 224 225 228 228 231 242 243 244 246 252 253 253 254 255 268 269
Idexxs Idexxs Idexxs Idexxs Idexxs Idexxs
sales, earnings and operating margin, 2000-2004 first half sales, 2004 and 2005 sales by region, 2004 sales by operating segment, 2003 and 2004 companion animal group revenues by business sector, 2004 spending on R&D, 2000-2004
Akzo Nobels sales by operating segment, 2004 Intervets animal health sales, 2000-2004 Intervets first-half sales, 2004-2005 Intervets sales by region, 2004 Intervets sales by product sector, 2004 Merials sales by business area, 2004 Merials animal health sales, 2000-2004 Merials first half animal health sales, 2004-2005 Merials animal health sales by product category, 2004 Merials avermectin revenues, 2000-2004 Leading formulations in the Merial ivermectin range Fipronil sales, 2000-2004 Novartiss sales by business sector, 2004 Novartiss animal health sales, 2000-2004 1 Novartiss animal health operating income and margin, 2000-2004 Novartiss animal health sales by region, 2003 and 2004 Novartiss sales by major product segment, 2004 Key products in the Novartis antiparasitic range Novartiss animal health R&D spending, 2000-2004 Pfizers Pfizers Pfizers Pfizers Pfizers Pfizers Pfizers Pfizers PAHCs PAHCs PAHCs PAHCs sales by business area, 2004 animal health sales, 2000-2004 1 animal health operating profit and margins, 2001-2004 first half animal health sales, 2004 and 2005 US/international sales split, 2004 animal health sales by species segment, 2002-2004 Animal Health sales by product segment, 2004 antiparasitic revenues by major brand sales by operating segment, fiscal 2004 1 animal health and nutrition sales, fiscal 2000-2004 1 animal health and nutrition sales, 2004 and 2005 animal health and nutrition sales by product category, 2004
Schering-Ploughs sales by business sector, 2004 SPAHs sales, 2000-2004 SPAHs earnings and divisional margins, 2001-2004 Schering-Ploughs animal health sales, first half 2004-2005 SPAHs US/international sales split, 2003-2004 Vtoquinols sales, 2000-2004 Vtoquinols sales by region, 2004
Table 20.1 Table 20.2
10
List of Tables
Table 20.3 Table 20.4 Table Table Table Table 21.1 21.2 21.3 21.4
Vtoquinols key acquisitions Vtoquinols sales by product category, 2004 Virbacs Virbacs Virbacs Virbacs animal health sales, 2000-2004 operating profit and operating margin, 2000-2004 first-half sales, 2004 and 2005 sales by region, 2004
270 272 278 279 280 281
11
List of Tables
12
Abbreviations
ABBREVIATIONS
ACE APHIS BIV CEO CIS CNS COX DAP EAP EPM FeLV FIV FMD HRV IHN IPI LOX MFA NSAID PAHC PAHI PPE PRRS R&D SBAH SEC Angiotensin-converting enzyme Animal and Plant Health Inspection Service (section of US Department of Agriculture) Boehringer Ingelheim Vetmedica Chief executive officer Commonwealth of Independent States Central nervous system Cyclo-oxygenase Dog appeasing pheromone Equine appeasing pheromone Equine protozoal myeloencephalitis Feline leukaemia virus Feline immunodeficiency virus Foot and mouth disease Hoechst Roussel Vet Infectious haematopoietic necrosis Idexx Pharmaceuticals Inc Lipo-oxygenase Medicated feed additive Non-steroidal anti-inflammatory drug Phibro Animal Health Corp Phibro Animal Health Inc Porcine proliferative enteropathy Porcine reproductive and respiratory syndrome Research and development SmithKlineBeecham Animal Health Securities and Exchange Commission (US)
13
Abbreviations
VML WNV
Vet Med Lab West Nile virus
14
Chapter 1: Introduction
CHAPTER 1 INTRODUCTION
1.1 The world market for animal health and nutrition products
Global sales of animal health and nutrition products exceeded $20 billion for the first time in 2004, as currency factors continued to inflate the dollar value of the sector, and as growth rates in major markets such as the US and Brazil exceeded those witnessed in recent years. Total market value was estimated to have reached $20,255 million up by 6.5% on year-earlier figures. 1.1.1 Market shares by region The continued slide in the value of the US dollar meant that currency factors continued to exert a significant influence on market shares by region. The US currency declined in value against the Euro by just over 9% and against the Yen by almost 7% during the course of 2004, inflating the dollar value of sales in Europe, Japan and many other international markets. Despite the impact of currency factors on regional shares of the global sales total, North America retained its position as the worlds biggest market for animal health and nutrition products, generating sales of almost $7.5 billion. Sales in the region rose at high single-digit rates, driven primarily by growth in the US, where demand remained strong across most species segments.
Table 1.1: Geography of the world market, 2004
Region Sales ($ million) 7,490 1,825 5,265 3,445 2,230 20,255 % of total 37 9 26 17 11 100
North America South America Western Europe Asia/Pacific Rest of the world Total
Source: Animal Pharm Reports.
Growth was harder to come by in most European markets, where conditions generally remained difficult in the livestock sector, and where companion animal market growth has been less marked in recent years. In common with other market regions, nutritional feed additive sales values in Europe were affected by pricing pressures in that sector, while growth rates in the remainder of the market were distinctly limited. Sales in France were up by little more than 1% on year-earlier figures, while market values in Germany, Spain and the UK rose by only 3-4%. Elsewhere, a return to strong growth in Latin Americas major markets was one of the few highlights in an otherwise relatively gloomy picture. Sales in Brazil rose at double-digit levels, driven by a combination of that countrys economic recovery and further rapid expansion of output in its poultry and livestock production sectors. Strong growth was also reported in Argentina, though sales there remain well below peak levels recorded before the economic crash witnessed earlier this decade. T&F Informa UK Ltd, 2005
15
Markets in south-east Asia, which have been a source of strong growth in recent years, suffered as a result of disease-related problems, with avian influenza disrupting sales across the region. The Japanese market also remained relatively flat though as in Europe, dollar-based sales values were higher as a result of exchange rate fluctuations. 1.1.2 Market shares by product category Pharmaceuticals are the dominant product sector in the animal health and nutrition market, generating global sales of almost $11 billion (54% of the total) in 2004. This segment of the market is dominated by antiparasitics and anti-infectives, which contributed approximately $4.7 billion and $2.6 billion, respectively, to total pharmaceutical revenues. The market for companion animal speciality products is a sector of growing importance, however, and was a major contributor to sales growth in 2004, which was estimated at almost 9% in dollar terms. Increases in the dollar value of the biologicals market were even sharper, at around 12%, taking sales in this sector to $3.2 billion, or 16% of the animal health and nutrition total. Dollar-based sales of medicated feed additives (MFAs) were also stronger than in recent years, thanks largely to significant volume increases in markets such as the US and Brazil. The market for nutritional feed additives declined in value by more than 3% to just over $4.1 billion, however, as prices of vitamins and amino acids came under strong pressure.
Table 1.2: World market structure by major product sector, 2004
Sector Sales ($ million) 10,950 3,205 1,950 4,150 20,255 % of total 54 16 10 20 100
Pharmaceuticals Biologicals Medicinal feed additives Nutritional feed additives Total

1.1.3
Market shares by species Products for use in food animal species dominate the market, with health and nutrition inputs for use in cattle, pigs and poultry alone responsible for almost two-thirds of global sales. The cattle segment is the biggest single food animal market, generating global revenues of well over $5 billion. While food animal products still dominate in terms of market share, it is the companion animal products sector that has been the main source of growth in the industry over the past 10 years. Sales in this segment continue to rise at rates in excess of the market average, thanks to a steady stream of new product launches, increased levels of spending by animal owners in developed markets and the development of more significant demand for pet health products in developing economies.
16
Animal Pharms Top 20, 2005 Edition Table 1.3: World market structure by species, 2004
Species Sales ($ million) 5,265 4,050 3,645 5,470 1,825 20,255 % of total
Cattle Pigs Poultry Small animals Others Total
26 20 18 27 9 100
1.1.4
The animal health and nutrition products industry The structure of the animal health and nutrition products industry has altered dramatically over the past 10 years. The list of companies that have disposed of interests in the sector since the middle of the 1990s continues to grow, while several other leading animal health and nutrition businesses have been restructured as a result of merger or acquisition deals most of which have been driven by parent-company strategies. Since the beginning of 1994, SmithKlineBeecham, Solvay, Mallinckrodt, Aventis, Sanofi and Hoffmann-La Roche have all divested animal health or nutrition divisions that were previously ranked among the worlds 20 biggest businesses in the sector, while Merck & Co and Rhne-Poulenc spun off their respective animal health interests in 1997 to create the Merial joint venture. Other leading animal health divisions, including those previously held by American Cyanamid, Syntex and Pharmacia, have changed hands as a result of corporate-level acquisitions, while those run by Ciba and Sandoz were amalgamated when the two Swiss companies merged at corporate level. More recently, this pattern of merger and acquisition activity has been repeated in Japan, where a decade of tough market conditions has forced national pharmaceutical majors to pursue fundamental restructuring programmes, offloading interests in subsidiary sectors such as animal health. Takeda, Fujisawa, Eisai, Shionogi and Daiichi are among the growing number of Japanese pharmaceutical majors to have divested animal health interests, and further disposals are expected. Within the animal health and nutrition industry, interests in particular product segments have also changed hands as a result of strategic decisions by certain companies. Bayer, for example, has divested the majority of its interests in the veterinary vaccines market, while Pfizer has offloaded its MFAs business. Prospects for the MFAs market are particularly poor, with all remaining antibiotic growth promoters due to be withdrawn from sale in the EU at the end of 2005 and debate surrounding their long-term use likely to have an increasingly negative impact on revenues in other market regions. While interests in some market sectors have been sold by a growing number of animal health and nutrition companies, most have also added to their businesses through strategic acquisitions designed to strengthen their position in particular geographical markets or product segments.
17
Animal Pharms Top 20, 2005 Edition Table 1.4: Merger and acquisition activity in the animal health sector
Year 1994 1995
Details American Home Products (now Wyeth) acquires American Cyanamid American Home Products sells Cyanamids feed additive business to Roche and purchases Syntex Animal Health from the Swiss company in a related deal Pfizer acquires SmithKlineBeecham Animal Health (SBAH) Corporate-level merger between Pharmacia and Upjohn leads to the creation of Pharmacia & Upjohn Animal Health Rhne Mrieux acquires Sanofis animal health activities in the Americas and Asia Corporate level merger between Ciba and Sandoz leads to the creation of Novartis Animal Health American Home Products acquires Solvay Animal Health Grampian Pharmaceutical divests animal health interests in a management buy-out Schering-Plough acquires Mallinckrodt Veterinary Merck & Co and Rhne-Poulenc merge their respective interests in animal health and poultry genetics, creating Merial Animal Health Rhne-Poulenc and Hoechst announce decision to merge, creating life-science specialist Aventis. Stake in Merial and the Rhne-Poulenc animal nutrition business are retained but Hoechst sells its animal health division. BASF acquires Daeseng (South Korea) lysine business Intervets parent, Akzo-Nobel, agrees to acquire Hoechst Roussel Vet (HRV) BASF acquires Takedas feed additives business French investment bank Paribas acquires Sanofi Animal Health & Nutrition (now trading as Ceva Animal Health) Virbac acquires Agri-Nutrition Group (US) Novartis acquires Vericore (UK) as part of a move into the veterinary vaccines market Vtoquinol acquires J Webster Laboratories (Canada) from Merial Pharmacia & Upjohn and Monsanto merge to create Pharmacia Corp Alpharma acquires the Roche medicinal feed additives business BASF agrees the takeover of Takedas vitamin business Schering-Plough acquires Takeda Chemical Industries Japanese animal health business Novartis adds Cobequid and the animal biologicals business of Biostar to its growing veterinary vaccines portfolio Pfizer sells its medicinal feed additives business to Philipp Brothers Chemicals (now Phibro Animal Health) Ceva completes the acquisition of Centralvet-Vetem (Italy) Schering-Plough acquires Fujisawas animal health business Vtoquinol acquires the Chassot Group (Switzerland) from Asklia Holdings Boehringer Ingelheim Vetmedica (BIV) takes a majority stake in an animal health joint venture with Shionogi of Japan Dainippon Pharmaceutical acquires Tanabe Seiyakus animal health business CVC Capital Partners completes the acquisition of Aventis Animal Nutrition Ceva acquires majority stakes in Interchem (Tunisia) and Laval (Algeria) Vtoquinol acquires the US companion animal business of IGI Novartis acquires the US veterinary vaccine businesses of Grand Labs and ImmTech Biologics Schering-Plough Animal Health acquires the privately owned UK company, Aquaculture Vaccines Ltd
1996 1997
1998
1999
2000
2001 2002
. . . continued
18
Chapter 1: Introduction Table: 1.4 (continued)

Year 2003 Details
2004
2005
Pfizer completes its $60 billion acquisition of Pharmacia Corp Meiji Seika acquires the animal health business of fellow Japanese company Eisai Degussa buys out Cargills 50% holding in the US-based Midwest Lysine joint venture Paribas Affaires Industrielles sells its majority stake in Ceva Animal Health to Industri Kapital Virbac acquires the privately held US veterinary pharmaceutical company, Delmarva Labs Virbac purchases the veterinary pharmaceutical business of King Pharmaceuticals (US) DSM completes the acquisition of Hoffman-La Roches vitamins and fine chemicals division, including the Roche animal nutrition business DSM sells its vitamin B3 business to the US company, Reilly Industries Pfizer completes the acquisition of CSL Animal Health (Australia) Meiji Seika acquires Daiichi Pharmaceuticals veterinary and livestock feed additive interests Kyoritsu Seiyaku acquires the Mitaka Seiyaku veterinary medicines and feed additives joint venture from Asahi Kasei Pharma and Intervet Idexx acquires the German-based veterinary reference laboratory, Vet Med Lab (VML), in a $31 million cash deal Boehringer Ingelheim buys out Shionogis 33% stake in the Japanese animal health joint venture established by the two companies in 2002 Idexx acquires the Swiss veterinary diagnostics specialist, Dr Bommeli, from Intervet Ceva acquires Dogu Ilac Veterinar, the leading animal health company in Turkey, from Sanofi-Aventis Private equity firm Montagu acquires Leo Animal Health from Leo Pharma of Denmark for approximately Euro 100 million Phoenix Scientific, the biggest veterinary generics manufacturer in the US, is acquired by Ivax Corp which in turn is acquired by Teva Pharmaceuticals of Israel The Butler Company and Burns Veterinary Supply merge to create the biggest veterinary distributor in the US Ceva acquires US veterinary vaccine specialist Biomune from Zeon Corp Intervet sells its range of MFAs to the Bulgarian company, Biovet Schering-Plough buys out Takedas 40% stake in the Japanese animal health joint venture established by the two companies in 2000 Merial announces the sale of poultry breeding interests Hubbard and British United Turkeys in two separate deals Intervet acquires New Zealand veterinary vaccine specialist AgVax from state-owned research institute AgResearch
1.1.5
Leading companies in the animal health and nutrition sector The net result of restructuring, both at parent company level and within the animal health and nutrition industry, has been a trend towards the consolidation of market shares in the hands of fewer, bigger players. Aggregate sales of the five biggest companies in 2004 were equivalent to over one-third of total market value; the 10 market leaders boasted an aggregate share of 55%; and total sales of the 20 companies profiled in this report at more than $15 billion were equivalent to 75% of global market value.
1.1.6
Market leaders in 2004 Pfizer cemented its position at the head of the industry sales rankings in 2004, posting a 22% gain that took its global revenues to within a whisker of the $2 billion mark. New product launches and strong performances by
19
several of the companys more established brands contributed to the size of that increase. The residual impact of the Pharmacia acquisition, the addition of revenues from its more recent purchase, CSL, and the continued weakness of the US dollar also had a positive impact on results, however. Currency factors were a significant contributor to gains posted by all US companies during the year. Most also benefited from strong demand in their home market, however, and Merial, Elanco and Schering-Plough Animal Health all returning increases of 9-10%. The Swiss company, Novartis, which began reporting its financial results in dollars during 2003, tabled gains of a similar magnitude, while diagnostics specialist Idexx reported a 15% increase in sales thanks to a combination of in-house growth and firsttime revenues from recently acquired business. Fort Dodge was also set to book a double-digit increase before the withdrawal of its ProHeart 6 canine heartworm treatment took the shine off results in the last four months of the year. Even Alpharma and Phibro, which operate in the more difficult MFAs segment of the market, were able to report sales increases of around 6% during 2004. Revenues generated by a distributor business that was on Alpharmas books for the first three months of the year were a factor behind the upturn there, however, and if currency factors are discounted from calculations, underlying sales of the companys core MFA lines were flat. While those reporting results in dollars saw revenues inflated significantly by the weakening dollar, the reverse was true for European companies, which saw local currency gains achieved in the US and other international markets eroded on conversion to Euros. Thus Intervet, which registered local currency gains of 4%, reported an increase of little more than 1%, while the 4.5% rise in local currency sales achieved by Bayer was wiped out completely by exchange rate factors. Virbac also struggled to post positive growth, while a flat year for Vtoquinol meant that sales as reported by the French independent were down on 2003 figures by more than 3%. Boehringer Ingelheim and Ceva both posted bigger gains than most of their European-based counterparts. Boehringer reported local currency growth at a level of 10%, thanks to strong performances by its Metacam (meloxicam) non-steroidal anti-inflammatory drug (NSAID), swine vaccines and companion animal speciality products. Exchange rate factors knocked over 3% off sales as reported, but the company was still able to book a gain of more than 6%. Ceva, which is less exposed than most other European companies to the influence of exchange rates, posted a 7.4% increase in sales, driven primarily by strong in-house growth, but boosted moderately by the impact of recent acquisitions. Dainippon, which is the sole Japanese representative in the rankings, has outgrown its sluggish home market consistently in recent years, but reported a near-5% decline in sales for the year to 31 March 2005. Revenues had been up on year-earlier figures at the half-year stage, but were affected in the final quarter by the termination of product licensing agreements with Merial. While currency factors meant that most European animal health companies reported either flat sales or modest increases during 2004, the continued weakness of the dollar compounded the impact of falling prices in the nutritional feed additives sector. As a result, double-digit reverses were the T&F Informa UK Ltd, 2005
20
order of the day for European-based nutritional businesses, with BASF, Degussa and Adisseo all reporting revenue totals 10% or more below yearearlier figures. Sales generated by DSMs animal nutrition business also declined, though no comparative total was available for 2003 following the transfer of the unit to the Dutch company from Hoffmann-La Roche.
Table 1.5: Top 20 rankings, 2004
Rank Company Local sales (million) $1,953 $1,836 Euro 1,024 Euro 860 Euro 786 Euro 725 3 $837 $799 $770 $756 Euro 530 Euro 456 $549 Euro 359 Euro 335 $315 Euro 231 $265 Yen 27,284 Euro 183 % change +22.2 +9.0 +1.4 N/a 2 -0.5 -10.0 +5.5 +9.9 +10.5 +10.9 -13.1 -14.0 +15.4 +1.1 +6.4 +6.4 +7.4 +5.9 -4.8 -3.2 US$ sales (million) 1 1,953 1,836 1,272 1,068 976 901 837 799 770 756 658 566 549 446 416 315 287 265 252 227
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Pfizer Merial Intervet DSM Bayer BASF Fort Dodge Elanco Schering-Plough Novartis Degussa Adisseo Idexx Virbac Boehringer Ingelheim Alpharma Ceva Phibro 4 Dainippon 5 Vtoquinol
Notes: 1 US dollar conversions at annual average rates for 2004; 2 Comparative figure not available following the transfer of the business from Hoffmann-La Roche during 2003; 3 Estimated figure BASF did not release a sales figure for its animal nutrition business in 2004; 4 Year to 30 June 2004; 5 Year to 31 March 2005. Source: Company information and Animal Pharm Reports.
1.1.7
Market leaders in 2005 The impact of exchange rates on results through the first half of 2005 was less marked than in recent years (the dollar was 4.5% weaker against the Euro than in the corresponding year-earlier period, compared with a slide of just over 10% in the first half of 2004). Nevertheless, currency factors continued to erode sales reported by European companies, whilst boosting gains posted by US multinationals. European-based players operating in the nutritional feed additives sector faced additional problems, as the erosion of some vitamin prices continued and amino acid prices plunged. The degree of volatility witnessed in that segment of the market complicates forecasting, but all four of the European nutritional additive manufacturers included in the rankings are expected to post a significant decline in revenues during 2005. That trend is in marked contrast to US-based companies operating in the veterinary pharmaceutical and biological market sectors, where double-digit increases will be the norm once again. At the head of the industry rankings, Pfizer is set to post the sharpest increase. First-half sales reported by the
21
company were up by 19%, with sizeable gains reported for recent launches and established brands alike. With its new antibiotic, Draxxin (tulathromycin), set to drive domestic sales in the second half, Pfizer is expected to maintain that momentum, with a full-year increase of 19% forecast to drive its sales up past the $2.3 billion mark. Merial is also expected to post revenues in excess of $2 billion for the first time. The companys Frontline (fipronil) pet ectoparasiticide continues to spearhead growth, but sizeable gains were also reported for the Merial biologicals range and, in a reversal of recent trends, for its endectocide products. The result was a first half gain of more than 15%, which should almost be matched in the second half of the year, taking 2005 sales to just under $2.1 billion.
Table 1.6: Top 20 ranking forecasts, 2005
Rank Company Local sales (million) $2,325 $2,095 Euro 1,095 Euro 835 Euro 825 $895 $895 $860 $855 Euro 630 Euro 493 $620 Euro 420 Euro 373 Euro 355 $334 Euro 256 $273 Euro 190 Yen 25,100 % change +19.0 +14.0 +7.0 +6.5 -4.0 +7.0 +16.0 +14.0 +7.0 -13.0 -7.0 +13.0 -8.0 +4.0 +6.0 +6.0 +11.0 +3.0 +4.0 -8.0 US$ sales (million) 2,325 2,095 1,387 1,058 1,045 895 895 860 855 798 625 620 532 473 450 334 324 273 241 234
1 2 3 4 5 6= 6= 8 9 10 11 12 13 14 15 16 17 18 19 20
Pfizer Merial Intervet Bayer DSM Fort Dodge Schering-Plough Novartis Elanco BASF Degussa Idexx Adisseo Virbac Boehringer Ingelheim Alpharma Ceva Phibro 2 Vtoquinol Dainippon 3
Notes: 1 US dollar conversions at average rates for the first eight months of 2005 (calculated using Oanda historical converter); 2 Year to 30 June 2005; 3 Year to 31 March 2006. Source: Animal Pharm Reports.
Schering-Plough Animal Health and Idexx are also forecast to report doubledigit revenue increases, while dollar-based sales generated by Novartis will also rise comfortably by in excess of 10%. Gains forecast for Fort Dodge and Elanco are more modest, but Alpharma is poised to enjoy its strongest year for some time. Headline sales generated by the company are forecast to rise by a relatively modest 6%, but revenues generated by its core MFAs business will increase by around 16%. Interim figures reported by European animal health companies have generally revealed growth at rates of 4-8%. With exchange rates still having some impact on sales as reported, those results are indicative of generally healthy underlying growth. Intervet, Bayer and Boehringer Ingelheim are all expected to report full-year gains of around 7%. Increases at Virbac and Vtoquinol will be more limited, but Ceva is forecast to deliver double-digit T&F Informa UK Ltd, 2005
22
growth, thanks in part to the inclusion of revenues from recently acquired businesses. For Dainippon, the year to March 2006 promises to be another difficult one, during which the termination of its distribution agreement with Merial will be reflected fully for the first time. The result will be a second consecutive fall in revenues that will see it overhauled by Vtoquinol in the industry sales rankings. Elsewhere, Bayer, Schering-Plough and Novartis will all climb up the rankings as nutritional feed additive manufacturers slip down the sales league. 1.1.8 Currencies and exchange rates The slide in the value of the US dollar has had a major impact on results posted by multinational animal health and nutrition companies since 2002, and on the value of a dollar-based market. Exchange rate influences moderated in the first half of 2005, but continued to depress sales reported by euro-zone companies and inflate international revenues booked by USbased manufacturers. Sales figures quoted for 2004 in this report have been converted from reporting currencies to US dollars at annual average rates of exchange for calendar 2004. Exchange rates used for such conversions are contained in Table 1.7.
Table 1.7: Annual average exchange rates for 2004

Country Currency Units per US$1 1.35985 2.92629 0.80510 108.17451 0.54604
Australia Brazil EU Japan UK
Australian dollar Real Euro Yen Pound sterling
Source: OANDA Historical Converter.
Sales forecasts for 2005 have been converted into US dollars at average rates prevailing through the first eight months of the year. Conversions are for comparative purposes only, and annual average exchange rates may differ significantly from the rates used here.
Table 1.8: Currency exchange rates used in dollar forecasts for 2005
Country (currency) Euro-zone countries (Euro) Japan (Yen) Local currency units per $1.00 0.78945 107.33774
Source: OANDA Historical Converter average of daily rates in the period from 1 January to 31 August 2005.
The Euro was adopted as the official currency of 12 EU member states in January 2002. National currencies of 11 euro-zone countries were merged at fixed exchange rates on 1 January 1999, while Greece adopted the new T&F Informa UK Ltd, 2005
23
currency on 1 January 2001. Sales figures previously reported in national currencies by companies based in these countries have been converted to euros at the relevant fixed rate of exchange. Historical figures quoted in national currencies should also be converted at official fixed rates of exchange, which are listed in Table 1.9.
Table 1.9: Fixed euro conversion rates

Country Currency Conversion rate (local currency per Euro 1) 13.7603 40.3399 5.94573 6.55957 1.95583 340.750 0.787564 1936.27 40.3399 2.20371 200.482 166.386
Austria Belgium Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain
Schilling Franc Markka Franc Mark Drachma Punt Lira Franc Guilder Escudo Peseta
Source: European Commission.
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Chapter 2: Adisseo
CHAPTER 2 ADISSEO
Adisseo 42 Avenue Aristide Briand BP 100 92164 Anthony France Tel: +33 1 4674 7000 Fax: +33 1 4096 9696 www.adisseo.com Key personnel Patrick Verschelde Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events November 2004 Implements 15% price hike for vitamin A and E products to offset rising raw material, energy and transportation costs. Announces European launch of MetaSmart methionine formulation for use in dairy cows. Announces launch of first liquid enzyme product for administration to poultry via drinking water. Euro 456 million ($566 million) 12th Vitamins, methionine Europe, Asia/Pacific, Latin America, North America Chief executive officer (CEO), Adisseo
April 2005 June 2005
2.1
Company background
Adisseo is a French-based company focused on the manufacture and marketing of nutritional feed additives. The business, which is the former animal nutrition division of the French healthcare major, Aventis (now Sanofi-Aventis), was sold to the private equity investment group, CVC Capital Partners Ltd, in the final quarter of 2001. It was re-launched under the Adisseo name in April 2002. CVC initially retained key senior managers, including CEO Jrme Gervais and his former deputy Grard Deman. Gervais stepped down in November 2002, however, and was replaced by Patrick Verschelde previously chair and CEO of the water solutions group, Ondeo Services. In the wake of the acquisition, CVC confirmed its commitment to a five-year, Euro 230 million investment programme designed to ensure the future competitiveness of the Adisseo business. Six months after the deal was completed, Adisseo announced plans for the construction of a new unit for the production of the methionine intermediate, MTPA, at its Les RochesRoussillon manufacturing complex in France. The company said the new
25
Chapter 2: Adisseo
plant would increase its potential methionine output by 50,000 tonnes a year.
2.2
Animal nutrition sales

Adisseo posted sales gains of around 5% in both 2000 and 2001, but revenues reported by the business have declined consistently since then initially as a result of exchange rate factors, but more recently due to competitive pressures within the animal nutrition sector, which have seen prices for some key products fall sharply. Expressed in euros, global sales generated by Adisseo totalled Euro 456 million in 2004 down by 14% on year-earlier figures, and Euro 150 million below the companys 2001 revenue peak.
Table 2.1: Adisseos animal nutrition sales, 2000-2004
Year Sales (Euro million) 577 607 581 530 456 % change
2000 2001 2002 2003 2004
+4.7 +5.2 -4.3 -8.8 -14.0
Source: Adisseo and CVC Capital Partners.
2.2.1
2003 performance The dollars slide against the euro, which had begun in 2002, continued through 2003, prompting Adisseo to raise prices for some of its leading products, including the Rhodimet methionine brands and the Microvit vitamins line. Increases were not sufficient to offset the negative impact of currency fluctuations and limited demand for parts of the vitamin range in some key markets, however. As a result, the company posted a near-9% decline in sales, which totalled Euro 530 million. Expressed in US dollars, sales were worth $599 million (some 9% higher than year-earlier figures). Sales as reported were similar to year-earlier figures in the Asia/Pacific region, but revenues generated in Europe, the Middle East, Africa and the Commonwealth of Independent States (CIS) were down by almost 8%. Expressed in euros, revenues generated in North America were 24% below 2002 levels, though with the annual average value of the dollar against the euro down by 16%, currency factors were responsible for the bulk of that reverse. Adisseos former parent company, Aventis, agreed during the year to pay $178 million in settlement of actions brought by 60 companies in the US in relation to a price fixing scandal in the methionine market that was uncovered in the late 1990s. In its former guise as Rhne-Poulenc Animal Nutrition, Adisseo was one of several manufacturers found to have been involved in cartels that fixed the price of certain vitamin and amino acid products in a period between the late 1980s and early 1990s. The company avoided financial penalties imposed by regulatory authorities in Europe and the US in return for co-operating fully with investigations into the affair.
26
Chapter 2: Adisseo
2.2.2
2004 performance The US dollar declined in value against the euro by a further 9% during 2004, depressing the financial performance of companies like Adisseo that report results in euros. Conditions in the animal nutrition market were also more difficult, however, with sharp increases in the price of oil driving up raw material costs for manufacturers at a time when prices for some of their finished products were coming under severe pressure. Major disease outbreaks and disease-related trade bans also affected feed consumption patterns in key regions such as south-east Asia, which is a significant contributor to Adisseos global revenues. The company continued to increase product prices in dollar-based markets where possible, in an effort to moderate the impact of currency fluctuations on its business. Nevertheless, at Euro 456 million, sales as reported in 2004 were 14% below year-earlier figures. In addition, while sales expressed in dollars had increased during 2003, they were down by almost 6% in 2004, at $566 million.
2.2.3
Interim 2005 performance Adisseo does not publish interim financial results, but with global prices for methionine and some key vitamin products remaining under pressure the company will have seen its global revenues dip further during the first half of 2005. Falling prices and rising costs are also affecting the profitability of manufacturers in the nutritional feed additives market, and Adisseo announced a latest round of price increases for its methionine products in July 2005, citing sharp rises in raw material, energy and transport costs.
2.3
Geography of the business

The Adisseo business is split into four operating regions run from France (Europe, Middle East, Africa and CIS), the US (North America), Brazil (Latin America) and Singapore (Asia/Pacific). Operations in the CIS were previously independent, but were integrated into an expanded European business following the collapse of the Russian economy in the late 1990s. The European business has traditionally been the main contributor to global revenues, and that position has been reinforced over the past three years by exchange-rate trends, which have eroded international sales as reported notably in the US and other dollar-denominated markets. Markets in the Americas still generate around one-third of Adisseos global revenues, with the south of the region responsible for the majority of that figure. About 20% of the companys sales were generated in Asia/Pacific markets during 2004.
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Chapter 2: Adisseo
Animal Pharms Top 20, 2005 Edition Table 2.2: Adisseos sales by operating region, 2004
Region Sales (Euro million) 210 68 87 91 456 % of total
Europe, Middle East, Africa and CIS North America Asia/Pacific Latin America Total
46 15 19 20 100
2.3.1
Europe, Middle East, Africa and CIS While activities in the Middle East, Africa and the CIS are all included in Adisseos European operations, markets in Europe are responsible for the vast majority of sales in this extended region, which are believed to have totalled approximately Euro 210 million in 2004. Europe is a major focus of production for Adisseos major brands, with largescale vitamin and pre-mix manufacturing plants operated in France and Italy, and two of the companys three proprietary methionine production facilities also located in Europe (at Roches-Roussillon in France and Burgos in Spain). A third methionine manufacturing plant is operated under licence in Russia. Adisseo has invested heavily in upgrading and expanding its European methionine manufacturing facilities over the past 10 years. A Euro 25 million project at the plant in Burgos, Spain, which was completed in 1999, doubled that sites liquid methionine production capacity, while a new 77,000 tonne production unit for the methionine intermediate, MTPA, came on-stream at the Roches-Roussillon site in France towards the end of 2003. In volume terms, demand for vitamins and amino acids has continued to rise in Europe. Prices in the region have come under pressure in recent years, however, largely as a result of increased market penetration by low-cost manufacturers exporting to European markets from Asia. This trend is expected to continue, and will represent a significant challenge for Adisseo and other established players in the nutritional additives sector. New products such as the MetaSmart methionine formulation for use in dairy cows, which was launched in the first half of 2005, will help to drive up Adisseos sales in the region, however.
2.3.2
North America North America is the smallest regional contributor to Adisseos global business, and the company has struggled to maintain its share of the market there recently in the face of stiff competition from BASF, Degussa, DSM and Novus International, all of which post significantly higher revenues in the US. Currency factors have also had a major impact on euro-based sales reported by the company in the US since 2002. As reported, North American sales fell by more than 20% in 2003, and a further decline in 2004 is believed to have seen the regional total slip back below Euro 70 million.
28
Chapter 2: Adisseo
Prior to the formation of Aventis and the subsequent sale of the companys animal nutrition business to CVC, North America had been earmarked as a major growth target, and plans were announced for the construction of a major new facility for the production of liquid methionine in the US. The project was shelved in the face of a downturn in prices for the amino acid towards the end of the 1990s, however. Adisseo does possess both vitamin and methionine manufacturing capacity in the US, but will struggle to grow its business there unless it is willing to invest further in the expansion of capacity in both of those sectors. Such a move appears unlikely in the current operating climate. 2.3.3 Asia/Pacific Operating conditions in a number of Asian markets deteriorated in 2004 following widespread outbreaks of avian influenza across the region. The resulting disruption to markets for feed inputs is believed to have seen Adisseos Asia/Pacific revenue total fall below Euro 100 million, and the regions share of the companys global sales is now approximately 20%. Recovery in markets affected by avian influenza is likely to be slow, with further outbreaks reported in some mainland south-east Asian countries recently. Market growth in Japan is also likely to remain subdued, though prospects for the business in Asia over the longer term remain positive, with local production of both pig and poultry meat expected to rise significantly. Intensive and semi-intensive production will account for a growing proportion of output, driving up demand for animal health and nutrition inputs, including both vitamins and methionine, which are Adisseos two main revenue generators. Local and regional manufacturers will represent stiff competition for western animal nutrition specialists, however. Operating profitably in the face of such competition will be a challenge for multinationals, but most have already invested significantly in a bid to build their own manufacturing and distribution networks in the region. Adisseo is no exception, having constructed a high-tech pre-mix manufacturing plant in Singapore and taken a 20% stake in a Chinese methionine production joint venture with local partner Tianjin Bohai Chemical Industry Group. The companys vitamin range is also distributed widely in emerging Asian markets, which are supplied primarily from Adisseos Australian vitamin manufacturing facility. 2.3.4 Latin America Adisseos Latin American business is expected to perform well in the near future, with continued expansion of livestock and poultry production in Brazil driving up demand for nutritional inputs in the region. Economic conditions in both Brazil and Argentina have improved significantly over the past couple of years, and a period of more stable economic growth promises to fuel domestic demand for livestock produce as well as exports, which have rocketed over the past five years. Poultry producers in Latin America have switched increasingly from powdered methionine to liquid formulations in recent years, prompting Adisseo to decommission its former powdered methionine manufacturing facility in Brazil. The region is now serviced entirely by imported products, but the company may eventually decide to invest in local liquid methionine T&F Informa UK Ltd, 2005
29
Chapter 2: Adisseo
production if the Brazilian poultry industry continues to expand at present rates.
2.4
Product portfolio
Vitamins and the methionine amino acid dominate the Adisseo business, accounting together for more than 90% of global sales. The company is also involved in the feed enzymes market, and manufactures the anticoccidial, decoquinate, for Alpharma, which acquired rights to the product in 1997.
2.4.1
Methionine Global demand for the methionine amino acid has risen at around 5-6% in volume terms over the past five years, and major suppliers such as Adisseo have invested in the expansion of their manufacturing capacity, anticipating further steady growth of the market in future. Adisseos Rhodimet brands claim a share of around 30% in the global market for methionine, in which its major competitors include Degussa and Novus. Powdered and liquid formulations of the product are sold, respectively, as Rhodimet NP99 and Rhodimet AT88. It operates four major methionine-manufacturing plants, and has a minority share in a fifth facility located in China. Adisseos own production sites are located in France, Spain and the US, while the company also manufactures methionine under licence at a fourth site in the CIS. Rhodimet AT88 has been the main driver of Adisseos methionine sales in recent years, and the company has reacted to increased demand by investing in the expansion of manufacturing capacity for the liquid formulation. Potential output at its site in Burgos, Spain has been doubled, while capacity at its plant in Institute, West Virginia (US) has also been increased significantly. In France, a new facility for the production of the methionine intermediate, MTPA, has been constructed, and began operating in 2003. Poultry production is the main source of demand for methionine, but use of the amino acid in other species has proven beneficial effects, and markets for the product have been established in the livestock sector. In response, Adisseo has developed and commercialised a coated methionine product that helps to overcome the problem of amino acid breakdown by bacteria in the rumen of cattle and sheep. Sold as Smartamine, it was launched initially for use in dairy cows, with indications for the improvement of protein content in milk. It has also been registered for use in beef cattle and sheep, however. More recently, Adisseo has been granted US and EU approvals for a second protected methionine product for use in dairy cows. Launched in Europe as MetaSmart during the first half of 2005, it is available in both liquid and powder formulations, with claims for the stimulation of milk production, protein and fat synthesis and improved rumen fermentation, which optimises the digestibility of feed. MetaSmart contains the isopropyl ester of the hydroxylated analogue of methionine, also known as HMBi.
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Chapter 2: Adisseo
2.4.2
Vitamins Adisseo is a proprietary manufacturer of vitamins A and E, which are the most widely used vitamins in animal production. Its Microvit-branded line spans a broad range, however, including vitamins D, H, K3 and several products from the vitamin B grouping. The company is the worlds leading producer of vitamin B12, and holds major shares of the markets for vitamins A, E and B2. Volume sales of most major vitamins have risen significantly since the late 1990s, but price competition in the sector has intensified following the break-up of a price-fixing cartel uncovered at the end of that decade and the market entry of low-cost producers from Asia. Revenues reported by Adisseo in the vitamins market have also been affected by currency fluctuations, and the company has implemented a number of price increases for its Microvit range in dollar-denominated markets. A global price increase of 15% for all of its vitamin A and E products was announced in the final quarter of 2004. Recent investment in the vitamins business has been focused on the expansion of manufacturing capacity and improvements in production efficiency, which are essential if Adisseo is to compete effectively in an increasingly price-sensitive market. Vitamin E production at the companys plant in Commentry, France has been increased by 50% since the beginning of this decade, while Adisseo is applying new manufacturing and formulation technologies to the Microvit line. These offer improved stability, better handling characteristics and improved assimilation of pre-mixes in compounded feed. Recent additions to the range include a series of products featuring a special coating that protects active ingredients in the rumen, ensuring high levels of bioavailability in fed cattle. It also offers high levels of stability and easy mixing, ensuring consistent inclusion rates in finished feed. Microvit A Supra 1000, a stable, concentrated form of vitamin A, was among the first coated products to be introduced to the Adisseo range. A combination product containing vitamins A and D3, which is being sold as Microvit AD3 Supra 1000-200, has also been added to the portfolio, and take-up of these two products has seen them emerge as the main source of vitamin A sales by the company. A coated vitamin B9 (folic acid) formulation, Microvit B9 Supra, which was added to the European range in 2004, is expected to have a similar impact on sales in that area of the portfolio. Other recent additions to the Microvit range include a free-flowing formulation of vitamin E sold as Microvit E Promix, and a vitamin H presentation that can be assimilated entirely by target animals (Microvit H Promix). Blended vitamin concentrates have also been added to the range, and are sold under the Microvit Blend label. Adisseo has invested heavily in manufacturing capacity for the Microvit Blend range, with plants already onstream in the US, Brazil and Singapore. Vitamin B2 production is the subject of a 50-50 joint venture with the US company, Archer Daniels Midland, which was established in 1994. Adisseo has extended the Microvit range further through co-marketing agreements with other manufacturers, under which it has gained access to several other B-group vitamins (including 1, 5, 6 and 9), as well as vitamins D3, H and K3.
31
Chapter 2: Adisseo
In-house production of vitamins is undertaken at five facilities, including sites in the US, Asia, Australia and Europe. 2.4.3 Other products In common with a number of its competitors, Adisseo has entered the recently emerged but rapidly expanding market for feed enzymes. Its offerings in this segment, which are sold under the Rovabio label, include both liquid (Rovabio Excel LC) and powdered (Rovabio Excel AP) formulations. Enzyme products still generate a relatively small proportion of Adisseos global revenues, but have provided a welcome source of growth in recent years following launches in new markets. The enzyme range has been expanded recently in Europe, with the commercialisation of a liquid formulation that can be administered to poultry via drinking water. Launched in Europe during the first half of 2005, the product is the first of its kind available to poultry producers in the region. In trials, Rovabio via Drinking Water produced results comparable to those achieved by the application of conventional enzyme formulations in poultry feed. Later in the year, Adisseo received EU approval to market its Rovabio Excel enzyme for use in fattening pigs. In trials with the product it produced improvements of up to 4.5% in average daily weight gain. It also improves feed conversion efficiency and reduces levels of ammonia in manure. Adisseos modest interests in the MFAs market were divested in the second half of the 1990s, when rights to the anticoccidial product, decoquinate, were sold the US company, Alpharma. Under the terms of the 1997 deal, Adisseo agreed to continue manufacturing decoquinate for a 15-year period, but the company is no longer active in the MFA market sector at marketing/distribution level.
2.5
R&D
In common with other nutritional feed additive specialists, Adisseo invests much more heavily in capital spending projects designed to expand and improve production than in product-specific R&D, which is believed to be in the region of Euro 25-30 million a year. Projects designed to improve the characteristics of existing products account for a significant proportion of R&D work. These include the development of improved formulations offering enhanced levels of stability or bioavailability. The companys protected methionine formulations, Smartamine and MetaSmart, and coated vitamin products in the growing Microvit Supra line are the most significant examples of developments in this regard. The development of a new enzyme product that can be administered to poultry via drinking water also represents a major advance for the company. New products and improved formulations are tested under field conditions at Adisseos experimental farm on the companys Commentry (France) site, where they can be trialled in broilers, laying hens, pigs and cattle. Tests on other product types that do not currently feature in the Adisseo range are also conducted at Commentry. These include probiotics and pigments, as well as novel livestock performance enhancers.
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Chapter 2: Adisseo
2.6
Strategy
Under the terms of the acquisition deal agreed by Aventis and CVC Capital Partners, CVC pledged to honour major capital spending commitments that had been planned prior to the sale of the Adisseo business in 2001. A significant proportion of the five-year, Euro 230 million programme, which is focused on upgrading and expanding the companys manufacturing network, is now complete. Further investment will be needed in future if Adisseo is to maintain its existing position in the global market for vitamins and methionine, however. Most of Adisseos competitors in these sectors are either part of multinational chemical companies that possess the financial resources to fund high-level investment programmes, or low-cost manufacturers based in China and other Asian markets, which enjoy a substantial cost-base advantage. Against that background, it is vital that Adisseo works hard to preserve established customer loyalty to its brands. The development of new and improved formulations that have been brought to market in the methionine, vitamin and enzyme sectors during the past 2-3 years will clearly be a great help in this regard. Improving the companys position in the US market is no doubt still high on the agenda of Adisseo senior management. Significant progress is unlikely to be achieved there without a major increase in spending on both manufacturing and marketing, however, and such a move is unlikely in the near future. Funding issues raise broader questions regarding CVCs plans for Adisseo. Ceva Animal Health which, like Adisseo, was acquired by venture capital funds in 1999, changed hands again four years later. Management at CVC gave the impression that they were content to commit themselves to longerterm involvement in the sector, but could not have foreseen the impact that exchange rate fluctuations, disruptions to markets in Asia and pricing issues would have on the Adisseo business. Having committed itself thus far, CVC is unlikely to offload Adisseo in the near future, but retaining the business will soon necessitate further rounds of investment in order to maintain its position in the market. Against that background, opportunities to broaden the scope of the existing business and add value to the company will be grasped readily. The diversification of the Adisseo vitamins business is one such opportunity, and the company has already begun to pursue applications of its major vitamin products in the human nutrition and cosmetics sectors. Competitors such as DSM and BASF are already active in these fields and gaining a competitive foothold may be difficult for Adisseo without recourse to a joint venture or acquisition deal. With prices in the human nutrition sector currently under pressure, committing substantial funds to such a development would be a high-risk proposition.
2.7
Prospects
New products have been added to the Adisseo portfolio in all three areas of its business (methionine, vitamins and enzymes) over the past year. These will help to boost revenues, notably in Europe, but are unlikely to prevent
33
Chapter 2: Adisseo
the company in common with other major players in the nutritional feed additives market posting a further reduction in sales during 2005. Amino acid prices in particular have plunged since the middle of 2004, while pricing pressures are also affecting revenues generated by some key vitamins. With these two product segments responsible for the bulk of Adisseos sales, another reverse for the business appears inevitable. The volatile nature of nutritional additive markets and the absence of published interim results makes full-year forecasting difficult, but the company is tentatively forecast to report a decline of around 8%, pushing 2005 sales down to approximately Euro 420 million. Beyond 2005, the performance of the Adisseo business in revenue terms will remain dependent largely on price trends in global markets for methionine and vitamins. Increases in livestock and poultry production will continue to fuel volume growth of the business at global level, but a reversal of recent price developments will be required if sales posted by the company are to regain levels reported in the early years of this decade. An early end to the disruption currently being encountered in Asias poultry markets would be a big positive in this respect. An acquisition-based entry into related industrial segments could provide the key for a much more positive scenario. It remains to be seen whether CVC regards such a move as a viable proposition, however.
34
Chapter 3: Alpharma
CHAPTER 3 ALPHARMA
Alpharma One Executive Drive PO Box 1399 Fort Lee NJ 07024 US Tel: +1 201 947 7774 www.alpharma.com Key personnel Carol Wrenn Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events July 2004 Divests aquaculture vaccine business to an employee group for approximately $3.9 million. $315 million 16th MFAs US, Europe, Asia and Latin America President, Alpharma Animal Health
3.1
Company background
Alpharma is a US company with interests in the human and animal health sectors. Its human pharmaceutical business is led by generic drug and pharmaceutical active ingredient divisions, while animal health interests are dominated by MFAs. Revenues posted by Alpharma have doubled in the past 10 years, primarily as a result of acquisitions completed in the human health sector. These have increased levels of debt carried by the company, however, and income has been depressed by a combination of acquisition-related expenses, investment in good manufacturing practice compliance initiatives and major restructuring programmes. Asset impairment charges have also been booked following the poor performance and reduced commercial prospects of some business units. These issues have had a significant impact on Alpharmas liquidity, prompting it to focus closely on the generation of higher free cash flows in a bid to reduce debt levels and improve levels of flexibility regarding future investments. As a result of those efforts, net corporate debt levels were reduced from more than $1 billion in 2001 to less than $600 million at the end of 2004. Alpharmas corporate net revenues rose by 3.2% to $1,339 million in 2004, but the company posted an operating loss of $223 million, having booked
35
Chapter 3: Alpharma
pre-tax earnings of $100 million in the previous year. Net loss totalled $315 million, compared with a net income of $14 million in 2003. Losses were the result of one-time charges totalling $280 million, most of which were goodwill and asset impairment write-downs associated with the diminishing commercial prospects of its US generics business. Revenues generated in the animal health sector totalled $315 million in 2004, accounting for 23% of gross sales posted by Alpharma. That figure included contributions from a distribution business and an aquaculture vaccine unit, both of which were divested during the year, and the share of gross corporate revenues generated by remaining interests in the animal health sector was $288 million, or 21%.
Table 3.1: Alpharmas revenues by division, 2004
Division Sales ($ million) 143.2 62.4 843.6 314.6 1,363.8 (24.3) 1,339.5 % of total 1
Active pharmaceutical ingredients Branded pharmaceuticals Generics Animal health 2 Gross total Eliminations Total reported
10.5 4.6 61.8 23.1 100.0 ---
Notes: 1 Percentages of gross total, prior to eliminations; includes revenues from distribution and aquaculture vaccine units divested during the year. Source: Alpharma.
The poor performance of Alpharmas generics business, which is responsible for more than 60% of corporate revenues, has prompted speculation about its future, which intensified in August 2005 following reports in the financial media that its Norwegian owners may be considering the sale of all or parts of the company. Comments issued by Alpharma in response to those reports appeared to confirm that a deal of some sort is likely to be revealed in the near future. While the company said it would not comment on potential transactions, it said it was actively considering various strategic alternatives for the business.
3.2
Animal health sales and operating profit

Underlying revenues generated by the Alpharma animal health division have been flat or in decline for a number of years, but sales were boosted at the beginning of this decade by the acquisition of Hoffmann-La Roches MFAs business. Completed in May 2000, the purchase drove revenues up by almost 90% in that year, and had a residual impact on 2001 results, when sales rose by a further 11%.
36
Chapter 3: Alpharma
Animal Pharms Top 20, 2005 Edition Table 3.2: Alpharmas animal health sales, 2000-2004
Year Sales ($ million) 301 1 335 322 296 315 % change +89.3 +11.3 -3.9 -8.1 +6.4
2000 2001 2002 2003 2004
Note: 1 Restated figures. Source: Alpharma.
Sales and pre-tax earnings originally reported by the company for 1999 and the first half of 2000 were restated following the discovery of fraudulent practices by former staff employed at the divisions Brazilian subsidiary. Results from 1998 through to the first half of 2001 were also revised in order to comply with revenue recognition requirements laid down in US accounting standards. Revenues reported by the division fell back in 2002 and 2003, and the 6.4% gain posted in 2004 was due primarily to the inclusion of sales from a distribution business that was on the Alpharma books for less than three months. Excluding distribution-related revenues and sales generated by an aquaculture vaccines business that was divested in the middle of the year, 2004 sales were less than 3% ahead of year-earlier figures. With currency factors also boosting sales as reported, underlying growth of the core animal health business was flat during 2004. Earnings posted by the animal health business have fluctuated since the beginning of the decade. Operating income peaked at just over $49 million in 2000 but fell back sharply in 2001 when profits were hit by a range of factors that included restructuring costs, poor market conditions, the impact of reduced discounting activity in the US and disruptions to blending and warehousing operations following a fire at one of the companys US facilities. The division posted an operating loss of $120.9 million in 2002, having booked charges totalling more than $152 million. These included one-off charges relating to the closure of four manufacturing facilities and substantial write-downs associated with a major reduction in anticipated future revenues from the porcine somatotropin product, Reporcin. The business returned to profit in 2003, when operating earnings totalled just over $20 million, while pre-tax income reached $24.8 million in 2004.
37
Chapter 3: Alpharma
Animal Pharms Top 20, 2005 Edition Table 3.3: Alpharmas animal health operating income, 2000-2004
Year Operating income (loss) ($ million) 49.1 1 23.6 (120.9) 20.1 24.8 % change Operating margin (%) +16.3 +7.0 -37.6 +6.8 +7.9
2000 2001 2002 2003 2004
+102.9 -51.9 N/a N/a +23.4
Notes: 1 Restated figures; 2 including costs associated with the sale of the aquaculture vaccines business. Source: Alpharma.
Earnings in 2004 equated to a pre-tax margin of just under 8%. Operating income included costs of more than $10 million associated with the sale of the aquaculture vaccines business, however. The core MFAs business generated pre-tax earnings of $35.2 million on sales of just over $288 million, equating to an operating margin of more than 12%. 3.2.1 2003 performance The animal health business returned to profit in 2003, posting operating earnings of $20.1 million. Revenues continued to decline, however, with a fall of just over 8% leaving sales for the year at $296 million. The fall in revenues was the result of declines in both volume sales and prices. Volumes were down on year-earlier figures by 6%, while prices fell by an average of 5%. Only the positive impact of the weakening US dollar on international sales as reported prevented Alpharma from posting a double-digit decline in revenues for the year. The fall in average prices reflected the continued impact of cheap generic competitors on price levels in the MFAs market. Returns were hit hardest in the swine and cattle product sectors. 3.2.2 2004 performance Alpharma bought out its erstwhile partners 50% interest in the Wynco US distribution joint venture in January 2004 before selling the company on at the end of March. Later in the year, it sold its Aquatic Animal Health business to an employee group in a transaction that was completed in July. Revenues from Wynco in the first quarter, and from the aquaculture vaccines business in the first half were included in the $315 million sales total posted for Alpharmas animal health business in 2004. Charges associated with both transactions were also placed on the balance sheet, however, limiting the divisions operating income to $24.8 million. The companys core MFAs business posted an operating income of $35.2 million up by 44% on sales that rose by a little under 3% to just over $288 million. Adjusting for currency factors, revenues generated by the feed additives portfolio were flat. Sales in North America and Europe were similar to figures T&F Informa UK Ltd, 2005
38
Chapter 3: Alpharma
reported in 2003, while growth of the business in Latin America was offset by declining sales in Asia, where activities were affected by outbreaks of avian influenza. Higher volume sales of products for use in poultry were offset by lower prices resulting from increased competition in the sector. Volume sales of livestock products were down on year-earlier figures. Earnings generated by the core animal health business rose sharply as a result of third party sourcing strategies, the impact of internal productivity programmes and reduced staffing levels. 3.2.3 Interim 2005 performance Neither Wynco nor the aquaculture vaccines unit sold in 2004 have been classified by Alpharma as discontinued operations, since the company will retain significant involvement with both businesses. Consequently, it has not restated historical results for its animal health division. Measured against a period during which Alpharma booked revenues from the Wynco distribution business in 2004, animal health sales in the first quarter of 2005 were almost 12% lower at $74.5 million. The business posted a gain of similar proportions in the second quarter, however, leaving first-half revenues only 1% lower at just over $154 million.
Table 3.4: Alpharmas first-half animal health sales, 2004 and 2005
Period 2004 ($ million) 84.5 71.5 156.0 2005 ($ million) 74.5 79.8 154.3 % change -11.8 +11.6 -1.1
First quarter Second quarter First half

Source: Alpharma.
Excluding Wynco and the aquaculture vaccines business from calculations, Alpharmas first half performance was an extremely positive one. Revenues generated by core MFA products were almost 18% ahead of 2003 levels, while operating income from the base animal health business was 150% higher at $29.2 million. The core business generated an operating margin of almost 19% during the first half. Higher earnings were the result of improved sourcing strategies and internal productivity initiatives, while the sharp increase in sales of the core business reflected strong growth in sales to the US poultry and livestock industries.
3.3

Prior to the acquisition of Roches MFAs business in 2000, Alpharmas activities in the sector were focused largely on the US. Former Roche products generated revenues of close to $100 million in Europe, Asia and Latin America, however, and while volume sales in some international markets have declined since the beginning of the decade, international sales as reported have been inflated by exchange rate factors over the past three years. As a result, the business has retained the multinational look that it acquired following the Roche purchase.
39
Chapter 3: Alpharma
Sales generated by the aquaculture vaccines business divested in July 2004 were realised primarily in European markets, where the Norwegian fish farming industry was the units most important customer. Excluding revenues contributed by Wynco and the aquaculture business in 2004, Alpharma generated an estimated 63% of its MFA sales in North America. Markets in Europe are believed to have contributed just over 20% to the $288 million total, while business in Asia and Latin America was responsible for a 16% share.
Table 3.5: Alpharmas animal health sales by region, 2004 1
Region Sales ($ million) 181 61 46 288 % of total 63 21 16 100
North America Europe/Middle East Asia/South America Total
Note: 1 Excluding Wynco and the aquaculture vaccine business. Source: Animal Pharm Reports.
3.3.1
North America Sales generated in the US livestock and poultry markets are responsible for the bulk of Alpharmas North American revenues, which are believed to total approximately $180 million. Demand in the US market has been strong in the past 2-3 years, and volume sales in the companys home market have risen accordingly. Downward pressure on prices has kept revenues in check, however, and Alpharma reported that sales in the region during 2004 were broadly similar to those reported in 2003. Volume gains appear to have outstripped the impact of declining prices in the first half of 2005, however, with the company citing strong growth in US poultry and livestock markets as the main contributor to double-digit gains reported for the core MFAs business in the January-June period. Alpharmas US business was strengthened considerably by the Roche acquisition and the purchase of the local company, I D Russel, which was completed in 1999. It was left with an extensive network of manufacturing and blending facilities, however, and has pursued a major restructuring programme designed to rationalise its US production network. This has resulted in the closure of feed additive manufacturing facilities at Hannibal, Missouri, and Lowell, Arkansas. A research centre at Wrightstown, New Jersey, has also been shut down, while a facility at Terre Haute, Indiana, which had been under construction as a manufacturing centre for the porcine somatotropin product, Reporcin, was also earmarked for closure under the restructuring programme. Alpharma had invested $12 million at the site since 2000, but said that while it still intended to pursue US approval of Reporcin it would investigate toll manufacturing options for the product. Alpharmas most substantial remaining production plant in the US is its facility at Chicago Heights, Illinois, which manufactures the companys leading product, BMD (zinc bacitracin). Global demand for BMD is supplied from Chicago Heights. Soluble antibiotics and vitamins are formulated at a facility in Longmont, Colorado, while remaining US plants are operated at Willow Island, West Virginia (chlortetracycline), Van Buren, Arkansas
40
Chapter 3: Alpharma
(blending of the Bio-Cox poultry anticoccidial) and Salisbury, Maryland (blending of the former Roche Avatec and Bovatec products). 3.3.2 International markets Alpharma generated MFA sales of more than $100 million in markets outside North America during 2004. European markets are the biggest contributors to that figure, with combined sales in Latin America and Asia totalling less than $50 million. International feed additive revenues are dominated by the sale of products added to Alpharmas portfolio as a result of the Roche acquisition, which included established business in Europe, the Asia/Pacific region and Latin America. Alpharmas European feed additive sales are estimated at around $60 million. Sales as reported in the region have been inflated significantly as a result of exchange rate factors since 2002, with the US dollar declining in value dramatically against the euro during the past three years. Prices in the region have been relatively weak, however, and volume sales have been affected by the EUs tough stance on the use of antibiotic growth promoters in livestock. Zinc bacitracin, which is the active ingredient in Alpharmas Albac brand, was one of four products for which performance-enhancing approvals were suspended in EU markets during 1999, prompting a decline of $11 million in the companys European revenues. Plans were announced for the expansion of the market for therapeutic indications of Albac in Europe, but these have had a limited impact on revenues. All remaining antibiotic growth promoters will be withdrawn from EU markets at the end of 2005. Elsewhere, Alpharma generates revenues of a little less than $50 million in markets across the Asia/Pacific and Latin America regions. Business in Latin America was difficult in the early years of this decade, but revenues posted there increased in 2004. Gains reported in Latin America were offset by lower sales in Asia, however, with avian influenza outbreaks disrupting markets there. Alpharma established a Brazilian animal health subsidiary in the second half of the 1990s, and has obtained marketing approvals for its Deccox (decoquinate) livestock anticoccidial in several major South American cattle markets. The Roche acquisition strengthened its position in the region significantly, bringing it direct sales and distribution capabilities in key markets, through which the company will hope to take advantage of improved operating conditions in countries such as Brazil and Argentina. Alpharma already possessed a sales office in China prior to the Roche acquisition, which strengthened its marketing and distribution capabilities in the Asia/Pacific region considerably. The company now operates sales offices in China, Thailand and Australia, but continues to sell through distributors and sales partners in other Asia/Pacific markets. South-east Asia remains a source of potential future growth for the business, despite current problems being encountered in the region.
3.4
Product portfolio
Following the sale of the companys aquaculture vaccine business to an employee group in July 2004, Alpharmas animal health interests now consist
41
Chapter 3: Alpharma
almost entirely of MFAs, indicated variously for the treatment, prevention or control of disease, and for performance enhancement in poultry, cattle and pigs. Efforts to broaden the livestock products portfolio have been largely unsuccessful, and interests acquired in the reproduction technology sector at the end of the 1990s were sold off within a couple of years. The company has retained the porcine somatotropin business purchased in 1999, but has reduced substantially its commercial expectations for porcine somatotropin, and renegotiated the terms of its licensing agreement for the product in 2004. 3.4.1 Antibiotics Alpharma is the worlds leading supplier of bacitracin and chlortetracycline for use in animal feed. Its share of the chlortetracycline market was boosted significantly by the Roche acquisition, but the company has a long-standing involvement in the manufacture and sale of bacitracin-based products. Two of Alpharmas leading brands, BMD and Albac, are based on bacitracin. BMD (bacitracin methylene disalicylate) remains a major contributor to the companys animal health revenues, generating global sales of more than $60 million. A substantial proportion of that figure is realised in the US, where BMD is used widely in the pig and poultry sectors. It is indicated variously for disease prevention/control and performance enhancement, and is used in combination with a broad range of other anti-infectives to enhance their spectrum of activity. Alpharma continues to develop and register new indications and combinations for BMD in the US market. Albac (zinc bacitracin) is used most widely as a performance enhancer in pigs and poultry, but is also registered for use in calves and has been developed for therapeutic use in some sectors of the livestock market. Albac revenues were hit by the EUs 1999 ban on zinc bacitracin and three other antibiotic growth promoters. A market worth $11 million was lost to Alpharma, while global sales of the product declined by a further $2 million as a result of copycat bans introduced in other countries. The company is attempting to develop therapeutic markets for Albac, but revenues from therapeutic use are unlikely to match those lost as a result of the bans on growth promoting formulations. Alpharmas chlortetracycline range includes its long-established ChlorMax line and former Roche brands including Aureomycin, Aurofac and Aureo. This range of feed-grade products is used widely in combination with other active ingredients to prevent and treat diseases; promote growth and improve feed efficiency in poultry, cattle and pigs. As with BMD, the US is the source of most revenues for the chlortetracycline product range. 3.4.2 Anticoccidials Alpharma is the worlds second largest supplier of products used to prevent and control coccidiosis a condition caused by protozoan parasitic infections that affect rates of growth in poultry and cattle. Its broad range of anticoccidial brands has been enhanced considerably by acquisitions. The company anticoccidial in now generates beef cattle and T&F Informa UK Ltd, 2005 acquired global rights to the Deccox (decoquinate) 1997. Originally developed for use in poultry, the product the majority of its revenues as a performance enhancer in calves. Alpharma has launched Deccox in a number of new
42
Chapter 3: Alpharma
markets, including Mexico and Brazil, since its acquisition, and has developed a new formulation (Deccox-M) for use in whole-milk-fed calves in the US. The Roche purchase added several other major brands to Alpharmas anticoccidial portfolio, including products based on lasalocid, salinomycin and maduramycin. Lasalocid is sold as a poultry anticoccidial under the Avatec brand, and as Bovatec for use as a performance enhancer in cattle. Salinomycin is sold as BioCox for use in the poultry sector, and as Bio-Gro for use as a performance enhancer in cattle and pigs. Maduramycin is used exclusively in the poultry sector, where it is best known under the Cygro brand. Other poultry anticoccidials featuring in the Alpharma range include Zoamix (zoalene), Robenz (robenidine) and Rofenaid (ormetoprim). The Roche portfolio also included laidlomycin which, although it is a member of the ionophore anticoccidial class, is used exclusively as a performance enhancer in cattle. It is sold under the Cattlyst brand. 3.4.3 Antibacterials 3-Nitro (roxarsone) and Histostat (nitarsone) are among Alpharmas leading antibacterial brands. Both are long-established products, but despite their age they remain significant contributors to divisional revenues, with 3-Nitro, for example, generating annual sales of around $23 million in 2004. 3-Nitro is used to treat disease, promote growth and improve feed efficiency in poultry and pigs. Histostat is used as a disease preventative in chickens and turkeys. Alpharma has been named in a US lawsuit alleging that the use of 3-Nitro in poultry causes chickens to produce litter containing high levels of arsenic which, when subsequently used as an agricultural fertiliser, may be responsible for high incidences of cancer in populations close to land treated in such a fashion. The suit does not allege any danger resulting from the consumption of poultry products from chickens treated with roxarsone, but publicity surrounding the action could affect future sales of 3-Nitro. 3.4.4 Porcine somatotropin The porcine somatotropin product, Reporcin, was added to the Alpharma portfolio in 1999 through the purchase of the Australian company, Southern Cross Biotech, along with technology licensed from the Dutch company, Natinco NV. Southern Cross had already secured approvals for Reporcin in Australia, New Zealand, Malaysia and Indonesia, but Alpharma said it would pursue authorisations in 13 other markets, including the US. Approval was obtained in Mexico during 2000, and registrations in a further six countries, including Brazil, were secured in 2001. Sales of Reporcin have failed to match expectations in countries where it has been marketed to date, and stocks of the product manufactured at a facility in Australia had reached significant levels by 2002. With US approval remaining a distant prospect, Alpharma undertook a detailed reassessment of Reporcins commercial potential. As a result, construction of a US manufacturing facility for the product was halted, and the Australian plant was closed down. Alpharma said it would outsource manufacturing of Reporcin to meet future needs. T&F Informa UK Ltd, 2005
43
Chapter 3: Alpharma
The deals struck with Southern Cross and Natinco in 1999 placed significant obligations on Alpharma in terms of commitments to develop, register, manufacture and commercialise the product in named markets. In September 2004, the company reached an agreement with Natinco under which the terms of the 1999 deal were revised. As a result, Alpharma now possesses a more restrictive licence to the technology in a smaller number of markets, but has been relieved of certain obligations pertaining to the registration and commercialisation of Reporcin.
3.5
R&D
Corporate spending on R&D by Alpharma totalled $81.5 million in 2004. That figure was equivalent to 6% of revenues, reflecting the largely generic nature of the business. The majority of R&D spending is aimed at the development and commercialisation of human drugs, and levels of investment by the animal health business are believed to total less than $15 million a year (equivalent to no more than 5% of revenues generated by the core MFAs portfolio). Hoffmann-La Roche ploughed $17 million into R&D programmes aimed at the development of its MFA range in the year before its disposal, but most Roche discovery programmes were terminated by Alpharma, and the Swiss companys former research centre at Wrightstown, New Jersey, was closed down. Most current spending is targeted at the development of approvals for new indications of existing products or the authorisation of those products in new combinations. Some work is also conducted on the development of formulation technology while, despite the recent reduction in its commitment to Reporcin, Alpharma is still believed to be investing in the registration of the porcine somatotropin product in certain markets. The development of a sustained release formulation of Reporcin that could improve its commercial prospects (it must currently be administered on a daily basis) is also being pursued.
3.6
Strategy
While Alpharma has made some headway with efforts to reduce levels of corporate debt since the beginning of the decade, results delivered by the business have been disappointing. Its 2004 balance sheet included impairment charges of $260 million, reflecting reduced expectations for its US generics business, which generated 44% of its entire human pharmaceutical revenues during the year. The companys existing portfolio and future product opportunities are regarded widely as being poor relative to those of its peers. This has fuelled speculation that Alpharmas owners may be preparing to dispose of all or part of the company. Statements issued by Alpharma in the wake of such speculation have not ruled out the possibility that a deal of some sort may be in the offing, and two Indian generic specialists are believed to have tabled bids for elements of the human pharmaceutical business. Until or unless the exact nature of any potential deal is unveiled, it is hard to know what impact it might have on the Alpharma animal health business. The animal health division has itself endured a turbulent period since the late 1990s, during which revenues from its existing portfolio have come
44
Chapter 3: Alpharma
under increasing pressure and efforts to diversify into new market sectors have proved a costly failure. This culminated in major write-downs that saw the division post an operating loss of around $120 million in 2002. Most of those charges related to decisions implemented by Carol Wrenn, who took over as head of the animal health business in 2001. She has implemented a number of other strategic changes since then in a bid to improve the profitability of the division. These have included the introduction of measures designed to address chronic overstocking of distributor pipelines, a programme of plant closures and staff cuts and, most recently, the sale of the loss-making aquaculture vaccine business and the renegotiation of deals relating to Reporcin. Initiatives designed to improve internal productivity levels have also been implemented, while an increasing proportion of MFA manufacturing and blending activity is being outsourced by the business. The net result of these changes has been a significant increase in the profitability of the core MFAs business, which generated a double-digit operating margin in 2004, and which posted sharp increases in both sales and earnings during the first half of 2005. The business remains more profitable than any of the companys other divisions, with the exception of its active pharmaceutical ingredients unit. Despite these successes, the future of Alpharma Animal Health remains unclear. In the short term, uncertainty surrounds the future of the company at corporate level, and the fate of individual divisions if, as most observers assume, parts of its business are divested. More important in the long term is the current debate surrounding the use of antibiotic feed additives in livestock and poultry production. Pressure on manufacturers in the sector continues to grow, and a coalition of medical organisations in the US launched a bid to ban the use of several antibiotic feed additive classes during 2004.
3.7
Prospects
Ironically, while Alpharma slides into further trouble at corporate level, it is a long time since the companys animal health business enjoyed the sort of positive results that it has posted recently. Headline figures for 2004 did not tell the full story, but when losses associated with the disposal of its aquaculture vaccines unit are stripped out of calculations, pre-tax earnings of $35.2 million generated by the MFAs business equated to a 12.2% return on sales. Results in the first half of 2005 were even more encouraging. The core business posted a sales gain of more than 19% in the first quarter, and a further 16% increase in the second quarter, driving first-half revenues up to just over $154 million almost 18% higher than year-earlier figures. Pre-tax earnings generated by the core feed additives business rose even more sharply, from $11.7 million in the first half of 2004 to $29.2 million in the first six months of 2004 a figure that equated to an operating margin of 18.9%. Assuming that demand in the US poultry and livestock sectors remains strong in the second half of the year, Alpharma is on track to post full-year revenues of $334 million. That figure is a relatively unremarkable 6% ahead of the total reported in 2004, but if Wynco and the aquaculture business are
45
Chapter 3: Alpharma
excluded from calculations it represents an increase of no less than 16%. If margins can be maintained at levels similar to those generated in the first half, the business will post an operating profit of more than $60 million. Beyond 2005, Alpharma will struggle to reproduce the sort of growth it has enjoyed recently in what is essentially a stagnating segment of the animal health industry. Competition for market shares will continue to erode prices, while volume gains are expected to return to more modest levels. Margins delivered by the animal health business are also expected to fall back from the heady interim levels achieved in the first half of 2005, but should remain comfortably in double-digit territory, reflecting the success of recent costcontainment and productivity initiatives implemented by senior management.
46
Chapter 4: BASF
CHAPTER 4 BASF
BASF Carl-Bosch-Strae 38 D-67056 Ludwigshafen Germany Tel: +49 621 600 www.basf.com Key personnel Joshua Rottenberg Animal health business 2004 sales 2004 ranking Main product areas Main business areas
1
Head of BASF Animal Nutrition unit
Euro 725 million 1 ($901 million) 6th Vitamins, amino acids, carotenoids Europe, North America
Animal Pharm estimate (2004 sales figures not revealed by BASF)
Key events August 2004 December 2004 Opens a new 40,000 tonne manufacturing plant at Ludwigshafen. citral
Is fined Euro 35 million by the European Commission for its part in a choline chloride price fixing cartel that operated between 1992 and 1994. Announces $2 million Advanced BioNutrition. investment in
January 2005
4.1
Company background
BASF is a German multinational with interests spanning chemicals and plastics, crop protection, nutritional products and the energy sector. Recent restructuring has seen the company group its interests into five operating segments: chemicals; plastics; performance products (coatings, polymers, etc.); agricultural products and nutrition; and oil and gas. BASFs animal nutrition business is part of a fine chemicals division that is grouped for reporting purposes with crop protection interests in the agricultural products and nutrition operating segment. Since the disposal of a prescription pharmaceutical business at the beginning of the decade, the fine chemicals division includes units that manufacture and market human nutrition products (mainly vitamins), pharmaceutical raw materials and intermediates, ultraviolet absorbers, aroma chemicals, organic acids and animal nutrition products. BASF posted pre-tax earnings of Euro 4 billion and a net income of just under Euro 1.9 billion in 2004, on group net sales that totalled Euro 37.5 billion ($46.6 billion). Sales were up on year-earlier figures by 12.5%, while
47
Chapter 4: BASF
operating earnings and net income both rose by 85% and 107%, respectively, driven by a combination of factors that included higher capacity utilisation, fixed cost reductions and lower one-time charges against the balance sheet.
Table 4.1: BASFs sales by operating segment, 2004 1
Segment Sales (Euro million) 7,020 10,532 8,005 5,147 5,263 1,570 37,537 % of total 18.7 28.1 21.3 13.7 14.0 4.2 100.0
Chemicals Plastics Performance products Agricultural products and nutrition Oil and gas Other Total
Note: 1 Excluding petroleum and natural gas taxes. Source: BASF.
Businesses in the agricultural products and nutrition operating segment generated sales of Euro 5,147 million, equivalent to a little under 14% of corporate total. BASFs Crop Science division was responsible for almost twothirds of the segment total. Fine chemical division sales were Euro 1,793 million. BASF did not reveal sales of individual units within the division in 2004, but the animal nutrition business is believed to have generated revenues of Euro 725 million, accounting for 40% of the divisional total and 2% of corporate net sales.
4.2

Revenues generated by the animal nutrition business have been affected in recent years by a combination of pricing pressures and exchange rate trends, which have had a negative impact on all multinationals based in the euro-zone. Having risen by more than 12% in 2001, when BASF began reporting results for vitamin interests purchased from Takeda, sales posted by the unit increased by a more modest 4% in 2002, and have declined in successive years since then. The estimated 10% reverse reported in 2004 saw revenues fall to Euro 725 million some 3% lower than the figure reported for the business at the beginning of this decade.
Table 4.2: BASFs animal nutrition sales, 2000-2004
Year Sales (Euro million) 747 840 874 805 725 % change +2.8 +12.5 +4.1 -7.9 -10.0
2000 2001 2002 2003 2004

Source: BASF.
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4.2.1
2003 performance Sales posted by the BASF fine chemicals division declined by 6.3% to Euro 1,845 million in 2003, with volume gains of around 3% outweighed primarily by currency factors, which knocked 9% of revenues as reported. Operating income reported for the fine chemicals division was positive for the first time since 1998, with pre-tax earnings totalling Euro 125 million in a year during which charges relating to a vitamin price-fixing scandal uncovered in the late 1990s were absent from the balance sheet for the first time in four years. Animal nutrition sales fell by 7.9% to Euro 805 million ($909 million at annual average rates of exchange). Higher volume sales were reported for the units lysine amino acid, carotenoids and organic acids, while higher prices for lysine and vitamin C also had a positive impact on revenues. Volume sales of fat-soluble vitamins for use in animal feed declined, however, and the substantial negative impact of exchange rate fluctuations ensured that sales as reported were down on year-earlier figures. BASFs agreement with DSM, under which it marketed a range of feed enzymes supplied by the Dutch company, was terminated in September 2003. Trade regulators demanded the dissolution of the alliance as a condition for clearance of DSMs proposed acquisition of the Roche vitamins and fine chemicals division, which also held a leading position in the feed enzymes market. BASF agreed to acquire the products and technology covered by its existing agreement, and began the construction of an in-house enzyme manufacturing facility at its Ludwigshafen complex. Under the terms of the deal, DSM has continued to manufacture enzyme products for sale by BASF until the facility comes on-stream. It is expected to commence production towards the end of 2005.
4.2.2
2004 performance Pricing pressures and the negative impact of exchange rate fluctuations continued to affect results posted by the BASF fine chemicals division during 2004. Volume sales at divisional level rose by 6%, but lower prices and currency factors combined to outweigh volume gains, leaving the divisional total down by 2.8% at Euro 1,793 million. Declining prices and the continued weakness of the dollar affected divisional operating income, while earnings were also affected by the reclassification of plant biotechnology research costs. The result was a sharp decline in divisional operating income, which fell from Euro 125 million to Euro 48 million. BASF did not reveal sales for individual businesses in the fine chemicals division in 2004. Trends observed in the previous year are believed to have been repeated, however, with animal nutrition revenues falling back more sharply than the divisional total. The difference between the two figures is likely to have been greater in 2004, however, and animal nutrition sales are estimated to have declined by 10% to Euro 725 million ($901 million at annual average rates of exchange). Lysine prices and sales volumes were higher on average during 2004, but declined significantly towards the end of the year, while prices for most of the units vitamin products were below 2003 levels in euro terms. Combined
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Chapter 4: BASF
with increases in raw material costs, this affected the profitability of the business. Work continued on the construction of an enzyme-manufacturing facility at Ludwigshafen, while in August 2004 a new 40,000 tonne citral production plant was inaugurated at the complex. The new facility provides a four-fold increase in BASFs citral manufacturing capacity, and will service rising demand for intermediates used in the production of vitamins A and E, as well as carotenoids. Late in the year, BASF was among three European companies fined by the European Commission for fixing the price of the animal feed ingredient, choline chloride, in a cartel that operated between 1992 and 1994. The fine will cost BASF just under Euro 35 million. 4.2.3 Interim 2005 performance BASF does not publish interim sales figures for individual businesses within its fine chemicals division, but 2005 is clearly shaping up to be another difficult year for the companys animal nutrition unit, which was singled out as the main factor behind a poor first-half performance by the division. Plunging lysine prices, which began to affect results in the final quarter of 2004, were identified as the main factor behind a sharp decline in divisional sales, which fell by 14% in the first quarter and 7% in the April-June period. Divisional operating income plummeted from Euro 79 million in the first half of 2004 to just Euro 1 million in the corresponding 2005 period. BASF said it was addressing the challenging operating environment through a combination of active portfolio management, cost-reduction measures, a closer focus on innovative products and close co-operation with its customers.
4.3

BASF fine chemical division sales by region were unchanged in 2004, with markets in Europe generating 45% of revenues, North America accounting for a 25% share, business in the Asia/Pacific and Africa region responsible for 24% and South America for the remaining 6%. Animal nutrition sales by region are broadly similar to divisional figures, though markets in Latin America are more significant contributors to the units revenues.
4.3.1
Europe Europes livestock and poultry production industries provide a major source of demand for BASFs major animal nutrition product lines. Sales in the region are dominated by business in France, Germany, the UK, Spain and Italy, but intensive pig and poultry production in the Benelux countries also generates demand at significant levels. The animal nutrition business is managed from BASFs corporate headquarters in Ludwigshafen, Germany, which is a major centre of production for both intermediate active ingredients and finished products for use in the animal feed industry. More than one-third of all raw materials used by the fine chemicals division are sourced internally from other BASF divisions, many of which are also based at the giant Ludwigshafen complex. Capital spending at Ludwigshafen has seen the addition or expansion of
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plants for several products used in animal nutrition recently, including astaxanthin, vitamin E and its precursors, citral and feed enzymes. BASF also operates animal nutrition manufacturing facilities in Spain, Italy and the UK, and acquired a pre-mix plant in Poland from local company Polfa Kutno in 1997 that has been used to expand business in central and east European markets. The UK facility, which was also acquired as a result of an acquisition in the mid-1990s, has since been expanded to include a pet food pre-mix plant, while BASF has invested heavily in its site at Tarragona in Spain in a bid to improve levels of production efficiency. In France, BASF has pursued a degree of up-stream vertical integration, acquiring the Sanders animal feed and premix business during the second half of 2003. Sanders uses a number of BASF products in its feed pre-mixes, and the deal was scrutinised closely by EU trade regulators, but was cleared on the basis that Sanders held a relatively small share of the pre-mix market. The merged businesses now operate together under the BASF Nutrition Animale banner. Demand for nutritional feed additives in some of Europes leading markets including France, the UK and Germany has been affected in recent years by significant declines in herd and flock sizes, while the operating climate in Spain has deteriorated sharply over the past year. Conditions facing European producers remain difficult, and further contraction is anticipated at regional level during the remainder of the decade. Livestock production in the expanded EU is forecast to continue rising, but trade flows will alter increasingly in favour of new member states in central and eastern Europe. 4.3.2 Americas BASF generates approximately one quarter of its animal nutrition sales in the US, where cattle, pigs and poultry are raised in large numbers on an intensive basis. Canada and Mexico are also significant sources of demand, while in South America, Brazil represents a major market for nutritional supplements, especially in the cattle and poultry sectors. Sales in the Americas are boosted further by demand for carotenoid products in important aquaculture markets such as Chile and Canada. BASF has invested substantial amounts in upgrading and expanding its manufacturing network in the Americas over the past decade, during which time new pre-mix plants have been established in Canada, Brazil and the US. Demand in the US has remained relatively strong in the past 2-3 years, with local consumption keeping the beef market afloat in the face of BSErelated export bans, and the weak dollar driving US exports of pork and poultry meat. Operating conditions in South America were considerably more difficult early in this decade, with economic problems in key markets such as Brazil and Argentina leaving a significant dent in the profitability of most foreign businesses competing there. The regions major economies now appear set to enjoy a period of more stable growth, however, and demand for nutritional inputs is especially strong in Brazil, where food animal production continues to expand rapidly, fuelled to a large extent by booming exports, especially in the poultry sector. Brazilian animal feed production rose by around 5% in 2004, and is set to continue increasing at similar levels in the near future. T&F Informa UK Ltd, 2005
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4.3.3
Asia/Pacific Asias emerging economies have been a source of strong growth for the animal health and nutrition industry over the past 15 years. Poultry and pig meat production in the region has risen sharply during that period, while an increasing proportion of total output is produced by intensive or semiintensive holdings. This has driven up demand for animal health and nutrition inputs. Operating in the region has not been without its problems, however. Markets took a knock in the late 1990s during the regional economic crisis, while poultry production has been severely disrupted by avian influenza outbreaks in several countries during the past two years. BASF has strengthened its presence in the Asia/Pacific region considerably since the middle of the 1990s through a series of joint venture and acquisition deals. The two most significant transactions were its purchase in 1998 of the South Korean lysine manufacturer, Daeseng, and the 2001 acquisition of Takedas vitamin business. The Daeseng acquisition, which included a major fermentation-based manufacturing plant at Kunsan port in South Korea, gave BASF a 20% share in the global market for lysine. Half of the Kunsan facilitys lysine output is sold in Asia. Vitamins are also manufactured at the Kunsan site, which has been the target of significant investment since its acquisition. A new vitamin B2 plant completed in 2003 has trebled production capacity for that product, which now stands at 3,000 tonnes a year. A year after the Daeseng acquisition, BASF announced that it had agreed the purchase of Takedas nutritional pre-mix and aquaculture products business, and it completed the acquisition of the Japanese companys global vitamin business early in 2001. Takeda retained its domestic vitamin manufacturing and marketing operations, but global revenues generated by the business acquired by BASF were equivalent to some Euro 240 million at the time of the purchase. With products for use in animal feed generating more than half of that figure, the deal had a major impact on BASFs animal nutrition business, sales of which rose at double-digit rates in 2001. Elsewhere in the Asia/Pacific region, China is a major source of potential future demand for BASFs animal nutrition products. The company established a joint venture with the Shenyang-based vitamin and pharmaceutical manufacturer, North Eastern Pharmaceutical Factory, in the middle of the 1990s, and opened a new facility for the production of dried vitamin powder and vitamin mixtures for animal feed at the end of the decade. Further investment in China is likely as intensification of the countrys pig and poultry production sectors gathers pace in future.
4.4
Product portfolio
Having acquired Takedas interests in the sector at the beginning of this decade, BASF emerged as the second biggest player in the global vitamins market, boasting a share of around 25%. Vitamins generate around onethird of the companys fine chemicals division revenues, and are the dominant source of sales realised by the animal nutrition business. In addition to vitamins and the lysine amino acid, the animal nutrition unit also manufactures and/or markets a range of other additives, including carotenoids, feed enzymes, organic acids and performance enhancers.
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Chapter 4: BASF
4.4.1
Vitamins Vitamins for inclusion in animal feed and pet food are the main contributor to BASFs animal nutrition revenues. The company markets all of the 13 naturally occurring vitamins, and boasts in-house manufacturing capabilities for six of the 13, including the five most significant products in terms of global market size. In-house production includes vitamins A and E, which are the most widely used products in livestock and poultry production, as well as vitamin D3 and the water-soluble products, B2 (riboflavin), C and calcium d-pantothenate (Calpan). The full catalogue of vitamins available from the animal nutrition business also includes K3, B1, B6, B12, biotin, folic acid, nicotinic acid and choline. Penetration of the vitamins market by low-cost manufacturers has depressed the price of several key products in recent years. With currency fluctuations also working against BASF, revenues in this segment of the market have fallen significantly since the beginning of the decade. Established manufacturers in Europe and the US are finding it increasingly difficult to compete with low-cost producers in Asia, but BASFs tight-knit structure enables it to operate relatively efficiently by sourcing many raw materials from other businesses within the group. It has also embarked on a major capital investment programme designed to reduce production costs and increase efficiencies further. The initiative includes the construction of new high-volume plants for the manufacture of vitamins E, B2 and C. New facilities for vitamin E, B2 and precursors are already up and running, while the overhaul of vitamin C output is forecast for completion in 2007.
4.4.2
Amino acids BASF had previously marketed lysine under agreements with third-party manufacturing partners, but its acquisition of the Daeseng business in 1998 transformed it into a leading producer of the product, which is the second most widely used amino acid in livestock and poultry feed after methionine. The company now claims a share of around 20% in the global market for the product, which is manufactured at a facility in Kunsan, South Korea, where annual production capacity is 90,000 tonnes. About half of BASFs lysine revenues are generated in the Asia/Pacific region, but the product is also exported at high volumes to Europe and North America. The company has invested significant amounts in improving lysine production efficiencies, and enjoyed an upturn in both volume sales and prices for the product in 2003. Prices continued to rise in the first half of 2004, but fell back sharply towards the end of that year and continued to plunge in the first half of 2005. Synthetic lysine prices in the US were reportedly down by more than 50% on year-earlier figures in the first quarter of the year.
4.4.3
Carotenoids Like the companys vitamin range, BASFs carotenoid products are sold for use in both the human and animal nutrition sectors. Demand in both fields has been strong in recent years, prompting the company to increase capacity at its Ludwigshafen manufacturing facility.
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Chapter 4: BASF
Products for use in the livestock and aquaculture sectors, which include beta-carotene, cantaxanthin and astaxanthin, are marketed under the Lucarotin and Lucantin brands. They offer a variety of pigmentations, including red (canthaxanthin), pink (astaxanthin) and yellow (C30-ester). Major uses include the pigmentation of egg yolks, broiler skin and fish. Lucantin Pink, which was launched in major aquaculture markets at the end of the 1990s, has been a key contributor to recent growth in sales generated by the range. While the poultry and aquaculture industries are the main targets for carotenoid sales, products are also used in other food animal species notably housed animals which are prone to beta-carotene deficiency. Research has also shown that the product can improve levels of fertility in cattle, pigs and horses, and BASF markets a 10% formulation for inclusion in animal feed (sold as Lucarotin 10%). More than half of BASFs carotenoid revenues are generated in European markets, with the poultry and aquaculture industries in northern Europe among the main consumers. 4.4.4 Enzymes The market for feed enzymes has expanded rapidly over the past decade, and is forecast to grow further as livestock producers seek alternatives to antibiotic-based performance enhancers. Enzymes such as phytase help to improve feed utilisation, but also offer environmental advantages, reducing levels of phosphorus excreted in pig and poultry manure by up to 30%. BASF entered the feed enzymes market in the 1990s through an agreement with the Dutch company, DSM, which manufactured a range of fermentation-derived enzymes sold by BASF, including Natuphos (phytase), Natugrain (gluconase/xylanase) and Natustarch (amylase). Natuphos is the most important in revenue terms, and is sold in a variety of formulations, including powdered, granulated and liquid products. Revenues from the range are generated primarily in Europe and North America. DSMs main competitor in the feed enzymes market was Novozymes, which had an alliance with the Hoffmann-La Roche vitamins and fine chemicals business along similar lines to the DSM/BASF deal. When DSM announced that it had agreed to acquire the Roche vitamins and fine chemicals division, trade regulators were concerned that the purchase would give the Dutch company a monopoly position in the feed enzymes market, and the issue emerged as a potential barrier to approval of the deal. The matter was resolved when BASF agreed to purchase rights to the products and technologies involved in DSMs existing enzyme business. BASF immediately began constructing an in-house enzyme manufacturing facility at its Ludwigshafen complex. The new plant is expected to be operational by the end of 2005, from which point the German company will be a totally independent player in the feed enzymes market. In the meantime, DSM has continued to manufacture the enzyme range for BASF. 4.4.5 Other products While vitamins, lysine, carotenoids and feed enzymes are the highest profile products in the BASF animal nutrition range, the company also markets a T&F Informa UK Ltd, 2005
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Chapter 4: BASF
number of other additives, including organic acids, a non-antibiotic livestock performance enhancer and a conjugated linoleic acid product. Organic acids are included in compound feed as preservatives, but some also have a nutritional value since they act directly on the digestive system, affecting microbial populations in the gastrointestinal tract. BASF is a leading player in the market for organic acids used in animal feed, and sales volumes have risen recently in line with growing global feed output. Rights to the potassium diformate livestock performance enhancer, Formi, were acquired by BASF from Norsk Hydro in 2002. The product had been approved by EU regulators a year earlier as the first non-antibiotic performance-enhancing feed additive authorised for use in piglets and fattening pigs. Its inclusion in swine rations at higher rates was cleared in 2003. Formis contribution to BASFs total animal nutrition sales is very modest, but the withdrawal of all antibiotic growth promoters in the EU from the beginning of 2006 should see demand for the product increase. Norsk Hydros Hydro Formates division manufactures Formi for BASF under the terms of the 2002 deal, which included a commitment to treble production capacity for the product. Norsk Hydro had already commercialised Formi in Scandinavia, Germany, France, Spain and Austria, but BASF plans to roll the product out on a global level.
4.5
R&D
The agricultural products and nutrition operating segment is the smallest contributor to BASFs group sales, but with a R&D budget of more than Euro 350 million in 2004 is the biggest spender on R&D. Most of the segmentlevel budget is consumed by the companys crop protection business, however, and R&D spending by the fine chemicals division totalled only Euro 92 million in 2004 equivalent to just over 5% of divisional sales. Approximately one-third of that figure is allocated to animal nutrition-related projects. R&D programmes are focused on improving the companys cost position and the development of new products. The development of biotechnology-based production processes is a major investment target, since these have the potential to reduce manufacturing costs by improving bacterial strains and fermentation processes used in the production of vitamins and amino acids. Among the most significant recent projects was an alliance with the US biotech company, Integrated Genomics, under which the genome of the Corynebacterium glutamicum bacterium, which is used in the production of lysine, was decoded. Knowledge gained as a result of the project has been applied by BASF to improve lysine production efficiencies. The company has also replaced chemical synthesis with biotech-based processes in the production of vitamin B2 and precursors of vitamin C. In the enzymes sector, BASF is working on programmes that could result in the addition of new heat-stable products to existing lines. The aim here is to encourage further improvements in the efficiency of the digestion process in food animal species, and to reduce the phosphate content of excretions. Work is also underway on the development of technologies capable of improving the stability of enzymes in feed.
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Chapter 4: BASF
Other research programmes include a project involving the use of the polyunsaturated fatty acid, conjugated linoleic acid, as a means of reducing fat content and improving fat quality in livestock. The inclusion of conjugated linoleic acid in pig feed has been shown to result in leaner animals with improved fat quality. BASF signed a global licence agreement with the Norwegian company, Natural ASA Group, in 2000, covering the production and sale of conjugated linoleic acid as an animal feed ingredient. Early in 2005, BASF announced that its venture capital division had invested $2 million in the US company, Advanced BioNutrition. Advanced BioNutrition has recently developed a new vegetable-based fish feed but, no doubt of more interest to BASF, it also possesses proprietary encapsulation technology that protects degradable substances such as probiotics from changes in temperature, acidity and other potentially harmful external influences.
4.6
Strategy
BASF has worked hard at corporate level to drive down costs and improve levels of efficiency across the group. The complementary nature of businesses headquartered at its Ludwigshafen manufacturing complex has been a major advantage in this respect, and the company announced recently that restructuring there had cut costs by almost Euro 500 million a year. Half of those savings are the result of staff reductions, and employee numbers at Ludwigshafen have been cut by more than 3,000. While the cost-cutting and efficiency drive has reaped significant rewards at corporate level, businesses in the companys fine chemicals division, including the animal nutrition unit, are under significant pressure as a result of pricing trends for some of their leading products. Divisional operating income fell back sharply in 2004, and interim results for 2005 show a further significant decline in profit levels, with BASF labelling divisional earnings as unsatisfactory in its report on the first quarter. The company says it is addressing the challenging operating environment faced by the division through a combination of active portfolio management, additional cost-reduction measures and a closer focus on innovative products. It is also believed to be examining its marketing functions closely. The implications of these general statements of intent for the BASF animal nutrition business are unclear, though staff cuts are undoubtedly a real possibility. The sharp decline in lysine prices has been a major contributor to the animal health units current problems, but like all of its European and US competitors, BASF will remain exposed to future price volatility in the market for both amino acids and vitamins, thanks to the ability of manufacturers in Asia to compete increasingly at low prices on a global basis. BASF is thought unlikely to exit either the vitamin or lysine production sectors, but may take additional steps to improve its cost base perhaps by increasing the capacity of its own manufacturing facilities in Asia. It is also expected to work on broadening its portfolio in an effort to reduce levels of exposure to conditions in the vitamins market. The decision to take a direct position in the feed enzymes market, and deals such as those negotiated in respect of Formi and the conjugated linoleic acid product may be just the
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Chapter 4: BASF
beginning of a new phase during which it enters other market sectors through the acquisition of either existing businesses or product rights.
4.7
Prospects
Having already posted two consecutive reverses, the BASF animal nutrition business appears certain to report a decline in sales for the third year in a row. The company has ceased publishing sales data for individual units in its fine chemicals division, but the 8% decline in animal nutrition sales reported in 2003 is believed to have been followed by a further 10% reduction in 2004, pushing revenues down to Euro 725 million. Comments in the companys interim reports for the first half of 2005 indicate that sales will fall sharply again this year. The decline in global lysine prices, which was already apparent towards the end of 2004, was highlighted as the main factor behind a near-11% fall in fine chemical division sales through the first half of 2005. Animal nutrition revenues have clearly declined even more sharply, and only the fact that the downward price spiral had already begun in the second half of 2004 will help the business in the remainder of the year. On the assumption that year-onyear declines will moderate in the final quarter, the animal nutrition unit is forecast to post a 13% reduction in sales for 2005, pushing revenues down to approximately Euro 630 million. Sales are expected to stabilise beyond 2005, and a recovery is anticipated later in the decade as lysine prices climb above current lows. At a more general level, the nutritional feed additives market will continue to be characterised by pricing pressures, however, and companies operating in the sector will struggle to maintain earnings while energy costs remain at current high levels. So while increases in global poultry and livestock production will continue to drive volume sales, revenue growth posted by nutritional feed additive manufacturers will be limited. On a brighter note, BASF should be manufacturing its feed enzyme product range in-house by the end of 2005, and this will help to boost profit levels generated in this sector of the portfolio in 2006 and beyond. Additions to the feed enzyme range are expected, while the company is also expected to pursue the acquisition of additional products or businesses in an effort to reduce its exposure to vitamin and amino acid pricing trends.
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Chapter 4: BASF
58
Chapter 5: Bayer
CHAPTER 5 BAYER
Bayer Alfred-Nobel-Strasse 4019 Monheim Germany Tel: +49 2173 380 Fax: +49 2173 383 593 www.bayeranimalhealth.com www.bayer.com Key personnel Dr Gunnar Riemann Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events January 2005 Receives EU marketing authorisation for its Advocate (imidacloprid plus moxidectin) combination pet antiparasitic. US regulators confirm their decision to ban the use of Bayers fluoroquinolone antibiotic, Baytril (enrofloxacin), in poultry. Euro 786 million ($976 million) 5th Antiparasitics, antimicrobials North America, Europe General Health manager, Bayer Animal
July 2005
5.1
Company background
Bayer is a German multinational with interests that have traditionally spanned the chemical, polymer, healthcare and agriculture industries. After a run of poor financial results, the company recently embarked on a major restructuring programme that has seen much of its chemicals range and a substantial proportion of its polymers business spun off through the creation of a new company, Lanxess, which began operating in July 2004 and was listed on the German stock exchange at the beginning of 2005. The move is designed to enable Bayer to focus more closely on higher-value, researchdriven growth areas that include healthcare, animal health, crop protection and the high-tech materials fields. The company posted an operating loss of just over Euro 1.1 billion in 2003 as a result of costs associated with the restructuring programme. It reported pre-tax earnings of Euro 1,808 million ($2,246 million) in 2004, however, on sales that rose by just over 4% to Euro 29,758 million. Net income in 2004 was Euro 603 million, compared with a net loss of Euro 1,361 million in 2003.
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Chapter 5: Bayer
Animal Pharms Top 20, 2005 Edition Table 5.1: Bayers sales by operating segment, 2004
Segment Sales (Euro million) 8,485 5,946 8,597 6,053 677 29,758 % of total 28.5 20.0 28.9 20.3 2.3 100.0
Healthcare CropScience MaterialScience Lanxess Corporate Total

Source: Bayer.
Lanxess was formally spun off at the end of January 2005, and will no longer be included in Bayer group financial results. This leaves the company with three reporting segments: Healthcare, CropScience and MaterialScience. Bayer Animal Health is part of the Healthcare operating segment. The animal health business posted global sales of Euro 786 million ($976 million) in 2004, accounting for just over 9% of Healthcare segment revenues and 2.6% of Bayers group net sales. Its share of corporate revenues has risen to around 3.5% following completion of the Lanxess spin-off.
5.2
Animal health sales and operating income

Results posted by Bayers animal health business have been affected by the weakness of the US dollar against the euro during the past three years. Expressed in local currencies, sales generated by the business rose by almost 6% in 2002 and by 5% in 2003, but revenues as reported fell by around 1% and 7%, respectively, leaving sales at Euro 790 million in the latter year. Exchange rates wiped out local currency gains for a third time in 2004, when underlying growth of 4.5% was transformed into a 0.5% decline on conversion to euros. Expressed in US dollars at annual average rates of exchange, 2004 revenues were worth $976 million an increase of more than 9% on equivalent year-earlier figures.
Table 5.2: Bayers animal health sales, 2000-2004
Year Sales (Euro million) 1 873 858 850 790 786 % change +9.0 -1.7 -0.9 -7.1 -0.5
2000 2001 2002 2003 2004
Notes: 1 Figures exclude sales of environmental health products, which are now part of the Bayer Crop Science division. Historical figures have been restated for consistency. Source: Bayer.
While revenues have been eroded by exchange rate factors, the division has maintained operating margins at a level of around 20% since the beginning of the decade. Pre-tax earnings peaked at Euro 172 million in 2003, but that T&F Informa UK Ltd, 2005
60
Chapter 5: Bayer
figure was boosted by the inclusion of a Euro 22 million one-time gain resulting from the disposal of rights to certain cattle vaccines, which were sold to Pfizer in the final quarter of the year. Excluding that item from calculations, underlying operating income rose by just under 5% in 2004, to Euro 157 million.
Table 5.3: Bayers animal health operating income and margins, 200020041
Year Euro (million) Sales 2000 2001 2002 2003 2004 873 858 850 790 786 Operating income 173 161 170 172 157 19.8 18.8 20.0 21.8 20.0
2
Operating margin (%)
Notes: 1 Excluding results from the environmental health product range; gain of Euro 22 million from the disposal of rights to certain vaccines. Source: Bayer.
including a one-time
5.2.1
2003 performance Exchange rate factors, which had wiped out local currency gains reported by the business in 2002, did so again in 2003. Underlying sales growth was close to 5%, but revenues fell by 7% to Euro 790 million on conversion to euros for reporting purposes. Boosted by a one-time gain of Euro 22 million on the sale of its Bayovac and Baypamun bovine biologicals lines to Pfizer in the final quarter, pre-tax earnings totalled Euro 172 million, equating to an operating margin of almost 22%. Disregarding one-off items, earnings totalled Euro 150 million, and the divisions operating margin was 19%. The disposal of additional interests in the biologicals sector followed the sale of Bayers US veterinary vaccine business at the beginning of the decade, leaving foot and mouth disease (FMD) vaccines as the companys only major involvement in that segment. Imidacloprid continued to spearhead growth of the remaining business, generating global sales of Euro 196 million. That figure was around 4% below year-earlier levels, but local-currency sales growth reported for the pet ectoparasiticide was close to double-digit levels, thanks to contributions from the combination product, Advantix (imidacloprid plus permethrin), which was launched in the US.
5.2.2
2004 performance The Bayer Animal Health business continued to post positive growth during 2004, but local currency gains totalling 4.5% were again eroded by exchange rate fluctuations. The impact of currency factors on results was less extreme than in 2003, however, and sales as reported were down by less than 1% at Euro 786 million ($976 million). Divisional earnings totalled Euro 157 million, equating to an operating margin of 20%. Pre-tax income was down on year-earlier figures, which were inflated by one-time gains associated with the disposal of rights to the
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Chapter 5: Bayer
Bayovac and Baypamun biological products. Excluding one-off items, earnings were almost 5% above 2003 levels. Local currency gains reached double-digit levels in Latin America during 2004, while sales in North America were over 6% higher before conversion to euros for reporting purposes. Business in the Asia/Pacific region was relatively flat, however, while European sales rose by less than 1%. Bayers imidacloprid-based companion animal parasite controls continued to spearhead growth, with sales of the Advantage and Advantix brands rising by 12% in local currency terms. Sales of these products as reported were 5% higher than 2003 figures, at Euro 206 million. Revenues generated by the Baytril (enrofloxacin) antibiotic, which is the divisions other leading product, were flat, however, and fell back by around 6% when expressed in euros. 5.2.3 Interim 2005 performance Bayer Animal Health enjoyed a strong start to 2005, with local currency sales almost 14% higher than year-earlier figures in the first quarter. The impact of exchange rate fluctuations on the business continued to moderate, knocking less than 2% off sales as reported, which were 11.8% higher at Euro 199 million. Gains in the second quarter were more modest, at just 2.6% in local currency terms, and less than 2% as reported. Total first-half sales were still over 6% ahead of year-earlier figures, however, at Euro 428 million, while operating earnings for the half year rose by almost 20% to Euro 92 million (a 21.5% return on sales). The imidacloprid franchise continued to spearhead growth, delivering high double-digit gains in each of the first two quarters following the launch of combination products such as Advantix and the imidacloprid/moxidectin combination, Advocate, in major new markets.
Table 5.4: Bayers first half sales, 2004-2005
Period Sales (Euro million) 2004 First quarter Second quarter First half
Source: Bayer.
% change
2005 199 229 428 +11.8 +1.8 +6.2
178 225 403
First half gains were reported at double-digit levels in local currency terms for the business in North America, Latin America and the Asia/Pacific region. Currency factors continued to erode gains reported in North America, however, while sales in Europe fell back by almost 2%.
5.3

The line of environmental health products transferred from the animal health division to Bayers crop protection business in 2002 was sold mainly in Europe and Latin America. Its exclusion from restated results has increased the share of animal health sales realised in North America, which remains
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Chapter 5: Bayer
the biggest regional contributor to Bayers global animal health revenues, despite the negative impact that currency factors have had on US sales as reported during the past three years. Europe is the other major source of revenues for the business, which generated almost 70% of its global sales in Europe and North America during 2004.
Table 5.5: Bayers animal health sales by region, 2004
Region Sales (Euro million) 245 295 120 126 786 % of total 31.2 37.5 15.3 16.0 100.0
Europe North America Asia/Pacific Latin America/Africa/Mid East Total

Source: Bayer.
5.3.1
North America Bayers North American business was transformed in the second half of the 1990s following the launch of its Advantage (imidacloprid) pet flea treatment, which soon emerged as the biggest competitor to Merials Frontline (fipronil) brand in the US market. The region had been responsible for less than 20% of Bayers global sales prior to the US introduction of Advantage, but accounted for almost 40% of divisional revenues by the beginning of this decade. The company has also invested heavily in its North American business, ploughing more than $120 million into the development of its facility in Shawnee, Kansas (US), which is the headquarters of its North American operations, and which houses almost 400 staff working in production, R&D, sales and marketing functions. The latest development at Shawnee is a new $13 million product distribution centre, which came on-stream in February 2005. North American sales as reported by the company have been affected since 2002 by the weakness of the US dollar against the euro, but underlying growth of the business there has remained strong. Gains of more than 6% were reported in the region during 2004, but sales as reported fell back by 3% following conversion to euros for reporting purposes. Nevertheless, with revenues equivalent to Euro 295 million, North America was still responsible for more than 37% of Bayers global animal health sales. While imidacloprid has spearheaded sales growth in North America, the companys Baytril (enrofloxacin) antibiotic is also a major source of revenues there. Its future in the US poultry sector has been under threat since 2000, however, when regulators proposed a ban on the use of fluoroquinolones in that segment of the market due to concerns regarding the development of microbial strains resistant to related human drugs. After a prolonged debate, the FDA finally confirmed its proposed ruling in July 2005, and approvals for the use of Baytril in US poultry will be withdrawn in September 2005. The ban will not have a major impact on the companys sales, however, since estimated revenues from Baytril in the US poultry sector are believed to be comfortably below $5 million.
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5.3.2
Europe Bayers European animal health sales have been flat or in decline over the past couple of years. A better performance was anticipated in 2004 following the initial roll-out of Advantix in the region, but growth was limited to just under 1%, with sales totalling Euro 245 million. Further declines were reported in the first half of 2005, though the sale of the companys bovine immunological lines to Pfizer in the final quarter of 2004 was a factor behind those reductions. Bayers major European manufacturing centre is located at Kiel in Germany, where production is handled by the companys subsidiary, KVP Pharma & Veterinrprodukte. About half of Bayers global veterinary pharmaceutical requirements are met by production at the Kiel site, where it has invested Euro 12 million during the past two years. Capital spending programmes focused on the construction of a new plant for the manufacture of liquid pharmaceutical formulations, which came on-stream in 2001. Advantage and Baytril are both manufactured at Kiel, where further investment is planned. The European business is at its strongest in Germany, with Bayer claiming a double-digit share of its domestic market. The company is also a leading player in Spain, Italy, the Benelux and Scandinavian countries, and its Italian subsidiary reported a particularly strong year in 2004. Sales of Advantix exceeded expectations in a country where companion animal product revenues have been affected by recent declines in consumer purchasing power. The business also reported strong growth in sales of established food animal product brands such as Baytril, Rintal (febantel) and Baycox (toltrazuril). Conditions in most other leading European markets have been less conducive to growth in recent years, and Bayer discontinued sales of its non-prescription livestock products in the UK recently, citing the impact of generic competition and the 2001 FMD outbreak on business as the reason for its withdrawal from the sector. Advantix was launched in Italy at the end of 2003, and had reached the UK and German markets by the middle of 2004. Bayer is now rolling out another imidacloprid-based product in Europe, having obtained EU-wide authorisation to market its imidacloprid/moxidectin product, Advocate, at the beginning of 2005. These additions to the companion animal range should help to drive sales in northern and western Europe, but Bayer is also focusing its attention on the south and east of the region, where markets in new EU member states such as Poland, Hungary and the Czech Republic are widely perceived as potential sources of stronger growth in the next five years. The company has established subsidiaries in a number of central and east European countries over the past decade.
5.3.3
Asia/Pacific Like many of its competitors, Bayer has struggled to post significant growth in the Asia/Pacific region recently, with markets in several countries suffering as a result of avian influenza outbreaks and demand in Japan remaining slow. The business posted growth of little more than 2% across the region in 2004, while currency factors depressed sales as reported, which were 1.4% below year-earlier figures at Euro 120 million equivalent to just over 15% of the divisional total.
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Bayer has reported much more positive results in the region since the beginning of 2005, with sales rising by more than 17% in the first six months of the year. The launch of new companion animal products in Japan is believed to have been a major factor behind that sharp upturn. The company has introduced both Advantage Heart Spot-On (an imidacloprid/ivermectin combination) and its imidacloprid/permethrin combination (being sold as Fortreon) in Japan recently. The former is being co-marketed by the leading Japanese animal health company, Dainippon, under an agreement established in January 2005. Elsewhere in Asia, Bayer is well placed to take advantage of an eventual recovery in markets affected by avian influenza. The company enjoys a strong position in key markets such as South Korea and Thailand, and has also been working to strengthen its presence in Vietnam, the Philippines and China. It holds a 70% stake in a production and marketing joint venture with local partners in China, where the majority of revenues are generated by products for use in that countrys rapidly expanding pig and poultry production sectors. In India, where previous alliances with local companies have not been as successful as the company hoped, Bayer handed responsibility for marketing its animal health range to Pfizer in a deal concluded during 2003. Pfizer is one of the three biggest animal health companies operating in India, and boasts an extensive field force that will market a growing range of Bayer brands, including antiparasitics such as Bayticol Pour-on (flumethrin) and Drontal Plus (praziquantel, febantel and pyrantel). 5.3.4 Other markets The business generated sales of Euro 126 million in markets outside Europe, North America and the Asia/Pacific region during 2004. The majority of that total is accounted for by activities in Latin America, and strong growth in markets such as Brazil and Argentina was a major factor behind the 10% local currency gain reported by the company in this miscellaneous region, which also includes Africa and the Middle East. Markets in both of those countries are currently growing in value at double-digit rates. Bayers manufacturing site at Belford Rocho in Brazil was expanded and upgraded recently, and now produces for export to Argentina and Colombia as well as satisfying local demand. Bayer has also begun manufacturing FMD vaccines and a range of antiparasitics for Schering-Plough in Brazil. Advantix was launched there in 2004, while the company has also overhauled packaging for its pig and poultry products in Brazil, and recently introduced a new beef-flavoured version of its market-leading Drontal Plus companion animal wormer. Brazil and many other Latin American markets are also key targets for Bayers FMD vaccines, which are now the companys only major interest in the veterinary biologicals sector. Volume sales of FMD vaccines in the region have risen recently, but Bayer has faced problems in Uruguay, where around eight million doses of its product were returned by farmers who were unhappy with its appearance. Bayer said the problems were caused by either polyethylene-glycol or cell fragments, and would not have affected the efficacy or sterility of the product, but the company reimbursed Uruguays Ministry of Agriculture for the cost of replacing its product. T&F Informa UK Ltd, 2005
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5.4
Product portfolio
The Bayer Animal Health business is dominated by antiparasitic and antimicrobial products, which account together for around 75% of its global revenues. Its two major products are the companion animal insecticide, imidacloprid, and the fluoroquinolone antibiotic, enrofloxacin, which generated sales of Euro 206 million and Euro 160 million, respectively, in 2004. These two flagship products are responsible together for almost half of divisional revenues. Enrofloxacin is used in a broad range of both companion animal and food animal species, but the success of imidacloprid has had a significant impact on the structure of the business in terms of sales by species, with products for use in companion animals responsible for 52% of sales in 2004.
5.4.1
Antiparasitics Bayers antiparasitic product range generated sales of approximately Euro 420 million in 2004, accounting for 53% of the divisional total. Products containing the imidacloprid insecticide were responsible for almost half of that figure. The Drontal/Droncit pet wormer range is also a major contributor to antiparasitic revenues, generating global sales of more than Euro 80 million, while remaining sales in the sector are realised by a broad range of established products that includes livestock wormers, and endectocides and ectoparasiticides for use in both livestock and companion animals.
. . . Imidacloprid
Launched in its first markets during 1996, Bayers novel pet flea treatment, imidacloprid (Advantage), had become the companys best-selling animal health product less than three years later. Bayer applied its formulation expertise to the active ingredient (which had been discovered and developed by its crop protection sister division), presenting imidacloprid in a spot-on formulation for application to dogs and cats at monthly intervals. While Merials Frontline (fipronil) pet flea/tick treatment had already been rolled out in a number of other countries, Bayer beat Merial to market in the US, guaranteeing that sales of Advantage would take off rapidly in the worlds biggest flea treatment market. Frontline has since emerged as the clear leader in the segment, but Advantage sales have held up well in what has become an increasingly competitive area of the companion animal parasite control market. Its global revenues had reached Euro 200 million by the beginning of this decade, and while exchange rate factors have eroded US sales reported for the product since 2002, imidacloprids global revenues rose by 5% to Euro 206 million in 2004. Calculated in local currencies, gains for the product were in excess of 12%. The renewed surge in sales of the Advantage franchise is due largely to the commercialisation of combination products that broaden the spectrum of activity offered by the original product. Fipronils activity against ticks and lice as well as fleas was a key factor behind the emergence of Merials Frontline as the leading pet ectoparasitic brand, but Bayer can now rival Frontlines claims with its new combination products.
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The most significant addition to the franchise so far has been a combination product containing imidacloprid and permethrin. Sold as Advantix, it possesses activity against ticks and mosquitoes as well as fleas. Advantix was launched in the US towards the end of 2002, and has boosted sales appreciably since then. It has been rolled out more recently in Europe and other major international markets, with European launches in particular adding to franchise revenues in 2004. US advertising in support of the product, which alleged that Advantix was more effective than Frontline Plus in protecting dogs against fleas, prompted Merial to file a lawsuit against Bayer in July 2005. Bayer has also developed flea control/heartworm combinations by pairing imidacloprid with ivermectin and moxidectin. The imidacloprid/ivermectin product, which is sold variously as Advantage Duo and Advantage Heart, has been launched in Australia, Japan and a number of other international markets, while the imidacloprid/moxidectin combination, sold as Advocate, was rolled out in Europe during the first half of 2005. Shortly after the Australian launch of Advantage Duo, Bayer bundled its new heartworm/flea treatment with the divisions market-leading canine anthelmintic, Drontal Allwormer (pyrantel, praziquantel and febantel), registering the combination as The Complete Parasite Control Kit for dogs. The two-product package was registered for use by veterinary surgeons in sample packs and starter kits for clients.
. . . Other ectoparasiticides
While imidacloprid is the dominant source of Bayers revenues in the sector, its portfolio also includes a number of other ectoparasite control products, including a relatively recent addition to the range in the shape of the insect growth regulator, pyriproxyfen. Sold as Fleeguard, the pyriproxyfen product reached its first markets in 2001, and has been introduced widely since then. More established elements of the range include small animal brands such as Bolfo (propoxur), Tiguvon (fenthion) and the Kiltix (flumethrin) line of canine flea collars, while livestock ectoparasiticides also generate modest revenues in a number of markets. A new cattle ear tag, CyLence Ultra, containing cyfluthrin and the synergist, piperonyl butoxide, was added to its US range in 2002, while the flumethrin-based pour-on product, Bayticol, is an established part of the Bayer range in many countries. Bayticol revenues have declined in recent years, however, and the product was placed in the hands of a distribution partner in the UK recently. It has also been withdrawn in Australia, where concerns surrounding the impact of residues on export trade to the US were cited.
. . . Anthelmintics and endectocides

Prior to the emergence of Advantage, Bayers best-selling parasite control line was the Droncit/Drontal range of companion animal wormers. These established products are now exposed to generic competition in a number of markets, and also face stiff competition from other proprietary brands. They have retained a leading share of the market in many countries, however, and are believed to have generated global sales of more than Euro 80 million in 2004. T&F Informa UK Ltd, 2005
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Droncit (praziquantel) is indicated for the treatment of tapeworm, while Drontal (praziquantel with pyrantel and febantel) is effective against both tapeworms and roundworms. Sales of the Droncit/Drontal range have benefited in recent years from the introduction of new formulations (including a spot-on version of Droncit) and substantial investment in promotion and marketing campaigns. Their bundling with Advantage Duo has helped to drive sales in Australia (see above), while new, flavoured versions of Drontal have been introduced in a number of markets. Bayer launched a new equine protozoal myeloencephalitis (EPM) treatment in the US during 2001. Based on ponazuril, which is a derivative of the companys poultry anticoccidial, toltrazuril, the product is presented in oral paste form, and is sold under the Marquis brand. The company withdrew some of its livestock wormers from the UK market recently, citing poor market conditions and increasing generic pressures. Older products such as Bayverm (febantel) and levamisole-based livestock wormers are still sold in a number of other countries, however, while Bayer has also begun to compete for shares of the generic endectocides market. Its Baymec-branded pour-on ivermectin formulation is the most significant contributor to generic endectocide revenues. 5.4.2 Antimicrobials The fluoroquinolone antibiotic, enrofloxacin, sold as Baytril, is responsible for the vast majority of Bayers antimicrobial revenues, generating global sales of Euro 160 million in 2004. Baytril revenues have flattened out in recent years, however, and currency factors have eroded sales as reported, which have fallen by more than 12% from Euro 183 million since 2002. Baytril has been commercialised for use in a broad range of both food animal and companion animal species, and Bayer continues to develop new formulations and secure additional indications for the product. A bolus formulation for use in calves was launched in European markets towards the end of the 1990s, while indications for the treatment of pyoderma in dogs and certain respiratory infections in cats have also been registered. Sales to the US cattle sector, where Baytril was not approved until the second half of the 1990s, drove a period of renewed sales growth for the product towards the end of that decade. It has also been used in US poultry since 1997, but regulators there confirmed in July 2005 that its marketing authorisation for use in the poultry sector would be withdrawn in September. The withdrawal, which was first proposed in 2000, is the result of concerns that the use of fluoroquinolones in poultry has contributed to the emergence of bacteria resistant to human drugs from the class. It will apply to all fluoroquinolones, but Baytril is the only member of the class currently used in poultry. The ban will not have a major impact on Bayers US sales, since annual revenues from the poultry formulation were believed to have been less than $5 million. The expiry of patents on enrofloxacin will present a more significant challenge to Baytrils revenues in the second half of this decade. Basic US patents on the active ingredient expired in 2004, and as the most successful fluoroquinolone commercialised in veterinary medicine to date it will be a popular target for generic manufacturers. Bayer is lining up a T&F Informa UK Ltd, 2005
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Chapter 5: Bayer
successor to enrofloxacin, however, in respect of which it has already filed for approval in Europe (see Section 5.5). 5.4.3 Other products Products other than antiparasitics and antimicrobials contributed less than Euro 200 million to Bayers animal health sales in 2004. That figure has declined in recent years as a result of restructuring initiatives and disposals, which have seen the company transfer a range of environmental health products to its crop protection business and sell the majority of its interests in the veterinary vaccines sector. Bayers US vaccines business was divested at the beginning of the decade, while rights to its gene-deleted infectious bovine rhinotracheitis vaccines and the Baypamune companion animal immunostimulant were sold to Pfizer in the final quarter of 2004. The manufacture and sale of FMD vaccines and a minor involvement in the aquaculture sector now represent Bayers sole remaining interests in the biologicals market, where it generated annual revenues of more than Euro 100 million as recently as 1999. Elsewhere, Bayer markets a modest range of feed and nutrition products that includes the anticoccidial, Baycox (toltrazuril), and the livestock performance enhancer, Bayonox (olaquindox), a farm hygiene product line, and a number of pharmaceutical products. Among the latter is a flunixin meglumine-based anti-inflammatory product for use in large animals. Sold as Binixin, it was launched in several European markets during 2002 and 2003. Initial approvals are for use in cattle and horses. Baycox is well established, and has been approved for sale in poultry and pigs in more than 40 countries around the world. Regulators in Canada ruled recently that the swine formulation, Baytril 5% which had not been granted full approval there should no longer be used by vets under the countrys Investigational New Drug Submission programme, since they could not rule out the potential for toltrazuril to cause cancer in humans. Bayer maintains that extensive testing has shown no carcinogenic potential. The companys interests in niche markets include competitive exclusion products and aquaculture biologicals. Bayer acquired the UK company, Microbial Developments, and its competitive exclusion product, Aviguard, in 1995. The product, which is indicated for salmonella control in poultry, has since been launched in a number of South American markets with considerable success. In the aquaculture sector, Bayer has been working since 1998 with the Canadian aquaculture specialist, Microtek International, through which it distributes a number of vaccine and diagnostic products under the Bayovac and BayoTest labels. The two companies are also collaborating on aquaculture product research.
5.5
R&D
Spending on R&D by the Bayer animal health division totalled Euro 67 million in 2004 equivalent to 8.5% of turnover. Recent declines in spending as reported can be attributed partly to the impact of exchange rate fluctuations, but the companys R&D/sales ratio has also fallen, from a figure of 10.6% in 2001. This almost certainly reflects high levels of spending on imidacloprid combinations that have now received regulatory approval in most major markets.
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Animal Pharms Top 20, 2005 Edition Table 5.6: Bayers animal health R&D spending, 2001-2004
Year Sales (Euro million) 858 850 790 786 R&D spending (Euro million) 91 80 72 67 R&D as % of sales 10.6 9.4 9.1 8.5
2001 2002 2003 2004

Source: Bayer.
R&D activity is focused at the companys Monheim complex in Germany, and at Kansas City in the US. Development work is also carried out at locations in Asia, South America, Australia and South Africa. In product terms, efforts are focused on the development of new antiparasitic and antimicrobial products, though work is also being pursued in other therapeutic areas notably the treatment of chronic diseases in companion animals, for which liver failure, cancer and congestive heart failure therapies are all in development. In the antiparasitics sector, efforts to expand the imidacloprid franchise have dominated recent activity. That work has now begun to pay dividends, with products containing imidacloprid in combination variously with permethrin, ivermectin and moxidectin all being rolled out in major markets. New parasite control molecules are also in development, including both wormers and insecticides. Novel antiparasitics in the Bayer development pipeline include emodepside, a novel anthelmintic compound licensed from Fujisawa several years ago. A member of the cyclo-octadepsipeptide class, emodepside is believed to have potential applications in both livestock and companion animal species, but first launches are expected to target the companion animal sector. A product for use in cats could reach its first markets in 2006. The company is also close to market with a major new fluoroquinolone antibiotic, pradofloxacin. Seen as a potential successor to enrofloxacin, it is being developed initially for use in companion animals, in respect of which requests for approval of two formulations have already been submitted to regulators in the EU. Efforts to maximise returns from enrofloxacin are also continuing, despite the recent expiry of some basic patents on the molecule. The Baytril brand has yet to be approved for use in swine by regulators in North America, but Bayer has submitted a request for approval of the swine formulation there.
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Animal Pharms Top 20, 2005 Edition Table 5.7: Bayers late-stage animal health product development pipeline 1
Project Endo/ectoparasite combinations Red mite control Baycox Calves Baytril swine Pradofloxacin
1
Indications Control of fleas, ticks, heartworm and gastrointestinal worms in dogs and cats Poultry Coccidiosis control in calves Antimicrobial in pigs (North America) Antimicrobial in dogs and cats
Status Launch/registration/clinical development Request for approval submitted Registration Registration Clinical development/submission (EU)
Products for which first launches are anticipated by 2009.
Source: Bayer.
5.6
Strategy
Bayer is nearing the end of a turbulent phase in its history, having put behind it a series of poor results and undertaken a major restructuring exercise that culminated in January 2005 with the spin-off of the newly created Lanxess business. The new-look company is focused more sharply on high-value industrial sectors, and will hope to drive up corporate profits as a result. Aside from the poor performance of some chemical interests, the withdrawal of the companys human drug, Lipobay, was a major factor behind its decision to reappraise and restructure its business. The disposal of its troubled human pharmaceutical division was predicted by many analysts, and Bayer was actively seeking a partnership deal in the sector at one time. It now appears to have settled for a future as a mid-tier player in the human pharmaceutical sector, but has begun to build up its broader human healthcare interests, acquiring Roches OTC business at the beginning of 2005. While the Bayer Animal Health unit is a modest contributor to the companys healthcare segment revenues, its margins are higher than those of either the prescription pharmaceutical/biological or consumer care/diagnostic businesses. Corporate management has been highly complimentary about its performance in the past couple of years, and Bayer is expected to retain its commitment to the animal health sector as long as returns generated by the business are maintained at current levels. The prospect of generic competition for Baytril and, later in the decade, for Advantage, will represent a major challenge for the division. Recent additions to the Advantage franchise and products currently in late-stage development will help to offset lower sales of more established products, however, and should also enable the company to bolster its margins. In a bid to maintain its current profit position, the divisions resources are being focused on key country and market segments. Acquisition and alliance opportunities are also being actively assessed by the company as it looks to fill gaps in its portfolio. This is expected to result in the conclusion of more product development and licensing deals in the next five years, but could also see Bayer step into the acquisition market. At the same time, it will look to harness product opportunities presented by its
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sister divisions in both the human pharmaceutical and crop protection sectors. Veterinary versions of several established human drugs are already in development, and following its acquisition of Aventis Crop Science, Bayer now possesses one of the worlds biggest crop protection businesses, through which the animal health division will have access to broad insecticide research capabilities.
5.7
Prospects
Like most companies headquartered in the euro-zone, Bayers results have been affected in recent years by the chronic weakness of the US dollar against the European currency. Underlying growth of the Bayer animal health business has remained positive, however, with local currency gains of around 5% recorded in each of the past three years. Exchange rate influences moderated in 2004, when sales as reported fell back by less than 1%. With that trend continuing into 2005, and with recently launched products driving up both volumes and revenues, Bayer Animal Health is on course to report its first increase in sales since the beginning of the decade. Sales in the first quarter were up by almost 12% on year-earlier figures, and while gains reported in the second quarter were more limited, first-half sales totalled Euro 428 million up by 6.2% on 2004 figures (+7.4% in local currency terms). Local currency sales growth was reported in all of the companys major operating regions except Europe during the first half of the year, and if European business picks up in the second half following launches of Advantix and Advocate, Bayer will expect to improve on its performance in the April-June period. First-quarter gains are unlikely to be repeated, but if the company can better year-earlier figures by around 7% in the second half of the year it will post a 2005 sales total of approximately Euro 835 million up by 6.5%. At Euro 92 million, earnings were also well ahead of year-earlier figures at the half-year stage, and the divisions operating margin had climbed to more than 21%. That figure will be harder to maintain in the second half, but fullyear returns on sales should certainly exceed 2004 figures, and margins are expected to remain at around 20%. Beyond 2005, sales growth from the Advantage franchise is expected to begin levelling off. With some more established products likely to face generic competition for the first time towards the end of the decade, the rate at which Bayer is able to develope its animal health business will depend largely on how soon it can bring new products to market, and how well they perform. With promising candidates close to market in both the antiparasitic and antibiotic sectors, it should be capable of generating reasonable growth at divisional level.
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Chapter 6: Boehringer Ingelheim
CHAPTER 6 BOEHRINGER INGELHEIM

Boehringer Ingelheim Binger Strasser 173 55216 Ingelheim Germany Tel: +49 61 32771 Fax: +49 61 32773000 www.boehringer-ingelheim.com Key personnel Dr Joachim Hasenmaier Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events December 2004 Acquires Japanese Shionogi. outstanding stake in joint venture from Euro 335 million ($416 million) 15th Pharmaceutical specialities, vaccines North America, Europe Managing director, BIV
April 2005
Receives approval to market Ingelvac porcine reproductive and respiratory syndrome (PRRS) MLV vaccine in China.
6.1
Company background
Boehringer Ingelheim is a German healthcare company with subsidiary interests in the animal health sector. Its animal health business trades as BIV. Boehringer Ingelheim posted a corporate operating income of Euro 1,372 million ($1,704 million) in 2004 up by 52% on sales that rose by 10.5% to Euro 8,157 million. Net income also rose sharply, up by 69% on year-earlier figures at Euro 908 million. That positive set of results was achieved despite the negative impact that exchange rate factors had on sales and earnings as reported. Corporate net sales rose by around 16% in local currency terms, but exchange rate factors knocked over 5% off sales as reported. Prescription pharmaceuticals dominate Boehringers business, generating three-quarters of the companys net sales. Consumer healthcare products and sales to industrial customers account together for a further 20% of revenues. The BIV business, which posted 2004 sales of Euro 335 million, contributed just over 4% to the corporate net sales total.
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Table 6.1: Boehringer Ingelheims sales by business area, 2004

Sector Sales (Euro million) 6,183 970 654 335 15 8,157 % of total 75.8 11.9 8.0 4.1 0.2 100.0
Prescription medicines Consumer healthcare Industrial customers Animal health Other Total
Source: Boehringer Ingelheim.
6.2
Animal health sales

BIV generates more than 40% of its sales in North America, and currency factors have had a major impact on revenues reported by the business since the beginning of this decade. Exchange rate movements were responsible for almost half of the 20% increase in sales reported by the division in 2000, but the weakness of the US dollar against the euro has depressed revenues reported since 2002. Local currency gains of more than 8% in 2003 were transformed into a slight reverse in sales on conversion to euros, while double-digit local currency gains achieved in 2004 were reduced to a reported increase of just over 6%.
Table 6.2: BIVs sales, 2000-2004
Year Sales (Euro million) 300 316 318 315 335 % change +20.0 +5.3 +0.6 -0.9 +6.4
2000 2001 2002 2003 2004
6.2.1
2003 performance Few European animal health companies generate such a large proportion of their global sales in the US than BIV, and the continued slide in the value of the US dollar had a substantial impact on the companys 2003 results. Sales as reported were down marginally on year-earlier figures, at Euro 315 million, but revenues expressed in local currencies rose by more than 8%, and in dollar terms the divisional total reached $356 million. BIV reported another strong year for its European business, but the performance of the companys North American operations also improved dramatically, thanks to a combination of stronger conditions in the US livestock sector and the US launch of Metacam (a meloxicam-based NSAID), which made its debut in the worlds biggest market during 2003. Metacam and the canine cardiovascular drug, Vetmedin (pimobendan), were also noted as strong performers in Europe, with the approval of indications for use in cats helping to drive sales of the companys flagship NSAID.
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The swine portfolio returned a strong performance in 2003, despite weak conditions in European pig production markets. BIVs gains in the sector were spearheaded by the Enterisol Ileitis and Ingelvac M Hyo vaccines. The company also generated its first sales in China during 2003, and with an eye to future potential growth is pursuing the registration and roll-out of its entire swine portfolio. 6.2.2 2004 performance BIV continued to perform strongly in 2004, posting sales growth of 10% in local currency terms. Gains as reported were limited to just over 6% as a result of currency factors, however, with the division booking global revenues of Euro 335 million. At annual average rates of exchange, that figure was equivalent to $416 million, representing the first time that BIVs sales had passed the $400 million mark. Substantial gains were reported for Metacam, sales of which rose by 27% following launches in the US and Japan during 2003. Double-digit growth was also recorded by the companys porcine ileitis vaccine, the Denagard feed additive line and the canine cardiovascular treatment, Vetmedin. Sales in Europe rose by more than 6% on year-earlier figures, with doubledigit increases reported in both France and the UK. Results in North America also remained strong, with growth there reaching 19% in local currency terms as the company won back shares of key markets, notably in the swine sector. Business in Asia was mixed, however, with some markets in the region affected adversely by avian influenza outbreaks and growth in Japan where BIV bought out the one-third share in a joint venture previously held by Shionogi remaining limited. 6.2.3 Interim 2005 performance Boehringer Ingelheim reported a first-half sales gain of around 5% for its animal health business in 2005, noting that revenues generated by the division had reached almost Euro 170 million in the six-month period. With the impact of exchange rates beginning to moderate, growth in local currencies appears to have been slightly slower than in 2004. That comes as no surprise, however, since the initial impact of Metacams launch in the US and Japan was reflected in 2004 results. Business in Europe and North America remains reasonably strong, while results in Asia should be boosted in the second half of 2005 following key product launches there. BIV launched its PRRS vaccine, Ingelvac PRRS MLV, in China and Thailand during the first half of the year, and is anticipating a strong performance by the product, especially in China, where no effective vaccine against the syndrome was previously available.
6.3

North America has been BIVs main source of revenues since its acquisition of the Fermenta Animal Health business in the mid-1990s. Exchange rate factors have eroded gains reported in the region since 2002, however, and North American sales were surpassed by those generated in Europe during 2004. These two regions were responsible together for approximately 87% of BIVs global revenues during the year.
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Chapter 6: Boehringer Ingelheim Table 6.3: BIVs sales by region, 2004

Region Sales (Euro million) 153 138 40 4 335
% of total 46 41 12 1 100
Europe North America Asia/Pacific and Africa Others Total

6.3.1
North America BIVs North American business was transformed by the 1995 acquisition of Fermenta Animal Health, which added substantial positions in the regions ectoparasite control and feed additive markets to the German companys existing interests. The purchase of Nobl Laboratories two years later added to its US livestock vaccine portfolio. The two deals broadened BIVs US presence and strengthened its manufacturing and distribution capabilities, enabling it to improve levels of market penetration for established products and accelerate launch programmes in the worlds leading market. BIV operates three manufacturing facilities in the US at St Joseph, Missouri; Elwood, Kansas; and Sioux Center, Iowa. A $40 million investment programme at the St Joseph site was completed in the late 1990s, and the plant is now capable of meeting global demand for key vaccines in the BIV range. R&D capabilities at St Joseph have also been expanded and upgraded, with new vaccine research facilities there inaugurated in 2002. Notwithstanding these investments, results posted by the US business were patchy in the early part of this decade, prompting a review of the companys strategy there. A decision was made to focus resources on core elements of the BIV livestock portfolio. As a result, a non-core line of insecticide products was sold to KMG Chemicals, while in 2003 the company announced that Merial would begin marketing its companion animal products in the US. The deal with Merial was concluded shortly before Metacam received its first US approval, and Merial began marketing the product in the second half of the year. The agreement has since been terminated, however, and Merial has launched its own competitor to Metacam in the shape of the cyclooxyenase (COX) inhibitor NSAID, Previcox (firocoxib). Metacam boosted BIVs US sales in the second half of 2003, while revenues were also driven up by improved conditions in the US livestock sector during the year. That strong performance was carried through into 2004, when the US business spearheaded double-digit sales growth reported by the company in North America.
6.3.2
Europe BIV has outperformed a generally sluggish European market consistently since the beginning of the decade, thanks largely to the impact of new products that have been added to its portfolio in the region. The company posted high double-digit growth in Europe during 2002, reported another
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strong performance there in 2003, and booked a 6% increase in European sales during 2004, despite recording a 1% reverse in revenues for its German business. France and the UK were the leading contributors to regional gains in 2004, with subsidiaries in those two countries reporting increases of 12% and 11%, respectively. Metacam and Vetmedin have spearheaded recent growth in Europes major companion animal markets, with new species indications driving Metacam revenues and Vetmedin continuing to increase its share of the canine cardiovascular treatment market. In the livestock sector, sales have been driven by additions to the swine biologicals portfolio, which have included the Mycoplasma vaccine, Ingelvac M Hyo, launched in 10 European markets during 2002, and Enterisol Ileitis, which reached its first European markets during 2004. Further growth is expected from the ileitis vaccine as it is rolled out more widely in the region during 2005. Despite the poor performance reported by BIV in its home market during 2004, Germany remains the biggest contributor to its European revenues, accounting for around one-third of the Euro 153 million regional sales total. Efforts to broaden the companys companion animal range have been a major factor behind recent growth in Europes other leading markets notably France and the UK while the growing swine biologicals range has been a source of consistent growth in Spain, the Benelux countries and Denmark, with sales rising by 8% in the latter country during 2004. 6.3.3 Other markets Markets outside Europe and North America contribute less than 15% to BIVs global revenues, generating 2004 sales of less than Euro 50 million. The majority of that total is accounted for by markets in Asia and Australasia, where revenues are in excess of Euro 35 million. Markets in Asia are a source of potential major growth for the company, especially in the swine sector, which is a particular area of expertise for Boehringer. Accordingly, it has invested heavily in building up its presence in the region. This strategy saw BIV enter a joint venture with the local company, Shionogi, in Japan during 2002. Boehringer originally held a 66% stake in the venture, but bought out Shionogis share at the end of 2004, and the business is now a wholly owned subsidiary of BIV. Its current business is focused largely on the swine and poultry segments, but plans to expand its position in the Japanese companion animal market have been drawn up. Elsewhere in Asia, BIV has established a presence in Taiwan, and set up a regional marketing centre in the Philippines several years ago that was earmarked as a potential bridgehead into the Chinese market. Initial entries into China were handled during 2003, and a local office has now been established there. Regulators in China issued an approval for BIVs PRRS vaccine, Ingelvac PRRS MLV, in the first half of 2005, and the product was launched there shortly afterwards. It has also been introduced in Thailand, and with the incidence of PRRS in both countries currently rising, demand is expected to be strong. While BIV continues to invest in its Asian business, international resources are being targeted carefully, and the company has wound down its presence in countries where the potential for future growth is limited, or where its T&F Informa UK Ltd, 2005
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portfolio does not fit local market conditions. Local operations in Brazil and Argentina were closed down in 2002 as a result of that strategy, with BIV handing responsibility for marketing its range in both countries to Elanco.
6.4
Product portfolio
Respiratory disease treatments, anti-inflammatory products and livestock vaccines are among BIVs traditional areas of expertise, but its portfolio has been broadened appreciably since the middle of the 1990s through a combination of acquisitions and new product launches. Feed additives and insecticides were added to its US business following the acquisition of Fermenta, while a growing range of companion animal specialities has been brought to market as a result of in-house development programmes.
Table 6.4: BIVs sales by product segment, 2004
Segment Sales (Euro million) 181 129 25 335 % of total 54 39 7 100
Pharmaceuticals Biologicals Others Total

The meloxicam-based NSAID, Metacam, which reached its first markets a little over a decade ago, has emerged as the companys leading product, generating global sales of Euro 58 million in 2004. That figure is equivalent to 17% of the divisional total, and Metacam is responsible for around onethird of the divisions pharmaceutical sales, which reached Euro 181 million in 2004. Pharmaceuticals account for more than half of BIVs global revenues, while biologicals are responsible for just under 40%. In species terms, the business is led by products for use in livestock, with cattle products accounting for 40% of revenues and swine treatments responsible for a further 30%. Small animal and equine products generate a little over 25% of sales, with products for use in dogs and cats accounting for an 18% share. 6.4.1 Pharmaceuticals Boehringers anti-inflammatory product range has been transformed since the middle of the 1990s by the success of its NSAID, meloxicam (sold as Metacam), which has emerged as the companys best-selling animal health product. Meloxicam was commercialised initially for use in the canine osteoarthritis treatment sector, but an injectable formulation for the treatment of bovine respiratory disease was rolled out in the late 1990s, while authorisations for use in the treatment of bovine mastitis and first approvals for use in pigs were secured in Europe during 2003. Its commercial potential in the companion animal sector has also been broadened following the registration of indications for use in cats during the past 2-3 years, while first launches of an oral suspension for use in horses were handled in Europe during 2003. Metacam soon emerged as a leading product in the European canine osteoarthritis market, but did not reach either the US or Japan until 2003. T&F Informa UK Ltd, 2005
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First sales in those two major markets, along with revenues being generated as a result of new indications, have triggered a renewed surge in global sales of the brand, which rose by 27% to almost Euro 58 million ($72 million) in 2004. BIV struck a marketing deal with Merial under which the two companies co-market Metacam in Japan, but a similar agreement in the US was terminated prior to the launch by Merial of its Previcox (firocoxib) NSAID. The canine cardiovascular treatment, Vetmedin (pimobendan), has also been a source of significant growth for BIV since its first launches in 2000. Initial introductions were handled in Europe, but the product is available in a number of international markets now. It has yet to reach the US, but already generates global sales of almost Euro 13 million, and racked up a 34% increase in revenues during 2004. Indicated for the treatment of canine heart failure, Vetmedin has performed well in a sector where several angiotensin-converting enzyme (ACE) inhibitors were already available in veterinary-approved formulations when it reached the market. Some older products in the BIV pharmaceuticals range have encountered more difficult market conditions in recent years. Sales of the Ventipulmin (clenbuterol) respiratory disease treatment fell back by around 7% in 2004, for example, and at Euro 11 million have now been surpassed by Vetmedin. The use of clenbuterol in food-producing animals has been banned in the EU, but Ventipulmin continues to hold a leading position in the equine respiratory disease treatment market, where it was launched in the US towards the end of the 1990s. Other established contributors to BIV revenues in the respiratory disease treatment sector include Bisolvon (bromhexin), while the range has been extended recently following first launches of a new albuterol-based equine product, Torpex, which is delivered via a metered dose inhaler (MDI) developed in a collaboration with 3M. Torpex was launched in the US during 2002, and has been introduced in several other major equine markets since then. Also new to the US market is Buscopan (butylscopolamine), an antispasmodic and anticholinergic for the treatment of colic in horses. Buscopan has been available in Europe since the 1960s, but had not previously been commercialised in the US. Regulators there approved the product in the first half of 2004. In the livestock sector, where Metacams indications for the treatment of bovine respiratory disease and mastitis have boosted revenues, BIVs position has also been strengthened by the acquisition of global marketing rights to a range of products from the Danish company, Leo Laboratories. Boehringer already distributed the range in some key European and international markets, but is rolling out core products more widely. The former Leo Mamyzin (penethamate) line of mastitis anti-infectives has been launched in several new markets since 2000, while BIVs existing mastitis treatment range has also been expanded through broader commercialisation of Ubrocef (cephacetril). 6.4.2 Biologicals Along with Metacam and Vetmedin, biologicals have been the main contributors to growth posted by BIV in recent years. The range now generates global revenues of almost Euro 130 million, and sales of several key products continue to rise at rates in excess of the market average. T&F Informa UK Ltd, 2005
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Revenues are dominated by swine biologicals, which generated global sales of around Euro 80 million in 2004 equivalent to more than 60% of the BIV vaccine sales total. Products for use in cattle account for a further 23% of sales. Leading contributors to revenues in the sector include PRRS and swine mycoplasma products, porcine ileitis vaccine, bovine respiratory disease preventatives and clostridial vaccines.
Table 6.5: Leading contributors to BIVs vaccine sales, 2004
Product/line Species Details Sales (Euro million) 30.7 18.3 13.7 9.0 66.3 129.0
Ingelvac PRRS Ingelvac M Hyo Enterisol Ileitis Express All others Total
Pigs Pigs Pigs Cattle Various Various
Modified live PRRS vaccine Inactivated M. hyopneumoniae vaccine Attenuated live Lawsonia intracellularis vaccine Attenuated live respiratory disease range Various Various
Most of BIVs swine vaccines are marketed under the Ingelvac brand, though products offering protection against salmonellosis and ileitis are sold under the Enterisol trade name. The Ingelvac line is wide-ranging, and includes products offering protection against most major viral and bacterial pathogens. Marker vaccines against Aujeszkys disease and products against Glssers disease, erysipelas, atrophic rhinitis and Actinobacillus pleuropneumoniae all feature in the range, but the companys PRRS vaccines and its Mycoplasma hyopneumoniae preventative, Ingelvac M Hyo, are the most important contributors to global revenues. Boehringer was responsible for isolating the American strain of the virus responsible for PRRS, and has built a leading position in the PRRS vaccine market on the basis of access to patented products and technologies. It markets several vaccines with the Ingelvac PRRS prefix, the most important of which is the modified live virus product, Ingelvac PRRS MLV. Other offerings include Ingelvac PRRS KV, an inactivated vaccine derived from the major European PRRS strain, and Ingelvac PRRS ATP, a modified live virus vaccine containing new, virulent strains of atypical virus which is marketed in North America. BIVs strong position in terms of intellectual property covering PRRS vaccines has seen it prevail in legal actions against both Fort Dodge and ScheringPlough Animal Health, which were forced to withdraw their respective PRRS vaccines from the market following suits settled in favour of the German company. Schering was ordered to pay Boehringer damages of $6.9 million plus interest by a US court judgement delivered in 2004. In 2005, BIV announced that it had acquired a portfolio of patents previously licensed on an exclusive basis from the Animal Sciences Group at Wageningen University and Research Centre in the Netherlands. It said the deal would enable it to expand its product range further in the future. Sales of Ingelvac PRRS products continued to increase in 2004, rising by 5.5% on year-earlier figures (close to 10% in local currency terms). Gains were spearheaded by revenue growth in North America, where higher sales were reported in both US and Canadian markets, and where Ingelvac PRRS T&F Informa UK Ltd, 2005
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became the leading vaccine against the syndrome in Mexico within 12 months of its launch there. Sales in the US were boosted by regulatory approval for whole-herd use of the product on units testing positive for the disease. The second biggest contributor to BIVs vaccine revenues is its inactivated Mycoplasma hyopneumoniae product, Ingelvac M Hyo, sales of which rose by almost 7% to just over Euro 18 million in 2004. The one-shot product was launched in the US during the late 1990s, but first European introductions were not handled until 2002, and sales there have been strong in the past two years. Extended label claims for onset of protection within two weeks of vaccination (earlier than any competitor product registered in the region) were approved by European regulators in 2004. Ingelvac M Hyo revenues were also boosted in 2004 by launches in international markets, including Japan and China. The attenuated live porcine ileitis (Lawsonia intracellularis) vaccine, Enterisol Ileitis, is the third of BIVs big three swine biologicals. Launched in the US during 2001, sales of the product began to take off there in 2003 as swine producers enjoyed a welcome upturn in market prices. Introductions in Canada and Mexico were handled in 2004, contributing to a 12% increase in sales, which reached almost Euro 14 million. A further sharp increase in revenues is anticipated in 2005 when introductions in Europe and key Asian markets will be handled. In Europe, Enterisol Ileitis is the first orally administered vaccine to be approved for use in pigs. While BIV is best known for its activities in the swine biologicals market, the company also handles a broad range of cattle vaccines in a number of countries, and possesses a modest presence in the companion animal vaccine sector. The cattle vaccine portfolio, which is at its most extensive in the US, includes lines against clostridial disease and multivalent combinations offering protection against IBR, BVDV, PI-3, RSV and leptospirosis. The Express line of attenuated live respiratory disease vaccines, which generates global sales of Euro 9 million, and the Alpha and Bar-Vac clostridial vaccine range, which realise revenues of more than Euro 8 million, are most significant in revenue terms. Multivalent respiratory disease vaccines are marketed under the Breed-Back and Elite brands, while the company also sells a range of products for the prevention of respiratory disease caused by Mycoplasma bovis, marketed under the Pulmo-Guard label. BIVs equine biologicals range includes products against influenza, rhinopneumonitis and a strangles vaccine, Strepvax II, while products against Potomac horse fever and encephalomyelitis feature in the US range. The companys US vaccine portfolio also includes Naramune-2, an intranasal vaccine for the prevention of parainfluenza and Bordetella bronchiseptica infections in dogs, and a seven-way canine vaccine sold as Solo-Jec-7. The contribution of small animal vaccines to BIVs global biological revenues is modest, however. 6.4.3 Others BIVs other interests, which include a growing involvement in the nutraceuticals sector and a more established but modest position in the livestock feed additives market, generate global sales of no more than Euro 25 million. The most significant contributor to that total is the tiamulin T&F Informa UK Ltd, 2005
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antibiotic pre-mix, sold as Denagard, which is used widely in swine. Purchased as part of the Fermenta Animal Health acquisition in the mid1990s, Denagard is indicated for the treatment and control of swine dysentery, but also has growth-promoting claims in the US and some other markets. BIV reported strong growth for Denagard in 2004, when global sales of the product rose by almost 14%, reaching Euro 11 million.
6.5
R&D
BIV has consistently invested 11% or more of divisional turnover in R&D during recent years. Spending as reported has been affected recently by the weakness of the US dollar against the euro, since a significant proportion of the divisions total investments are ploughed into programmes being conducted at its site in St Joseph, Missouri (US). Spending as reported in 2004 totalled Euro 37 million below the 2002 peak of Euro 40 million, but still equivalent to 11% of turnover.
Table 6.6: BIVs spending on R&D, 2000-2004
Year Spending (Euro million) 30 35 40 36 37 % change +11.1 +16.7 +14.3 -10.0 +2.8
2000 2001 2002 2003 2004
Investment in the development of its biologicals range has reaped substantial rewards in recent years through the success of products such as the Ingelvac PRRS line, Ingelvac M Hyo and Enterisol Ileitis. Spending on these products continues in the form of regulatory submissions in new markets, as well as the development of data in support of additional product claims. The development of second-generation PRRS vaccines is already well advanced, and the acquisition of previously licensed intellectual property covering PRRS vaccines and vaccine technology has opened up new options for the company. Rights to a vaccine patent portfolio built up by the Animal Sciences Group at Wageningen University in the Netherlands were purchased by the company in 2004. Elsewhere, BIV is involved in R&D alliances that are expected to result in the eventual commercialisation of new products. These include a novel swine influenza vaccine being developed in a partnership with the US biotech company, Protein Sciences, and a range of other swine biologicals under development in an alliance with fellow German company IDT. Innovative approaches to the development of respiratory disease vaccines for use in cattle are also being researched, while BIV is a partner in a broadranging agreement targeting the development of livestock vaccines using Embrexs viral neutralising factor (VNF) technology. In the pharmaceutical sector, BIVs expertise in therapeutic areas such as the treatment of respiratory and inflammatory conditions reflects the T&F Informa UK Ltd, 2005
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established involvement of its human pharmaceutical parent in these fields. Many of the companys leading veterinary pharmaceuticals, including meloxicam, were accessed for animal health development through its parent division. BIV is continuing to invest in the development of meloxicam, and has secured a string of recent approvals for the product, including authorisations for additional indications in dogs and cattle, and first registrations for its use in cats, horses and pigs. Further work with the molecule is expected to result in the eventual development of broader indications, and of new meloxicam formulations, including a gel product for use in horses. The BIV pharmaceutical development pipeline also includes antibacterial products and a number of unidentified speciality treatments that are expected to broaden the companys existing companion animal range. New products are also being brought in through licensing agreements, with Peptech Animal Healths Ovuplant equine fertility product a prominent example. BIV has licensed European marketing rights to Ovuplant, and has invested in the generation of pharmacokinetic and residue studies to support its registration in the region.
6.6
Strategy
Joachim Hasenmaier, who took over as head of the BIV division in 2002, is one of the youngest CEOs of a major animal health company. As a qualified veterinary surgeon and MBA with a spell at the renowned McKinsey consulting group on his curriculum vitae he boasts excellent credentials, however, and has already begun to make his mark on the business. Under Hasenmaiers leadership, the focus at BIV is firmly on strength rather than size, with resources being focused increasingly on product segments and markets where the company already boasts a leading position, or where it sees significant growth potential for its core products. This has seen it relinquish direct responsibility for its range in countries such as Brazil and Argentina, where current rates of market growth are high, but where its portfolio was considered too small and ill-suited to take advantage of that growth. The companys US portfolio has also been restructured, with a line of non-core parasite control products divested recently. Resources freed up by these initiatives are being ploughed into markets that have been identified as key targets for future growth. South-east Asia in general, and China in particular, are high on that list, and BIV has been working hard to register and launch its swine biologicals portfolio in the region. Those efforts are already beginning to pay off, and the introduction of its PRRS vaccine in China and Thailand during 2005 is expected to boost total sales in the region. The company has also acquired total control of its Japanese joint venture initiative, having bought out the 33% stake previously held by local partner Shionogi. Now operating as a wholly owned BIV subsidiary, the Japanese business has benefited considerably from Shionogis local market knowledge, which will be put to good use as the company adds more products to its range there. Boehringer Ingelheim remains committed to its animal health subsidiary, and while the business continues to perform well it is unlikely to be divested.
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Funds may even be made available for the division to pursue its own acquisition targets. In line with the philosophy of the division, however, these will be strategically focused deals rather than broad, global agreements, and will be designed to strengthen the business in key product or market segments.
6.7
Prospects
While exchange rate factors have taken the shine off BIVs results in recent years, the business has continued to post solid underlying growth. Local currency gains totalled 8% in 2003, and reached double-digit levels in 2004, reflecting the impact of Metacam sales in new markets such as the US. The initial impact of Metacams US and Japanese market entries has now been absorbed, but BIV still posted a gain of around 5% in the first half of 2005, during which sales totalled just under Euro 170 million. Launches for new Metacam formulations, continued growth from Vetmedin and the performance of the vaccines portfolio are all believed to have contributed to growth. With conditions in the US market remaining favourable, and first sales of key vaccine products set to be booked in major new markets such as China and Thailand, BIV is expected to match or exceed its first-half performance in the final six months of the year. As a result, the company is forecast to report a 2005 sales total of approximately Euro 355 million up by 6% on year-earlier figures. Growth may be somewhat harder to come by beyond 2005, as market shares held by major pharmaceutical and vaccine brands begin to settle. BIVs ability to continue outpacing rates of growth in the animal health sector as a whole will depend increasingly on its performance in emerging markets such as China, and on the rate at which new products especially vaccines can be brought to market.
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Chapter 7: Ceva
CHAPTER 7 CEVA
Ceva Animal Health La Ballastiere BP 126 33501 Libourne France Tel: +33 5 5755 4040 Fax: +33 5 5755 4198 www.ceva.com Key personnel Philippe du Mesnil Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events December 2004 Acquires Turkish animal health market leader Dogu Ilac from SanofiAventis. Acquires Biomune Inc (US) from Zeon Corp. Euro 231 million ($287 million) 17th Anti-infectives, behavioural products reproduction, Chair and CEO, Ceva Sant Animale
Europe, Africa/Middle East, Asia
June 2005
7.1
Company background
Ceva Sant Animale is the former animal health and nutrition division of the French healthcare company, Sanofi-Synthlabo (now Sanofi-Aventis). Sanofi had sold a substantial proportion of its animal health interests earlier in the 1990s, and completed its exit from the sector in October 1999 in a leveraged management buy-out financed by Paribas Affaires Industrielles, the equity investment arm of French investment bank Paribas. Paribas Affaires Industrielles sold its controlling stake in Ceva to leading European private equity firm Industri Kapital Ltd in September 2003.
7.2

Ceva operates a small trading and sub-contracting business, and has retained a modest interest in the animal nutrition sector. Revenues from both of those businesses have declined in recent years, however, and sales of animal health products are responsible for approximately 95% of its turnover, which totalled Euro 231 million ($287 million) in 2004. Revenues generated by sub-contracting activity and the animal nutrition business have fallen by more than Euro 20 million since the beginning of this decade, but Cevas total sales have risen by almost Euro 80 million during that period, thanks to a combination of acquisition activity and new product
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launches in the animal health sector. The 25% gain posted in 2001 was attributable largely to the acquisition of the Italian animal health company, Centralvet, but sizeable increases in turnover reported in 2002 and 2004 were both generated largely by in-house growth.
Table 7.1: Cevas animal health and nutrition sales, 2000-2004
Year Sales (Euro million) 153 191 211 215 231 % change +0.7 +24.8 +10.5 +1.9 +7.4
2000 2001 2002 2003 2004
Source: Ceva Animal Health.
Acquisitions, the growth of the core animal health business and reduced contributions from sub-contracting activity and animal nutrition sales have all helped to drive up Cevas earnings, which doubled in the period between 2000 and 2003, and which rose by a further 14% in 2004. Operating margins have risen consistently as a result, from less than 7% at the beginning of the decade to just over 11% in 2004.
Table 7.2: Cevas operating profit and margins, 2000-2004
Year Sales (Euro million) 153 191 211 215 231 Operating profit (Euro million) 9.9 16.3 19.0 22.4 25.6 Operating margin (%) 6.5 8.5 9.0 10.4 11.1
2000 2001 2002 2003 2004
Source: Ceva Animal Health.
Increased earnings reflect a combination of factors, including a more profitable product mix. They are also the result of strategic policies being pursued by Cevas management with a view to driving up profit levels, however. 7.2.1 2003 performance Modest gains reported at corporate level masked another relatively strong year for Cevas core interests in the animal health sector in 2003. Group revenues rose by only 2% to Euro 215 million ($243 million at annual average rates of exchange), but animal health sales increased by almost 7% to just over Euro 203 million. Gains generated by the animal health business were offset by sharp declines in revenues posted by the animal nutrition unit (-36%) and its trading and subcontracting interests (-44%). Pre-tax earnings generated by the Ceva business continued to rise, increasing by almost 18% to Euro 22.4 million. With operating income continuing to outpace sales, the companys operating margin reached double-digit levels (10.4%) for the first time. T&F Informa UK Ltd, 2005
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Chapter 7: Ceva
Acquisitions in Sweden and Denmark helped to drive Cevas European sales, while international animal health revenues were boosted by the consolidation of new business in Africa. International sales gains were eroded by currency factors, however, with the weakening US dollar knocking almost 9% of revenues as reported. Significant declines were also noted in the value of local currencies against the euro in Brazil and the Philippines, while business in parts of the Middle East and Asia was affected by political problems and the SARS outbreak affected sales activity in some Asian markets. In July 2003, Cevas major shareholder, Paribas Affaires Industrielles, announced that it had agreed to sell its stake in the company to the European private equity investment group, Industri Kapital Ltd. A leveraged management buy-out was completed at the end of September. Industri Kapital has already shown itself to be an enthusiastic supporter of Cevas continued geographical growth through acquisition, and has said it wants the company to double its sales to Euro 400 million in the next 3-4 years through a combination of in-house growth and acquisitions. 7.2.2 2004 performance Ceva returned another solid performance in 2004, when the impact of acquired business was for once largely absent from its balance sheet. Sales rose by 7.4% to Euro 231 million, driven primarily by the core animal health business, revenues from which were up on year-earlier figures by more than 10%. Operating profit also continued to rise, up by more than 14% to Euro 25.6 million. Pre-tax margins exceeded 11% as a result. Revenues generated in the EU rose by over 9%, driven by the performance of established products and recent additions to the core animal health range. Turnover in markets outside the EU increased by almost 8%, despite the impact of currency factors on international sales as reported. Business in Latin America was particularly strong, led by sales in Brazil, which rose by almost 80%. Revenues were also up sharply in central Europe, but conditions were more difficult in Asia, where avian influenza outbreaks disrupted a number of Cevas key markets. In product terms, growth was spearheaded by Cevas biologicals business, sales of which increased by 19% during the year. Anti-infective revenues rose by a little over 8%, while gains posted for the reproductive product range were of a similar order. Sales generated by behavioural therapies and other central nervous system (CNS) treatments increased by more than 6%. Ceva purchased the Mexican company, Kemia, in January 2004, and ended the year by completing the acquisition of Dogu Ilac Veteriner in Turkey. Revenues from the Kemia business offset declines in the dollar value of the companys established business in Mexico, but the Dogu Ilac Veteriner acquisition did not affect sales in 2004. 7.2.3 Interim 2005 performance Ceva posted relatively modest gains in the first quarter of 2005, but a stronger performance in the second quarter drove sales up to Euro 122.5 million at the half-year stage 9% ahead of 2004 figures. The company reported another strong performance in the EU, led by substantial gains in northern and central Europe. International sales growth was also strong in T&F Informa UK Ltd, 2005
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Chapter 7: Ceva
both Latin America and Asia, with business in key markets such as Brazil and Thailand continuing to recover after recent problems. With established business on course to deliver further growth in the second half of the year, Ceva is set to post strong double-digit sales growth in 2005 following the integration of its latest acquisitions. The Dogu Ilac Veteriner business purchased in Turkey was not included in first-quarter results, but contributed to strong gains reported in the second quarter. It will continue to boost revenues in the second half of the year, which will also be driven up by the inclusion of acquisitions completed recently in South Africa and the US. The purchase of the US vaccine specialist, Biomune, which was announced in June, is perhaps the most significant acquisition completed by Ceva in recent years. It will add more than Euro 20 million to the companys annual revenue total but, more importantly, it represents the French companys first direct entry into the worlds biggest animal health market since Sanofi sold its business there in the middle of the 1990s.
7.3

Sanofi had planned to exit the animal health and nutrition sector completely in the mid-1990s, but was unable to find a buyer for the whole of its business. In the end, it sold the bulk of Sanofi Animal Healths operations in the Americas and Asia to Rhne Mrieux (now part of Merial) in 1995, retaining a business that was dominated by sales generated in Europe, the Middle East and Africa. That residual business was eventually sold in 1999, and began trading as Ceva Sant Animale. Cevas major stakeholders have financed a series of acquisitions over the past five years, strengthening its business in both Europe and international markets. Product ranges have also been expanded in markets outside the EU, and when sub-contracting and animal nutrition interests are excluded from calculations, the international business is now responsible for 45% of Cevas core animal health sales.
Table 7.3: Cevas animal health sales by region and activity, 2004
Region/activity Sales (Euro million) 220.4 120.4 100.0 3.3 7.2 230.9 % of total 95.5 52.1 43.3 1.4 3.1 100.0
Animal health Of which:
EU International Contract manufacturing Animal nutrition Total
Note: Value figures may not add up due to rounding. Source: Ceva.
7.3.1
EU Excluding sub-contracting and animal nutrition sales, Ceva posted revenues of Euro 120 million in the EU during 2004. That figure will increase significantly in 2005, partly as a result of further sales growth, but also
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following the transfer of business in new member states into the companys EU results. Ceva has subsidiaries in five of the countries that acceded to the EU in May 2004, including the Czech Republic and Poland as well as Hungary, where its business is particularly strong. Ceva holds a strong position in its home market, where two of its five main manufacturing facilities are located. The companys global headquarters site at Libourne boasts a sterile injectables production plant, while liquids, tablets, granules and a number of other formulations are manufactured at Loudeac. Ceva continued to outperform the market in France during 2004, posting a 6% increase in turnover, thanks in part to the launch of new products in both the companion animal and livestock market segments. Italy is now the second biggest contributor to Cevas EU sales total, following its acquisition of Centralvet Vetem in 2001. The company has retained Centralvets manufacturing plants at Porto Empedocle, where output consists mainly of sterile injectables, and at Cavriago, where oral powders, liquids and granulated pre-mix formulations are all produced. A new production unit for pre-mixes and oral powders came on-stream at Cavriago during 2002. The Italian animal health market remained flat in 2004, but Ceva achieved a 4.5% increase in sales there, while earnings generated by the Italian subsidiary rose by 20%. Ceva also possesses subsidiaries in seven other established EU member states, including all of the regions biggest markets, while the acquisitions of Vetpharma in Sweden and Rosko in Denmark during the past two years have laid the platform for expansion in northern Europe. Germany, the UK and Belgium were among the strongest contributors to Ceva sales growth in the EU during 2004. Business in Germany was strong in both the companion animal and livestock market segments, with the relaunch of Prid (progesterone) acting as a major driver of revenues in the livestock market. Sales in the UK were led by the companys pheromonebased behavioural therapy line, which accounts for around half of Cevas revenues there, while ovine vaccine launches drove sales in Spain. 7.3.2 International markets Markets outside the EU contributed Euro 100 million to Cevas animal health sales in 2004. That figure included revenues generated in countries that joined the EU during the year, and which will be reported as part of the EU business in 2005. Ceva has established subsidiaries in several of the new member states, and boasts a particularly strong position in Hungary, where it bought out a previous joint-venture partner several years ago. The Phylaxia subsidiary in Hungary possesses major vaccine manufacturing and research capabilities, and its Budapest site has been the focus of a substantial investment programme designed to bring production up to EU standards. The site supplies markets across Europe and beyond, but local sales have declined as a result of the countrys farming crisis, which has seen the Hungarian animal health products market decline in value by almost 20%. New product launches scheduled for 2005 should help to bolster Cevas sales in Hungary, however. Adapting to EU standards represents a challenge for Cevas Hungarian subsidiary and those in other new member states notably Poland and T&F Informa UK Ltd, 2005
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Romania. The company has restructured its operations in both of those countries, reorganising technical and marketing teams and putting new managers in place. These changes had a positive impact on the business in the second half of 2004. Further east, markets in Russia and the CIS experienced a sharp upturn in 2004, and Cevas sales in that region rose by more than 40% on year-earlier figures. New offices were opened in Belarus and the Ukraine, where prospects for further growth are most encouraging. Business was less straightforward in Asia during 2004, with several markets in the region disrupted by outbreaks of avian influenza. The decline in value of the US dollar also affected sales as reported, and Asia was the only region in which Ceva posted a decline in revenues during the year. Efforts to bolster the business included a switch in emphasis from the poultry sector into the regions pig production markets, with more resources committed to swine vaccines and anti-infectives. By contrast, Cevas sales in Latin America were more than double 2003 levels, thanks to a combination of strong growth, new product launches and the integration of new business in Mexico, where it acquired local company Kemia at the beginning of the year. Poultry vaccines were a major contributor to growth in Brazil, which reached 83% during the year. Regional revenues reached Euro 10 million, despite the negative impact of exchange rate fluctuations on sales as reported. Cevas existing product range in North America is very limited, but business there will be strengthened following the acquisition in 2005 of the US veterinary biologicals specialist, Biomune, from Zeon Corp. Biomunes existing portfolio of recombinant and inactivated poultry vaccines provides a good fit with Cevas own interests in the sector, which are dominated by live vaccines. The US company has more than 60 vaccine approvals in the US, and more than 300 in international markets. It has posted double-digit sales growth consistently in recent years, and generated global revenues equivalent to around Euro 14 million in 2004. Business in the Middle East has been reorganised following the acquisition of DIF in Turkey and the entry of Cyprus into the EU. Management of the region has been transferred back from Cyprus to Cevas French group headquarters, and activities will be focused on Turkey and the Arabian peninsula in the near future. Results in Africa were mixed during 2004, with currency factors contributing significantly to the 40% growth figure reported in South Africa, double-digit gains posted in Algeria, but business in sub-Saharan Africa hit by the political crisis in the Ivory Coast. Ceva has followed up its acquisition of Anchorpharm in South Africa, announcing in 2005 that it had agreed the purchase of a second business there. MDB Animal Health, which achieved a turnover equivalent to Euro 3 million in 2004, will strengthen Cevas sales in the ruminant sector of the South African market. Acquisitions have also been used to strengthen the business in North Africa, where the company purchased majority stakes in Interchem (Tunisia) and Laval (Algeria) during 2002. A new Euro 2 million production plant was opened in Algeria towards the end of 2003, with output there to be led by anti-infectives, parasiticides and vitamin supplements. New production and distribution facilities were also inaugurated in Morocco in 2003. Output at both of these sites will initially be focused on meeting local demand, but both have been T&F Informa UK Ltd, 2005
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constructed to international GMP standards, and are expected to drive export growth across Africa.
7.4
Product portfolio
Over the past 10 years, Ceva has focused the majority of its resources on building up its business in a handful of core market segments. Chief among these are companion animal specialities, reproductive controls, therapeutic antibiotics and vaccines. Products in these core segments are now responsible for around 70% of the companys animal health sales. Ceva has retained modest interests in the nutritional products market, and also operates a small contract manufacturing business, but activities in these two areas contributed less than Euro 11 million to group sales in 2004. The shape of the Ceva animal health portfolio varies widely by region. Sales in Europe are led by anti-infectives, with reproductive aids and a growing range of companion animal speciality products responsible for an increasing proportion of revenues. Poultry vaccines and pre-mix products are the main revenue generators in Asia, while ovine vaccines and trypanocides are responsible for a significant proportion of revenues in Africa and parts of the Middle East. Products for use in companion animals have spearheaded sales growth in recent years, but the business is still led at a global level by food animal vaccines, pharmaceuticals and medicated pre-mixes. Sales to the poultry industry are responsible for around 25% of animal health revenues, while products for use in ruminants and swine account for a further 45%.
7.4.1
Companion animal/behavioural products Additions to the companion animal product range have been the main driver of recent sales growth in Europe, and are expected to fuel further gains in the near future. Their launch in international markets will also contribute to sales growth in the second half of this decade. High-profile additions to the companion animal portfolio since the middle of the 1990s include the canine behavioural therapy, selegiline; a growing range of pheromone-based products; and the equine lameness treatment, tiludronate. An enalapril-based canine ACE inhibitor, which reached its first markets in 2004, is among the latest additions to the range. The behavioural therapy, selegiline, was launched in France during 1997 under the Selgian brand, and has since been rolled out in all of Europes biggest markets. Indicated for the treatment of canine behavioural problems including anxiety and aggression, it is sold as Selgian. Cevas existing revenues from seligiline could rise further following the resolution of a patent dispute over the product in 2003. Pfizer has sold a selegiline-based product, Anipryl, in the US and a number of other markets for several years under a licensing agreement with the Canadian company, Deprenyl Animal Health. Approved indications for Anipryl include Cushings disease and canine cognitive dysfunction. Rights to those indications in Europe were the focus of a dispute between Ceva and Deprenyl, but the two companies reached an agreement 2003 under which Ceva acquired European marketing rights to Anipryl, along with claims for the treatment of Cushings disease and canine cognitive dysfunction. Ceva will make
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milestone and royalty payments to Deprenyl in recognition of European approvals and sales. Still in the behavioural therapy sector, Ceva has launched a range of pheromone-based treatments in Europe and some international markets since 1996, when its lead product in this sector, Feliway, was introduced in France. Feliway is a pheromonal spray indicated for the elimination of urine marking and scratching caused by environmental stress in cats. It was launched in most major European markets in 1997, and has also been commercialised in Japan and the US under distribution agreements with third parties. A related hormone-based product, Felifriend, has also been commercialised for the treatment of stress during handling or veterinary consultation. Felifriend contains the F4 fraction of the feline facial hormone, while Feliway is based on the F3 fraction. Feliway is presented in a spray formulation for application to the hands prior to physical contact with cats. A new plug-in diffuser for the release of Felifriend was launched in a number of European markets in 2001, and has also been applied to a new canine product, DAP (dog appeasing pheromone), which was launched France during 2001 and reached a number of other leading European markets in 2002. DAP is indicated for the prevention and control of undesirable behaviour caused by fear or stress in dogs. A collar version of DAP was launched in France during 2003, and is now being rolled out across Europe and in key international markets, while in 2004 Ceva handled first launches of an equine appeasing pheromone (EAP). Cevas existing companion animal product range was broadened significantly by the Centralvet acquisition, but has also received a major boost following the launch of a new equine lameness treatment, Tildren (tiludronate). Tildren is the first product from the bisphosphate class to be approved for use in veterinary medicine, and has made a strong contribution to Cevas European revenues since its first launches in 2002. It was singled out by the company as a major contributor to European sales growth in both 2003 and 2004, with gains reported at double-digit levels in both years. The companion animal speciality range was broadened further during 2004, when Ceva handled first launches of Prilenal, an canine ACE inhibitor containing enalapril that will compete directly with Merials Enacard brand. 7.4.2 Reproduction The acquisition of Centralvet broadened Cevas already substantial interests in the reproduction segment, adding products such as the prolactin inhibitor, Galastop (cabergoline), which carries indications for the treatment of false pregnancy and suppression of lactation in bitches, to an established range that includes widely recognised brands such as Prid (progesterone), SyncroPart (fluorogestone) and Cystorelin (gonadorelin). Ceva reported sales growth of 8% for its reproductive product range in 2004, with particularly strong growth observed in France and Spain. Prid, which is used widely in cattle breeding programmes, is a longestablished brand, but has been reformulated and re-launched in Europe, where the new version contains progesterone alone instead of progesterone and oestradiol. The melatonin implant, Melovin, which enables producers to manipulate the timing of sheep breeding seasons, is a more recent addition T&F Informa UK Ltd, 2005
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to the reproductive product range. It has been available in France since the middle of the 1990s, but has been launched more recently in other European markets and across Africa and the Middle East. 7.4.3 Anti-infectives Cevas anti-infectives range has been strengthened by a combination of inhouse development activity and the Centralvet acquisition, which included a number of therapeutic and pre-mix products as well as manufacturing capacity in the sector. Revenues generated by the companys range of injectable and oral anti-infectives increased by a little over 8% in 2004, driven by higher sales of injectables in Europe and of oral dose forms in international markets. The European range has been expanded recently following first introductions of Colivet, an oral formulation containing colistin that is indicated for the treatment of severe bacterial infections in swine, especially those caused by E. coli and Salmonella spp. The established Ceva range is led by injectable products for use in livestock, with Tenaline, Intramicine and Vetrimoxin among the most widely recognised brands. More recent additions include Doxyvit (doxycycline) and Flumisol (flumequine), which were launched in France at the beginning of the decade, and Quinoex (enrofloxacin), which has been part of the Ceva range in Spain since 1999 and which has been launched in a number of Asian and African markets more recently. 7.4.4 Vaccines Revenues generated by Cevas veterinary vaccines increased by almost 20% in 2004. Poultry biological sales rose at double-digit rates, despite the impact of avian influenza on sales in Asia, while products for use in livestock generated sales growth of well over 20%, largely as a result of new product launches, particularly in Europe. The vaccines portfolio is dominated by products for use in poultry and sheep, but also includes a growing range of swine biologicals and an emerging position in the cattle vaccine market. The acquisition of Biomune, which generated vaccine revenues equivalent to around Euro 14 million in 2004, will further boost Cevas standing in this sector of the market. Broader commercialisation of key poultry and pig vaccines has been a major driver of recent sales growth in the sector. The companys infectious bursal disease product, Cevac IBD L, has been launched in several new markets during the past 2-3 years, including Brazil, and returned a 13% increase in sales during 2003. A new infectious bursal disease vaccine, Cevac Transmune IBD, was registered in Brazil during 2004, and is expected to drive further sales growth there. Poultry vaccine revenues have also been boosted in South Africa following the introduction of the Cevac range there at the beginning of the decade. The Newcastle disease vaccine, Cevac Vitapest L, has also contributed strongly to recent growth following launches in a number of Asian markets, though business in parts of Asia has been disrupted recently by avian influenza outbreaks. T&F Informa UK Ltd, 2005
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Sheep vaccines include the Coglavax and Panclostil clostridial products, which have been launched across much of North Africa, and the sheep pox preventative, Poxovis. As with the poultry vaccine line, ovine biologicals are being rolled out in new markets as Ceva pursues broader geographical involvement in the vaccines sector. A new clostridial vaccine was launched in Spain during 2004, while the Cevac Chlamydia product was rolled out in Spain, the UK and France. French regulators also granted a temporary authorisation for the companys Q Fever vaccine, Coxevac, during the year.
7.5
R&D
Cevas spending on R&D rose by almost 12% in 2004, reaching Euro 17.3 million. Excluding revenues generated by the companys animal nutrition business, that figure is equivalent to almost 8% of sales. R&D/spending ratios have increased in each of the past two years. Cevas main R&D programmes are pursued at established centres in Libourne (pharmaceuticals) and Budapest (vaccines). Pharmaceutical development work is also carried out at its facility in Milan, Italy, which was acquired as part of the Centralvet purchase, while research capabilities in the biologicals sector have been enhanced as a result of the Biomune acquisition. Prior to the completion of the Biomune deal, 187 (12.5%) of Cevas staff of just under 1,500 were employed in R&D-related jobs. Recent increases in R&D spending have been driven partly by work on submissions for the approval of both vaccines and pharmaceuticals in new markets. Those efforts resulted in European authorisation of three new vaccines developed by the companys Phylaxia subsidiary during 2004. The year also saw European authorities grant approvals for Prilenal (enalapril) and Colivet (colistin), while new poultry vaccines received approval in several international markets. R&D budgets are focused on the development of products in Cevas core business areas, including companion animal specialities, behavioural products, reproductive aids, anti-infectives and vaccines. Tiludronate and enalapril are among the most recent results of work in the companion animal speciality field. Cevas enalapril will compete with established canine ACE inhibitors, including Merials enalapril-based brand, Enacard, but tiludronate is the first active ingredient from the bisphosphate class to be approved for use in veterinary medicine. Current approvals are for the treatment of equine lameness, but Ceva continues to work on clinical studies that could broaden its applications in horses and pave the way for authorisations in other species. Regulators in the US authorised the use of tiludronate in poultry during 2004. Ceva has also filed applications for the authorisation of several other companion animal speciality products, including novel anticancer treatments. Without direct access to a parent company pharmaceutical portfolio, future pharmaceutical development candidates will have to be accessed through licensing agreements, but Ceva has already demonstrated its ability in this sphere. Its pheromone-based behavioural therapies were developed in a collaboration with public sector research organisations in France, for example.
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The company is also using product development and technology licensing agreements to access new biologicals. Current partnerships include an alliance with the in ovo vaccine delivery specialist, Embrex, which is focused on the development of new poultry vaccines, while in January 2005 Ceva announced an agreement with French stem cell specialist Vivalis under which it acquired rights to EBx cell lines for use in viral vaccines. Cevas efforts in biologicals R&D have seen it bring several innovative products to market in the past 18 months, including vaccines like the Q fever preventative that received a temporary marketing authorisation in France during 2004. Its Coglamune product for the prevention of necrotic enteritis in piglets was also given temporary authorisation by regulators in both France and Denmark during the year. The acquisition of Biomune is expected to result in the commercialisation of several new recombinant vaccines by Ceva during the second half of this decade. Biomunes existing portfolio already features a number of recombinant products, and others are at a relatively advanced stage of development. Commenting on the acquisition, Ceva CEO Philippe du Mesnil said a new family of vaccine products would reach the market in the next two years.
7.6
Strategy
There can be little doubt that both the original leveraged buy-out of the Ceva business and the subsequent transfer of ownership from PAI to Industri Kapital have been beneficial to the company, which previously languished as a patently unwanted part of Sanofi-Synthlabos portfolio. Commenting on its acquisition in 2003, Industri Kapital director Christopher Masek said that while Ceva would retain its independence, it would have access to substantial capital to support investment and expansion. Indeed, IK appears determined to bankroll a period of rapid growth for the company, having stated publicly that it wants to see Ceva post an annual turnover of Euro 400 million before the end of the decade. Since 2003, Ceva has completed a string of acquisitions that have strengthened its business in Mexico and a number of African markets. In December 2004, it announced an agreement to purchase Turkish animal health industry leader DIF from Sanofi-Aventis, belatedly completing the latters exit from the animal health sector. The delay in the disposal of DIF was attributed to the fact that it previously included interests in both the human and veterinary healthcare fields, which had to be split before the animal health business could be sold off. Four months after the DIF deal was closed, Ceva announced that it had agreed the acquisition of the US veterinary vaccine specialist, Biomune, in a move that will see it represented directly at a significant level in the worlds biggest animal health market for the first time since the mid-1990s. The companys existing distribution agreement with Farnam, which handles a number of Ceva companion animal products, will also be expanded in the near future in a bid to drive up revenues in the US. Ceva is in negotiations that could lead to more acquisition announcements before the end of 2005. These are believed to concern relatively small businesses, however, and when existing purchases have been integrated
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into its operations the company will still post global sales of less than Euro 300 million. It would come as no surprise to see a more significant acquisition announcement at some point in the next two years as IK continues to finance expansion of the Ceva business. While Ceva continues to pursue both in-house and external growth, the company is also working hard to improve levels of efficiency and profitability. These have already begun to pay dividends, with operating margins reaching 11% in 2004. Earnings are expected to continue rising through the second half of the decade, however, fuelled in part by higher sales, but also driven by the introduction of additional cost-containment and efficiency initiatives. These range from efforts to source raw materials more cheaply and cut production costs, through to organisational changes such as the application of the 5Ss and SMED disciplines. The 5Ss strategy is designed to improve levels of operating efficiency by rationalising organisation and maintenance procedures, while the single minute exchange of die, or SMED strategy aims to speed up switches in production runs at the companys manufacturing facilities. The aim is to reduce machine down-time by more than 50% during switches from the production of individual product forms.
7.7
Prospects
Ceva has continued to post growth at rates in excess of the animal health market average in recent years, thanks to a combination of acquisition activity and in-house expansion. It is well on track to deliver another set of positive results in 2005, having reported gains of 9% in the first half of the year and acquired new businesses in the US, Turkey and South Africa. The inclusion of the Turkish animal health market leader, DIF, in results for the second quarter, was a major factor behind double-digit sales gains reported in the April-June period. MDB Animal Health in South Africa and, more significantly, Biomune in the US, will both be included in results for the second half of the year, driving a period of more rapid growth. Assuming that underlying growth of the established Ceva business is reported at around 5% in the second half of 2005, the addition of recently acquired business should see the company post overall gains of around 12% in the July-December period. Growth at that rate would drive full-year sales growth up to around 11%, with global sales reaching Euro 256 million in 2005. The early completion of further acquisition deals could see that figure increase further, however. Efforts to drive up levels of efficiency should ensure that divisional margins remain in double-digit territory. With Biomunes earnings expected to offset any negative impact that lower profits from other acquired business might have on margins, Cevas overall return on sales is forecast to remain steady at around 11% in 2005. That would see the company post pre-tax earnings of around Euro 28 million. Beyond 2005, Ceva should continue to grow at rates in excess of the animal health market average, thanks to a combination of new product launches and the residual impact of acquired business on global revenues. Some further increase in operating margins is also expected as a result of continued efforts to drive up earnings.
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Chapter 8: Dainippon
CHAPTER 8 DAINIPPON
Dainippon Pharmaceutical 6-8 Doshomachi 2-chome Chu-ku Osaka 541-0045 Japan Tel: +81 6 6203 5321 Fax: +81 6 6203 6581 www.dainippon-pharm.co.jp Key personnel Takao Kakihara Animal health business 2004 sales 2004 ranking Main product areas Main business areas
1
General manager, Dainippon Animal Science Division
Yen 27,284 million ($252 million) 20th Pet nutrition and pharmaceuticals Japan
Year to 31 March 2005 (dollar conversion at 2004 annual average)
Key events January 2005 Terminates distribution agreement with Merial and begins co-marketing Bayers Advantage Heart product. Parent company and Sumitomo Pharmaceuticals reach a definitive merger decision, including a commitment to retain the Dainippon animal health business.
April 2005
8.1
Company background
Dainippon Pharmaceutical is a Japanese healthcare major with subsidiary interests in the animal health, food additive and chemical industry sectors. The company posted an operating income of Yen 10,396 million ($96 million) in the year to 31 March 2005 up by 12% on sales that rose by just under 2% to Yen 173,899 million. Net income fell by 13% to Yen 6,924 million. Human pharmaceuticals dominate the Dainippon business, accounting for 70% of corporate net sales. Its animal health division, which is the biggest in Japan, generated just under 16% of corporate revenues in fiscal 2005. Remaining sales are realised by minor interests in the food additive and chemical industry sectors.
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Animal Pharms Top 20, 2005 Edition Table 8.1: Dainippons sales by division, fiscal 2005 1
Division Sales (Yen million) 122,055 27,284 25,871 175,211 (1,311) 173,899 % of gross total 69.7 15.6 14.7 100.0 N/a N/a
Human pharmaceuticals Animal health Other Gross total Eliminations/corporate Total reported
Notes: 1 Year to 31 March 2005; N/a, not applicable. Source: Dainippon.
Japanese pharmaceutical market growth has been limited for over a decade now by a combination of depressed economic conditions and tight government price controls. Most local players in the sector are heavily exposed to domestic market conditions, which have taken a heavy toll on industry earnings. This has triggered a period of major restructuring in the sector, with a stream of merger and acquisition announcements being made in the past 2-3 years. Dainippon and Sumitomo Pharmaceuticals announced in November 2004 that they had agreed to merge their respective businesses, and a definitive merger agreement was published in April 2005. Sumitomos parent, Sumitomo Chemical, will hold a 50.1% stake in the merged business, which will begin operating in October 2005, and which will trade as Dainippon Sumitomo Pharma Company Ltd. Dainippon Pharmaceutical president Kenjiro Miyatake, who will assume the same position in the merged business, said the new company would retain its commitment to Dainippons animal health subsidiary.
8.2

The Dainippon Pharmaceutical animal health subsidiary has posted consistent growth in recent years, despite the depressed nature of the Japanese market, but suffered a reverse in fiscal 2005 when sales fell back by almost 5% to Yen 27,284 million. Revenues had previously increased at rates between 5% and 9% a year since the beginning of the decade, thanks to a combination of new product launches and the acquisition of Tanabe Seiyakus animal health business, which was completed in November 2002.
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Animal Pharms Top 20, 2005 Edition Table 8.2: Dainippons animal health sales, fiscal 2001-2005 1
Year Sales (Yen million) 23,553 24,646 26,815 28,653 27,284 % change +5.3 +4.6 +8.8 +6.9 -4.8
2001 2002 2003 2004 2005
Note: 1 Years to 31 March. Source: Dainippon.
Products sold under licence from multinational partners generate the majority of Dainippons animal health revenues, limiting divisional earnings. Operating income reported by the business totalled less than Yen 1 billion in fiscal 2005, and the divisions operating margin during that year was less than 4%. 8.2.1 Fiscal 2004 performance Animal health sales rose by 6.9% in the year to 31 March 2004, reaching Yen 28,653 million ($247 million at annual average rates of exchange for calendar 2003). Operating income increased by 22.4% to Yen 1,257 million, pushing divisional operating margins up from 3.8% to 4.4%. Sales gains were attributable largely to the residual impact of the Tanabe Seiyaku acquisition, which was a major factor behind the 11% increase in sales posted by the division at the half-year stage. Revenues were flatter in the second half, however, with Tanabe product sales having been booked through most of the second half in fiscal 2003, and underlying growth still limited by the relatively weak conditions prevailing in the Japanese animal health market. Companion animal products were the main driver of revenues from the established Dainippon business, with gains reported for the Hills prescription pet diet line and pharmaceutical speciality products such as the heartworm preventative, Cardomec (ivermectin), sold under an agreement with Merial. 8.2.2 Fiscal 2005 performance Dainippons animal health sales declined for the first time this decade in the year to 31 March 2005, falling back by 4.8% on fiscal 2004 figures to Yen 27,284 million. At annual average rates of exchange for 2003, that total was equivalent to $252 million. Divisional earnings also fell, down by 24% to Yen 955 million, equating to an operating margin of only 3.5%. Revenues had been up on year-earlier figures by around 2% at the half-year stage, but the termination of Dainippons licensing agreement with Merial, under which it previously handled that companys Cardomec (ivermectin) heartworm lines and the Enacard (enalapril) canine ACE inhibitor, affected sales in the final quarter. Sales of the pet nutrition range are also believed to have been relatively flat during the year.
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Elsewhere, sales of Dainippons pharmaceutical products for use in the livestock and poultry industries were up on year-earlier figures. Feed additive and aquaculture product sales were down sharply on fiscal 2004 levels, however. 8.2.3 Interim fiscal 2006 performance With growth in other areas of the portfolio still limited, the absence of revenues generated by Merial brands previously sold by Dainippon in Japan continued to affect sales in the early part of fiscal 2006. The company posted animal health sales of Yen 6,791 million in the first quarter ended 30 June 2005 down by 12% on year-earlier figures. Operating income also continued to fall, totalling only Yen 199 million in the first quarter, compared with a figure of Yen 592 million in the corresponding three months of fiscal 2005. Dainippon has launched its own canine ACE inhibitor, and has entered a comarketing deal with Bayer covering the German companys combination heartworm/flea treatment, Advantage Heart. At this early stage, however, revenues from these products are clearly not sufficient to plug the gap left by Merial brands. From October 2005, the Dainippon animal health business will become part of a new company, following closure of the merger agreement between its parent and Sumitomo Pharmaceuticals. Senior management have indicated that the new company will retain its commitment to the animal health business.
8.3

While most of Japans leading pharmaceutical companies have worked hard to build up their international presence in recent years, core human health businesses are the focus of such efforts. Few can afford to devote significant funds to the geographical expansion of animal health subsidiaries, and international rights to key animal health products have traditionally been licensed out to multinational partners. Even Dainippon, which heads the Japanese animal health and nutrition company sales rankings, continues to focus its in-house resources almost exclusively on its domestic business. A substantial proportion of its domestic animal health revenues are generated by products distributed and marketed under agreements with US and European partners. Similarly, most revenues booked in markets outside Japan take the form of royalties on the sale of products that have been licensed out by Dainippon to international partners. The company does possess a direct presence in some neighbouring southeast Asian markets, but even in countries such as South Korea and Taiwan, major Dainippon products such as the fluoroquinolone antibiotic, orbifloxacin, are distributed by local partners under licensing agreements. Further afield, orbifloxacin is marketed by the US company, Schering-Plough Animal Health, which negotiated broad access to the product in an agreement with Dainippon that dates back to the 1990s.
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8.4
Product portfolio
Dainippons involvement in the animal health sector was originally based on the extension of antibiotic and antibacterial products, developed originally for use in human medicine, into the veterinary sector. Its current portfolio is much broader, however, spanning both companion animal and aquaculture products as well as livestock and poultry franchises. A substantial proportion of divisional revenues are generated by products sold under licence as a result of deals struck with multinational partners. Dainippons ability to continue posting substantial sales growth in a generally depressed Japanese animal health market through the 1990s and well into this decade was based largely on the performance of established licensed products and the addition of new multinational brands to its portfolio. More recently, the acquisition of Tanabe Seiyakus animal health business, which was completed in November 2002, has boosted revenues and strengthened the existing Dainippon portfolio, most notably in the aquaculture and livestock species segments, where turnover was increased by more than Yen 2 billion as a result of the deal. Companion animal products still dominate Dainippons animal health business, however, thanks largely to the major contribution that the Hills pet nutrition line makes to divisional sales.
Table 8.3: Dainippons animal health sales by product sector, fiscal 2005 1
Sector Sales (Yen million) 8,350 1,325 875 350 16,385 27,285 % of total 31 5 3 1 60 100
Small animal medicines Livestock/poultry medicines Aquaculture products Feed additives Pet nutrition Total
Note: 1 Year to 31 March 2005. Source: Animal Pharm Reports.
8.4.1
Companion animal products The Hills pet nutrition range handled by Dainippon has been expanded gradually over the past decade, and now numbers well over 20 products from the Prescription Diet and Science Diet lines. Revenues generated by the range increased rapidly as more products were added to existing lines, but have begun to level off more recently. Further growth is expected as a result of recent additions to the range, however. These include the Prescription Diet Canine j/d product, indicated as an aid to the improvement of hypokinesis due to canine arthritis, which was launched in Japan early in calendar 2005. Companion animal pharmaceuticals and biologicals are the other main contributors to Dainippons animal health sales. Revenues generated by the company in this segment of the market rose at double-digit rates during the early part of this decade as a result of volume sales growth and the addition of more new products to the portfolio.
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Major contributors to those increases included the canine heartworm preventative, Cardomec (ivermectin), and the canine ACE inhibitor, Enacard (enalapril), both of which were sold under an agreement with Merial. Dainippon posted annual revenues of almost Yen 2 billion for Cardomec alone, and the two products were responsible together for around half of its companion animal pharmaceutical sales. The deal with Merial was terminated at the end of calendar 2004, however, and the loss of Cardomec and Enacard revenues has had a significant impact on sales since then. Dainippon has a new partner in the companion animal parasite control market, where it began co-marketing Bayers combined heartworm/flea control product, Advantage Heart Spot-On Solution (imidacloprid and ivermectin) in January 2005. Enacard has also been replaced, this time with a product developed in-house. Dainippon developed and registered a veterinary formulation of its alacepril ACE inhibitor several years ago, but having already struck a deal with Merial to handle Enacard, the alacepril product was not commercialised. It was finally launched, as Apinac, at the beginning of 2005, following the termination of the deal with Merial. Dainippon has established partnerships with several other multinationals in the companion animal market segment. These include Idexx, on behalf of which it distributes the Snap heartworm diagnostic range; Schering-Plough, whose flunixin meglumine NSAID has been commercialised by Dainippon in the Japanese equine and small animal product sectors under the widely recognised Banamine and Finadyne brands; and Virbac, whose flagship feline leukaemia vaccine, Leucogen, is an established part of the Dainippon companion animal portfolio. Dainippon continues to pursue business with new partners in the companion animal market, and its growing range has also included Pfizers marketleading canine NSAID, Rimadyl (carprofen), since 2001. The company handled the Japanese launch of the Rimadyl chewable tablet formulation in 2003. Other relatively recent additions to the Dainippon companion animal range include Periocare Dental Ointment (minocycline hydrochloride), a canine periodontal disease treatment developed in association with Sunster; Abbotts canine inhalation anaesthetic, Isoflu (isofluorane) and Digital Angels companion animal identification product, Lifechip Injector. Advantage Heart is the newest major addition to Dainippons licensed range of companion animal medicines. The fluoroquinolone antibiotic, orbifloxacin, is the highest-profile companion animal product developed in-house by Dainippon. Launched originally as an injectable, it has been made available more recently in several other formulations, including a tablet with indications for the treatment of urinary, dermal and enteric infections, and a hydrophilic ointment (Victas S MT Cream), containing orbifloxacin in combination with miconazole and triamcinolone, which is indicated for the treatment of bacterial and mycotic external otitis and skin infections in dogs. Orbifloxacin has been developed and commercialised in most major markets outside Japan by the US company, Schering-Plough Animal Health, which sells the active ingredient under the Orbax brand. 8.4.2 Food animal products Revenues generated by Dainippons established range of food animal products declined appreciably in the second half of the 1990s and the early T&F Informa UK Ltd, 2005
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part of this decade, reflecting the difficult conditions that prevailed through most of that period in Japans livestock, poultry and aquaculture production sectors. The acquisition of Tanabe Seiyakus animal health business, which was led by livestock and aquaculture products, bolstered interests in the food animal sector, however, boosting the contribution of products in this area of the market from less than 5% of divisional sales to more than 10%. Feed additive and aquaculture product sales fell sharply in fiscal 2005, but declines in those segments were offset partially by an increase in revenues generated by the companys line of livestock therapeutics and vaccines. Dainippons most significant livestock therapeutic is the quinolone antibiotic, orbifloxacin, first introductions of which were handled in the mid-1990s. Sold as Victas, orbifloxacin helped to shore up sales of the Dainippon livestock and poultry products portfolio during the second half of the 1990s. A comarketing agreement with Meiji Seika saw that company launch an injectable orbifloxacin product for use in cattle and pigs under the Meivics Injection trade name towards the end of the decade. While few major third-party products feature in the Dainippon food animal range the company added an ivermectin-based injectable endectocide to its portfolio in 2003 through an agreement with the generics specialist, Eco Animal Health. The product, which is indicated for use in cattle and pigs, is being sold under the Tanamex label, reflecting a previous agreement struck between Eco and Tanabe. More recently, Dainippon announced in 2005 that it was to begin marketing BioVets interferon alpha product, Bimuron, which was approved by Japanese regulators in 2004 as a treatment for rotavirus infection in calves.
8.5
R&D
The size of the Dainippon animal health business and its limited margins preclude major involvement in basic research, and the development of products accessed through its parent company or licensing agreements are the main targets of divisional R&D spending, which is believed to total less than Yen 1 billion a year. Notwithstanding its limited resources, Dainippon invested significant amounts in a new 3,000m2 research facility at Ideda which came on-stream in the middle of the 1990s, and which is now the focus of animal health product development work. Importantly, the concentration of development activity at a single site has enabled Dainippon to accelerate the generation of data in support of approvals for licensed products. This has been a major factor behind its ability to land agreements with major multinational partners. Orbifloxacin is one of very few products resulting from in-house R&D work that has been brought to market since the beginning of the 1990s. Work on the product continues, and has resulted in the commercialisation of new formulations and indications registered since its initial launch. The canine ACE inhibitor, alacepril, is a high-profile addition to the companys in-house range. Dainippon developed and registered a canine formulation of the product several years ago, but already handled Merials enalapril-based ACE inhibitor, and did not bring its own product to market until 2005.
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Both orbifloxacin and alacepril were accessed through the animal health divisions human pharmaceutical parent company. Other potential crossovers in the antibiotic, cardiovascular and CNS treatment fields are believed to be in development, while the merger between Dainippon Pharmaceutical and Sumitomo Pharmaceuticals promises to broaden the range of potential development candidates that the division is able to access directly from its parent.
8.6
Strategy
Dainippon Pharmaceutical and Sumitomo Pharmaceuticals announced their intention to merge in November 2004, and released details of a definitive merger agreement in April 2005. The merged business, which will begin operating in October 2005, will effectively be a subsidiary of Sumitomo Chemical, which will hold a 50.1% stake in the venture. Kenjiro Miyatake, who has been appointed president of Dainippon Sumitomo Pharma, confirmed in April 2005 that the company will retain its commitment to the Dainippon animal health business. Sumitomo Pharmaceuticals animal health and nutritional feed additive interests were transferred to Sumitomo Chemical at the end of the 1990s, and it is possible that the two businesses might be merged. There is little overlap between the two, however, with Sumitomos activities focused largely on nutritional feed additives (methionine, biotin and vitamin B12) and a line of established parasite control products. Having received a vote of confidence from its new parent, managers of the Dainippon animal health business must set about the task of ensuring that its commitment is retained by driving up sales and, more importantly, operating margins. Earnings are particularly relevant in this respect, since the business currently returns a pre-tax margin of less than 4%. On the face of it, the recent sharp downturn in operating income does not bode well for the business. Declines are almost certainly attributable primarily to the termination of the agreement under which Dainippon previously distributed Merials Cardomec and Enacard brands, however. It will hope to build up sales of Bayers Advantage Heart product to replace the gap left by Cardomec, and has entered the ACE inhibitor market with its own product, which will replace Enacard in the portfolio. Dainippons alaceprilbased product is unlikely to match sales generated by Enacard, but earnings generated on revenues will be much healthier, since it was developed entirely in-house, and will not attract royalty payments as a result. Dainippon will continue to be an attractive partner for multinationals operating in Japan, not least because of its established reputation with the Japanese veterinary profession and its comprehensive distribution and marketing capabilities. This makes it a popular choice, especially with foreign companies looking to maximise the penetration of major brands in the Japanese market. Income generated as a result of distribution and marketing deals is inevitably limited, however, and it is possible that Dainippon will make a further acquisition in a bid to build further on its inhouse business.
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8.7
Prospects
The impact of the Tanabe Seiyaku acquisition, which was spread over two fiscal years, helped to mask a slowdown in sales of Dainippons established animal health portfolio. The Tanabe business has now been fully digested, however, exposing limited or negative growth in parts of the range notably the aquaculture and livestock/poultry feed additive lines. On top of that, the termination of the deal under which Dainippon previously distributed two of Merials leading companion animal brands has limited sales in the companion animal market sector. These factors combined to push Dainippons animal health sales down by almost 5% in the year to march 2005 the first reverse reported by the business for the best part of a decade. Interim results for fiscal 2006 indicate that a further, sharper decline is on the cards. Sales in the first quarter ended 30 June 2005 totalled Yen 6,791 million, down by 12% on year-earlier figures. Recent additions to the pet nutrition range and the introduction of other new products such as Bimuron may help to limit declines in the remainder of the year, while final-quarter sales will be measured against a period during which revenues from Cardomec and Enacard had already been lost. Nevertheless, Dainippon is unlikely to post a fiscal 2006 sales total far in excess of Yen 25 billion. A decline of 8% on year-earlier figures is forecast, pushing divisional sales down to Yen 25,100 million. Earnings also appear set to decline further in fiscal 2006, and the divisions operating margin could slip back to around 3%. Beyond fiscal 2006, Dainippon will hope to build up sales of its new canine ACE inhibitor and recent major additions to its in-licensed portfolio such as Advantage Heart. The performance of the latter will have a major bearing on the fortunes of the companys companion animal pharmaceutical range. Elsewhere, some further growth is anticipated in the pet nutrition business as a result of recent and upcoming additions to the range, but prospects for growth from livestock, poultry and aquaculture product lines is expected to remain limited. The size of the business may be boosted if it is merged with Sumitomo Chemicals animal health and nutrition interests, but that appears unlikely. A more probable source of non-organic growth is the purchase of additional interests in the veterinary pharmaceutical/biological segments of the market. In the current environment there are sure to be plenty of candidates for sale, and if Dainippon is truly committed to its animal health business this would appear to quickest way to drive up divisional margins to more acceptable levels.
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CHAPTER 9 DEGUSSA
Degussa Weisfrauenstrasse 9 D-60311 Frankfurt am Main Germany Tel: +49 69 218 3158 Fax: +49 69 218 2023 www.degussa.com Key personnel Dr Hubert Wennemer Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events June 2004 December 2004 January 2005 Acquires the Hungarian amino acid manufacturer Agroferm. Opens a new methionine production facility in Wuming, China. Signs a joint venture agreement covering the construction of a 40,000 tonne lysine plant in China. Euro 530 million ($658 million) 11th Amino acids North America, Europe, Asia Head of Degussa feed additives
9.1
Company background
Degussa is a German chemicals major that operates as an independent, publicly listed company within the mining and technology group, RAG Projektgesellschaft mbH. RAG, which launched a takeover bid for Degussa in May 2002, acquired a 46.5% stake in the company during 2003, and increased its holding to a majority 50.1% share in 2004. The change in Degussas ownership has had no material impact on the company, which is pressing ahead with a major two-phase restructuring programme that has already had a significant impact on its activities. Phase one of the project, which has seen it divest businesses with annual sales of more than Euro 6 billion, is approaching completion. In Phase II, the proceeds of those disposals will be ploughed into a targeted expansion of core activities, which are now focused firmly in the speciality chemicals field. Businesses designated as core interests generated almost 98% of Degussas Euro 11.2 billion ($13.8 billion) sales total in 2004. Group sales rose by 1.5% on restated 2003 figures, but revenues from core businesses were up by 3%. Volume sales were up by 6%, but exchange rate factors knocked 3% off sales as reported.
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The company also returned to profit in 2004, having recorded negative pretax earnings and net income figures in 2003, when it booked an asset impairment charge of Euro 500 million against its fine chemicals business. Income from continuing operations totalled Euro 391 million in 2004, while Degussa posted a group net income of Euro 309 million. Degussas animal nutrition business is one of five units that make up the companys fine and industrial chemicals division. The business posted sales of Euro 530 million in 2004, accounting for almost 19% of divisional revenues and a little less than 5% of Degussas corporate net sales total.
Table 9.1: Degussas sales by division, 2004
Division Sales (Euro million) 1,788 2,828 2,041 2,190 1,420 670 26 10,963 281 11,244 % of total 15.9 25.2 18.2 19.5 12.6 6.0 0.2 97.5 2.5 100.0
Construction chemicals Fine and industrial chemicals Performance materials Coatings and advanced fillers Speciality polymers Services Corporate Total core activities Non-core businesses Total
Source: Degussa.
9.2
Feed additive sales

Degussa posted feed additive sales of Euro 530 million ($658 million) in 2004 down by 13% on year-earlier figures. The business expanded rapidly in the late 1990s and during the early part of this decade. Sales reported by the unit have been affected more recently by the weakness of the dollar, uneven demand and volatile prices in the amino acids market, however.
Table 9.2: Degussas feed additive sales, 2000-2004
Year Sales (Euro million) 492 570 568 610 530 % change +36.7 +15.9 -0.4 +7.4 -13.1
2000 2001 2002 2003 2004

Source: Degussa.
9.2.1
2003 performance Feed additive sales rose by 7.4% to Euro 610 million in 2003 ($689 million at annual average rates of exchange), despite the adverse impact of currency factors on sales as reported in markets outside the euro zone. Degussa noted strong increases in demand for all of its amino acid products, especially in Asia, while the inclusion of revenues from the US-based Midwest Lysine business in results for the second half of the year is also
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thought to have boosted divisional sales. Operating earnings generated by the feed additives business were reported to have risen substantially, though Degussa does not publish earnings for individual units within the fine and industrial chemicals division. Degussa bought out Cargills 50% share in the Midwest Lysine joint venture in June 2003, though Cargill continues to supply Degussa with intermediate products such as dextrose under the terms of the deal. Later in the year, work commenced on the construction of a major new methionine manufacturing plant in Antwerp, Belgium. Being built at a cost of Euro 350 million, it is the biggest single capital expenditure project ever undertaken by Degussa. The new plant is scheduled to begin operating before the end of 2005. Towards the end of 2003, Degussa announced the sale of its vitamin B3 business to a subsidiary of Reilly Industries (US). Degussa and Reilly had worked together in the sector for more than 20 years through joint ventures covering the production and sale of vitamin B3. Degussas decision to terminate its involvement came as a further indication of its determination to focus its business on amino acid products. 9.2.2 2004 performance Having exceeded Euro 600 million for the first time in 2003, revenues generated by the feed additives business fell back sharply in 2004. The disruption of markets in Asia by outbreaks of avian influenza, weakening demand and price erosion all affected revenues, while the continued weakness of the dollar eroded sales as reported by the unit. The net result was a 13% decline in revenues, which fell back to Euro 530 million ($658 million). Pre-tax earnings generated by the feed additives business were also down significantly on 2003 figures. Despite the sharp downturn in the amino acids market, Degussa continued to invest in its feed additives business, acquiring the Hungarian company, Agroferm. A new methionine-manufacturing facility in China also came onstream towards the end of the year, while work on the expansion of threonine production capacity at the companys wholly owned Slovakian subsidiary, Fermas, continued. Degussa became part of the RAG industrial group on 1 June 2004, when RAG increased its holding in the company from 46.5% to 50.1%. Degussa will continue to operate as an independent company, however, and its strategic direction will not be affected by the change in ownership. 9.2.3 Interim 2005 performance Degussa does not publish interim sales and earnings figures for individual businesses within the fine and industrial chemicals division, but operating conditions facing the feed additives unit clearly remained difficult during the first half of 2005. In its report on the first quarter, the company noted that while demand for its amino acid products had picked up, methionine and lysine prices had declined sharply. These are the two most important contributors to revenues generated by the feed additives business, and pricing pressures will affect both sales and earnings reported by the unit. Similar trends were reported in the second quarter, and reduced earnings generated by the feed additives business were among a number of factors T&F Informa UK Ltd, 2005
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that drove divisional pre-tax income down by 30% in the first half of the year. While lysine prices are on a downward trend, demand for the product continues to rise, and Degussa announced the formation of a new lysine production joint venture in China during the first quarter of 2005. The collaboration will involve the construction of a new lysine production plant at a site in Jining, Shandong Province, owned by the German companys joint venture partner, Shandong Cathay Lineng Biotechnology. Later in the year, Degussa announced that the scope of its new methionine manufacturing facility at Antwerp had been reviewed and, in view of the difficult operating environment, its capacity had been scaled down from 150,000 tonnes to 120,000 tonnes a year. It also said the existing, 80,000 tonne methionine plant at its Antwerp site would be taken out of production, and would not come back on-stream until demand for the product picked up.
9.3

Degussas feed additive manufacturing capacity has traditionally been concentrated in Europe and North America, which both account for a substantial proportion of its global sales. Demand for amino acids has risen appreciably in emerging Asian and Latin American markets over the past 10 years, however. The share of Degussas global feed additive sales generated in Asia has doubled since the middle of the 1990s, and had reached more than 25% by 2003. Markets in the region have since been affected by the disruptive impact of avian influenza outbreaks, but long-term prospects there remain good, with rising pig and poultry production expected to support sizeable increases in demand for nutritional feed additives. Potential for growth is greatest in China, where Degussa established a new holding company in 2001 as part of a strategy designed to pave the way for expansion there at corporate level. In a further development that underlines its commitment to the Chinese market, the company opened a new R&D centre in Shanghai during 2004, and has also begun work on the construction of a new production facility that will be used by several of its business units. The feed additives business is already involved in a joint venture with the Chinese amino acid manufacturer, Nanning Only Time Pharmaceuticals, and entered a second collaborative agreement in 2005 under which it will work with local partner Shandong Cathay Lineng Biotechnology on the construction of a new lysine production plant. Operating conditions in Latin America were extremely difficult in the early part of this decade, but leading economies in the region have now begun to pick up, and levels of livestock and poultry production in Brazil have continued to increase rapidly. Broiler meat output in Brazil has doubled since 1995, while output in the pork and beef sectors has increased by 80% and 35%, respectively. Volume sales of inputs such as nutritional feed additives have risen accordingly, and while prices have not always been favourable they have strengthened appreciably in the past two years. Feed production in Brazil rose by almost 5% in 2004, and the country is now the worlds third largest producer of animal feed, after the US and China.
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Demand for methionine in Brazil rose by 5% in volume terms, reaching over 39,000 tonnes, while a similar increase in lysine sales volume saw the market for that product reach almost 27,000 tonnes. Booming exports have been a major factor behind recent expansion of Brazils livestock and poultry production industries. Producers in Argentina have now begun to benefit from a sharp rise in export demand, and feed additive sales there will begin to increase accordingly. While Asia and Latin America represent the most promising sources of potential future demand for Degussas products, markets in Europe and North America still account together for more than half of the companys feed additive revenues. Livestock production in most of Europes major markets is relatively depressed, however, and the weakness of the dollar against the euro since 2002 has had a major impact on revenues reported by the company in North America. These two regions are also home to most of the units major production facilities, and have been the subject of major capital investment programmes in recent years. In Europe, Degussa recently began producing methylmercaptane, which is a key ingredient in methionine synthesis, at a new 50,000 tonne plant in Wesseling, Germany, while a major new methionine production plant is due to come on-stream at Antwerp in Belgium before the end of 2005. The Antwerp facility will have an annual production capacity of 120,000 tonnes. Degussa has also broadened its portfolio through the acquisition of amino acid producers in Europe, buying out its former partner in a move that gave it full control of the Slovakian lysine and threonine production business, Fermas, in the late 1990s, and acquiring the Hungarian company, Agroferm, in 2004. The latter markets lysine, threonine and tryptophan, making Degussa the only company in the world that markets all four of the major amino acids used to supplement animal feed. In the US, capacity at Degussas methionine manufacturing facility in Mobile, Alabama, has been increased, while in 2003 the company bought out Cargills 50% share in a lysine manufacturing joint venture. Trading as Midwest Lysine, the venture began producing commercially in 2000. It is located close to Cargills own manufacturing complex in Blair, Nebraska, and Cargill will continue to supply Degussa with intermediates such as dextrose used in the production of lysine.
9.4
Product portfolio
Degussa is the only company in the world with in-house capabilities covering the manufacture of all four of the major amino acids (methionine, lysine, threonine and tryptophan) that are supplemented in animal feed. Following the disposal of previously modest interests in the vitamin B3 market during 2003, its feed additives business is now focused entirely on amino acids. Methionine is the biggest contributor to revenues, but demand for lysine has increased significantly in recent years, driving up sales in that part of the business.
9.4.1
Methionine Degussa is the worlds leading supplier of methionine for use in poultry and livestock production. Sales of its Mepron (powdered formulation) and
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Liquimeth (liquid) methionine brands are responsible for the bulk of the companys Euro 530 million feed additive revenues. Poultry rearing is the main source of demand for methionine, but the product is included increasingly in pig and speciality ruminant feeds as understanding of its ability to improve performance in those species sectors increases. Global demand for methionine has risen consistently since the middle of the 1990s and, like most of its competitors in the sector, Degussa has invested heavily in expanding and upgrading its methionine production network. The companys methionine products are synthesised at three major plants, in Mobile, Alabama (US), Wesseling (Germany) and Antwerp (Belgium). All three sites have been the subject of significant investment since the second half of the 1990s, but the Euro 350 million expansion project at its Antwerp complex dwarfs spending elsewhere. Existing capacity at Antwerp is 80,000 tonnes a year, but construction of a second plant there with a capacity of 150,000 tonnes was begun in 2003. The project is due for completion by the end of 2005, but has been reviewed in the light of recent downturns in the global market for methionine. As a result, the capacity of the new plant has been scaled back to 120,000 tonnes, and Degussa has announced that, when the new facility comes onstream, the existing plant will be shut down temporarily. This will allow the new plant to operate at levels close to full capacity, making production more efficient. The existing facility will also be overhauled during its closure, but will not be reopened until global demand for methionine picks up sufficiently to warrant production there. Investment at the Antwerp manufacturing complex also involves the construction of production facilities for the methionine starting products, acrolein and methylmercaptane, while existing production capacity for a third intermediate, prussic acid, is being increased by 50%. A new 50,000 tonne methylmercaptane production facility also came on-stream at Degussas Wesseling site recently, increasing its ability to control the supply of raw materials used in the manufacture of methionine. This will enable it to avoid supply bottlenecks that have affected the business at times in the past. In addition to its major Mepron and Liquimeth brands, Degussa also manufactures a protected methionine formulation, Mepron M85, which is indicated for use in ruminant feed. The product is formulated in small pellets covered by a protective film that enables it to pass through ruminant forestomachs before being released and absorbed in the abomasum and small intestine. It is indicated for use in high-yielding dairy cows, assuring high milk protein content and promoting milk production. Trials have indicated that it can also improve fertility and prolong the service life of treated cows. While global demand for methionine has risen significantly over the past 10 years, price volatility has had a major impact on the value of the market at times. Prices fell sharply towards the end of the 1990s following the exposure of a cartel that had fixed global prices for the product earlier in that decade. Degussa was one of several manufacturers implicated in the affair, and has since made significant payments in the form of fines imposed by trade regulators and the settlement of legal actions brought by customers. T&F Informa UK Ltd, 2005
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Prices began to recover in 2001, and remained reasonably strong through the period to 2004. They have followed a sharp downward trend since then, however, affecting the performance of the Degussa feed additives business in the second half of 2004 and the early months of 2005. 9.4.2 Other amino acids While methionine is the dominant source of Degussas amino acid revenues, the company also manufactures lysine, threonine and tryptophan, which are the three other most widely supplemented amino acids in animal feed. Its entry into these markets has been engineered through joint venture and acquisition agreements that have given it access to both manufacturing facilities and production know-how. The companys first foray outside the methionine sector saw it enter a joint venture with the Slovakian company, Biotika, in the early 1990s. Degussa bought out Biotikas share in the venture in 1998, and now owns 100% of the Slovakian manufacturer, which trades as Fermas. It has since invested heavily in the Fermas facility, and is currently pursuing a programme that will see threonine production capacity in Slovakia rise from 10,000 tonnes to 20,000 tonnes by 2006. Fermas manufactures threonine as a feed-grade crystalline powder indicated for inclusion in all major livestock feeds. It is used most widely in animals fed on diets with a high grain content, which can lead to threonine deficiencies. Lysine production capacity at the Fermas plant is limited, at around 13,000 tonnes, but Degussa has pursued other options in a bid to increase its stake in this segment of the amino acids market. Towards the end of the 1990s the company entered a $100 million joint manufacturing venture with the US company, Cargill, under which the two constructed a 75,000 tonne lysine facility at Blair, Nebraska, that came on-stream in 2000. Degussa bought out Cargills share in the venture in 2003, though Cargill continues to supply it with raw materials used in the lysine production process. Additional production capacity and an exclusive licence covering trademark rights and know-how in respect of lysine, as well as threonine and tryptophan, was acquired in 2004, when Degussa purchased the Hungarian company, Agroferm, from Kyowa Hakko Kogyo. The deal will add around Euro 20 million to Degussas global revenues. Degussas most recent initiative in the global lysine market saw it establish a joint venture for production of the product in China at the beginning of 2005. The German company holds a majority 51% stake in the venture, in which its partner is the local company, Shandong Cathay Lineng Biotechnology. The deal envisages the construction of a lysine production facility with an initial capacity of 40,000 tonnes. Due to begin operating before the end of 2005, the plant will eventually be expanded to a potential capacity of 120,000 tonnes by 2008.
9.5
R&D
Degussas fine and industrial chemicals division was responsible for almost a quarter of the companys R&D spending in 2004 a figure equivalent to just under Euro 90 million. The feed additives business is believed to account for around Euro 25 million of that figure, with R&D spending by the unit equivalent to around 5% of sales.
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Most R&D work is undertaken at Degussas global research and applied technology centre in Hanau-Wolfgang, Germany. Spending is devoted largely to projects that aim to increase the efficiency of production processes and develop improved formulations of existing amino acid products. Work on the development of improved bacterial strains used in amino acid production is a key area of activity. New production processes for Ltryptophan, which is used as a supplement to L-lysine and L-threonine in animal feeds, have been developed as a result of those efforts, using genome technology to optimise microbial processes. While lysine and threonine are produced by fermentation, methionine is manufactured using conventional chemical processes. Degussa has assessed possible alternative methods of production, but the company has concluded that chemical-based manufacture of its leading product will remain the most competitive method in the foreseeable future. The efficiency and costeffectiveness of production processes for the methionine intermediates, acrolein and methylmercaptane, has been increased by the development of new catalysts. This was the result of work at Hanau-Wolfgang, where Degussa has invested around Euro 55 million in catalysis since the beginning of this decade. Developments in this field have applications in several of the companys fine and industrial chemical businesses. Degussa is also involved in collaborations with partners in both the academic and commercial spheres. Its work on improved bacterial strains was undertaken with university partners, while a new project that aims to analyse bacterial genomes and integrate experimental data in the pursuit of pure amino acid production is being undertaken using a bioinformatics technology platform developed by the Swiss company, Genedata.
9.6
Strategy
Degussa is close to the completion of a major corporate restructuring programme that has seen it divest interests that generated annual sales of around Euro 6 billion. The proceeds of those disposals, which total more than Euro 3.8 billion, have been used to fund the targeted expansion of the companys core businesses, and to reduce its net financial debt. In a second phase of the restructuring process, Degussa is now addressing changes in the way it does business, with the aim of driving a period of profitable growth for its core interests. Due for completion by 2008, phase two of the restructuring process has four main aims: Strengthening links with customers and improving levels of customer service; Gaining a leadership position in promising growth markets; Positioning Degussa manufacturing sites to meet increasing competitive pressures; Overhauling management structures.
While developments in the first and last of these four areas will be largely invisible to those outside the company apart from its customer base, progress towards the two other main goals is already apparent, both at corporate level and within the feed additives business.
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China, which is the first emerging market in which the company aims to gain a lead over its multinational competitors, has already been a target for major investment. This has seen Degussa establish a growing presence in terms of both manufacturing and marketing. In the feed additives sector, existing levels of investment in the country were stepped up at the beginning of 2005 when the company established a joint lysine manufacturing venture that will eventually boast an annual capacity of 120,000 tonnes some 45,000 tonnes higher than that of its US lysine facility. The second target for growth is central and eastern Europe. Here, the feed additives business is already well placed, having purchased manufacturing capability in both Hungary and Slovakia. Its presence on the ground will give it an important advantage over some of its main multinational competitors in the region. Positioning its manufacturing sites to meet increasing competitive pressures will present a sterner challenge for the Degussa feed additives business. Capital spending on the units manufacturing network has reached unprecedented levels in the past five years, and those investments will undoubtedly help the business to compete more effectively. The recent downturn in prices of the major amino acids underlines the importance of continued efforts in this field, however, and companies operating from production bases in Europe and North America will find it increasingly difficult to compete with emerging low-cost manufacturers from Asia. Critics of the decision to invest so heavily in a new methionine plant at Antwerp believed that the facility should have been built in Asia, but the company has defended its strategy, pointing out that existing infrastructure at Antwerp, access to a skilled labour force and its port location were all important factors behind the decision. Nevertheless, the Chinese lysine manufacturing joint venture announced by the company at the beginning of 2005 is likely to herald further developments there in future.
9.7
Prospects
Like most companies operating in the amino acids market, Degussas business began to suffer in 2004 from a combination of factors that depressed both revenues and profit in the sector. For companies based in Europe, the weak dollar was already a problem, but its continued depreciation exacerbated the impact of other market trends, including the disruption caused in Asia by continued outbreaks of avian influenza and downward pressure on amino acid prices. The net result for Degussa was a 13% decline in reported sales of its feed additives business, and a sharp decline in the units earnings. Volume sales picked up in the first quarter of 2005, but methionine and lysine prices were far below levels witnessed in the corresponding period of 2004, and earnings reported for the business fell sharply. Similar trends were reported in the second quarter, and while total sales reported for the fine and industrial chemicals division increased by 5% in the first half, feed additive revenues are believed to have fallen back by more than 10%. Further declines are expected in the second half of 2005, though reverses will not be as sharp, since methionine and lysine prices had already begun to slip in the second half of 2004. As a result, the fall in sales through 2005 as
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a whole may be limited to around 7%, with revenues totalling Euro 493 million. Beyond 2005, the strength of global demand for methionine and lysine will continue to have an impact on the performance of the Degussa feed additives business. Assuming that global consumption continues to rise in the long term, the company is now well placed to respond, having expanded and upgraded manufacturing capabilities for both of its major products. Price will remain a dominant influence on the business, however, determining the degree to which revenues and profits can be driven back up following recent reverses. Near-term pricing prospects do not appear particularly positive, but tighter markets for methionine in particular are expected in 2006 and beyond.
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CHAPTER 10 DSM
DSM Nutritional Products PO Box 3255 Building 241/1011 CH-4002 Basel Switzerland Tel: +41 61 688 3333 Fax: +41 61 688 3330 www.dsm.com www.dsmnutritionalproducts.com Key personnel Dr Georg Kau Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events September 2004 Opens the worlds biggest vitamin E plant at its Sisseln (Switzerland) manufacturing complex. Announces agreement to buy out domestic partner in Chinese vitamin manufacturing joint-venture. Euro 860 million ($1,068 million) 4th Vitamins, carotenoids, enzymes Europe, North America, Asia/Pacific Head of animal nutrition and health
January 2005
10.1
Company background
DSM is a Dutch multinational with interests in the life science, performance materials and industrial chemicals sectors. The company has been restructured significantly since the beginning of the decade, disposing of interests in the petrochemicals field and acquiring Hoffmann-La Roches vitamins and fine chemicals division in a deal that was completed in October 2003. The Roche deal included that companys animal nutrition business, and DSM is now a major player in the global market for nutritional feed additives. Re-branded as DSM Nutritional Products, the former Roche division is part of the Dutch companys life sciences operating segment, but is treated as a separate business where financial results are concerned. It generated global sales of Euro 1,899 million ($2,359 million) in 2004, when its inclusion in full-year results for the first time was the main factor behind a 28% increase in net sales posted by DSM, which took corporate revenues to Euro 7,752 million. The business has also had a positive impact on DSMs earnings, generating a pre-tax income of Euro 203 million (equivalent to more than 40% of the corporate total, which rose by 66% to Euro 489 million).
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Animal Pharms Top 20, 2005 Edition Table 10.1: DSMs sales by operating segment, 2004
Segment Sales (Euro million) 1,882 1,899 2,008 1,608 355 7,752 % of total 24.3 24.5 25.9 20.7 4.6 100.0
Life science products DSM Nutritional Products Performance materials Industrial chemicals Other Total
Source: DSM.
The nutritional products business was responsible for almost a quarter of DSMs net sales total in 2004. Revenues are generated by human nutrition products, a personal care range and an animal nutrition unit. Animal nutrition products accounted for approximately 45% of divisional sales in 2004 equivalent to around Euro 860 million.
10.2

Sales generated by the former Roche animal nutrition business peaked in 1997 at almost SwFr 2,300 million equivalent to almost $1,600 million at the time. Revenues fell consistently through the remainder of the 1990s, however, while the disposal by Roche of its interests in the MFAs market, which were sold to Alpharma in 2000, also had a negative impact on sales generated by the business. In the final full year during which the business was owned by the Swiss company, animal nutrition products generated 54% of its vitamins and fine chemicals division sales a figure equivalent to approximately SwFr 1,830 million (or $1,173 million at annual average rates of exchange). Its share of divisional revenues has fallen sharply since then, to only 45% in 2004, when sales generated by the unit were approximately Euro 860 million ($1,068 million at annual average rates of exchange).
10.2.1
2003 performance DSM agreed provisionally to purchase the Roche vitamins and fine chemicals division in 2002, but the transaction was not completed until October 2003. In the meantime, Roche continued to report on the financial performance of the division, posting a double-digit decline in revenues over the first half of the year. Currency factors were responsible for around three-quarters of the 13% reverse. Conditions in the global market for vitamins and fine chemicals remained difficult during the first half of 2003, however, and the terms of the original acquisition agreement struck between the two companies were amended in July, with the purchase price being reduced by Euro 200 million to Euro 1,750 million. Roche also agreed to take financial responsibility for future liabilities that may arise as a result of investigations into a vitamin price-fixing scandal in which it was involved during the 1990s. European trade regulators finally cleared DSMs purchase of the division in July 2003. The transaction was closed two months later, and the business began operating as part of DSM in October. Neither company reported a full-
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year sales total for the division but, expressed in euros (DSMs reporting currency), revenues are believed to have totalled approximately Euro 1,990 million. The animal nutrition unit is thought to have been responsible for around half of that total, with pricing pressures, currency factors and the expiry of a toll manufacturing agreement for the anticoccidial product, lasalocid, all contributing to declines in the segment. Reporting on the animal nutrition units performance in the final quarter of 2003, DSM said revenues were led by Hy D and the Ronozyme line of feed enzymes both relatively modest contributors to total revenues. Poor conditions in the European salmon industry limited demand for carotenoids, while prices for some key vitamin products remained under pressure. 10.2.2 2004 performance DSM posted sales of Euro 1,899 million for the nutritional products division in 2004 the first full year in which the business contributed to its corporate revenue total. Pre-tax earnings generated by the division were Euro 203 million equivalent to more than 40% of the companys total operating profit. At divisional level, sales were reported to have been broadly similar to yearearlier figures, with higher volumes offset by falling prices. Price pressures were particularly strong in the animal nutrition sector, which was also affected by outbreaks of avian influenza in Asia and falling prices in the aquaculture market. DSM said the animal nutrition business was responsible for 45% of the divisional sales total a figure equivalent to approximately Euro 860 million ($1,068 million at annual average rates of exchange). Sales of the Hy D feed supplement and the companys feed enzymes range continued to rise, but revenues generated by its core vitamin lines are believed to have declined. Restructuring measures being pursued by DSM at divisional level led to the loss of more than 400 jobs, with cuts introduced at the Sisseln manufacturing site, the head office in Kaiseraugst, and the European sales office in Birsfelden (all in Switzerland). Investment in the companys global production network continued, however, with a new feed pre-mix facility at Chonburi in Thailand inaugurated during the first quarter and the worlds biggest vitamin E plant, which is located at the divisions Sisseln manufacturing complex, coming on-stream in September. 10.2.3 Interim 2005 performance Revenues generated by the nutritional products division were down marginally on year-earlier figures in each of the first two quarters of 2005, leaving first-half revenues at Euro 946 million 1.3% below 2004 figures. In line with recent trends, the performance of the animal nutrition business is believed to have been somewhat weaker than that of the division as a whole. Volume sales generated by the animal nutrition unit were higher in the first quarter, but the company noted that prices in parts of the vitamins market remained under pressure, and revenues are believed to have fallen back on year-earlier figures. Similar trends were reported in the second quarter, though volume gains are believed to have outweighed the impact of lower T&F Informa UK Ltd, 2005
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prices in the April-June period, leaving second-quarter animal nutrition revenues up slightly on 2004 levels.
10.3

The DSM animal nutrition business is led by sales generated in Europe and North America, but significant revenues are also realised in Asia and South America, where poultry and livestock production volumes have increased significantly over the past decade. Contributions to global sales by markets outside Europe have been affected since 2002 by the weakness of the US dollar and related currencies. Both the animal nutrition business and the DSM nutritional products division are still being run from Switzerland, which is also a key location for both manufacturing and research activity. Capacity has been increased at the divisions vitamin E intermediates plant in Lalden, which has been expanded to meet rising demand for inputs at the Sisseln complex, where the worlds biggest vitamin E manufacturing plant was inaugurated officially in September 2004. Elsewhere, biotin output at the companys facility in Grenzach, Germany, has been increased to meet recent sharp increases in demand, while a new production facility for vitamin B2 came on-stream during 2001, and a new feed pre-mix facility was inaugurated in Hungary in 2002. In May 2005, DSM announced that bulk vitamin C production will be concentrated at its plant in Dalry, Scotland, where capacity has been increased as a result of recent investment programmes. The decision to focus activity at Dalry will result in the closure of a bulk vitamin C production plant in the US (see below). The divisions activities in the Americas are supported by a broad network of bulk manufacturing and pre-mix production facilities. Prominent among these is a site in Belvidere, New Jersey (US), where the workforce will be reduced by around 150 in the second half of 2005 following the closure of a bulk vitamin C production plant (see above). The Belvidere facility will continue to produce a range of vitamins and related products marketed by the division, however. Elsewhere in the Americas a new feed pre-mix facility was opened in Chile by Roche a year or so before it sold the business to DSM. Demand there has been strong in recent years, thanks to rapid expansion in the Chilean aquaculture sector. With livestock production in Brazil and Argentina also increasing rapidly as a result of improving economic conditions and strong export trade, and the US livestock sector performing well in the past 2-3 years, volume sales in the Americas have increased appreciably. Revenues as reported have been affected by the weakness of the US dollar, however.
10.4
Product portfolio
Vitamins are the dominant source of revenues for the DSM animal nutrition business, generating over three-quarters of global sales. The company also manufactures and markets a range of carotenoids, however, while feed enzymes and non-antibiotic performance enhancers are increasingly significant contributors to revenues.
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10.4.1
Vitamins The DSM Nutritional Products division is a leading player in the global market for synthetic vitamins used in both animal production and in human health applications. Products for inclusion in animal feed are sold under the Rovimix label. The full range includes vitamins A, B1, B2, B6, B12, C, D, E, K, niacin, biotin and folic acid. Sales for use in animal feed are led by vitamins A, E and B2, which together generate more than half of all revenues in this sector. Vitamin A is used widely to supplement levels of beta-carotene in harvested fodder crops, while vitamin B2 is used almost universally in compound feed to supplement low levels of the product found in cereals. Other more specific targets for particular vitamins include young, growing stock (vitamin B6), improved milk yields (niacin), treatment of hoof problems (biotin) and reproduction/laying performance in poultry (folic acid). Most Rovimix products are for use in premixes and compound feeds. Several key vitamins are also manufactured for use in milk replacers and liquid diets, however. The vitamins and fine chemicals division also produces vitamins for use in the food, pharmaceutical and cosmetics industries. Many of its production sites manufacture for use in a range of sectors. The division operates 11 major production facilities, located in seven different countries. It also runs a network of around 50 smaller pre-mix production plants. Prices in the global vitamins market have been volatile over the past decade, and pricing pressures have affected revenues posted by most established manufacturers in the sector over the past two years, offsetting higher volume sales. Lower prices are squeezing manufacturer margins, and most leading players are working hard to improve levels of production efficiency in order to bolster returns on their business. DSM has cut costs associated with its vitamin manufacturing business significantly since it acquired the division from Roche, boosting earnings appreciably. Further restructuring measures have been announced recently, including the decision to focus bulk vitamin C production at the companys plant in Dalry, Scotland. Broadening applications for existing products and expanding the portfolio through the development of new products are other goals being pursued at both divisional level and within the animal nutrition business. The vitamin D3 metabolite, 25-hydroxy-vitamin D3, is among the most recent additions to the DSM animal nutrition range. Acquired by Roche from Monsanto shortly before it sold the business, the product is sold as Hy D. Its main applications to date are in the poultry sector, but it has potential for use in other food animal species. New pet nutrition products containing vitamin C and betacarotene are also being added to the range, while a powdered formulation of vitamin A for use in cattle has also been launched recently.
10.4.2
Carotenoids Like the companys vitamin products, DSMs carotenoid range has applications in a number of industrial sectors, including the food and drink industries, pharmaceuticals and cosmetics, as well as animal nutrition. Major sources of demand in the animal nutrition industry are the aquaculture and poultry sectors, where applications include the pigmentation of eggs, poultry and fish.
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DSM sells its animal-use carotenoids under the Carophyll brand. Products include the vitamin A precursor, beta-carotene, which is used in livestock feeds; canthaxanthin, which is used widely for egg yolk and broiler pigmentation; and astaxanthin, which is added to the feed of farmed salmon, trout and shrimps, replacing natural sources of astaxanthin that are responsible for the characteristic pink pigmentation of these species in the wild. Volume sales of carotenoids to the poultry and aquaculture sectors have been strong in recent years. Demand in some Asian markets has been affected by outbreaks of avian influenza, however, while prices in the aquaculture sector were affected in 2004 by a downturn in salmon prices during the second half of the year. Carophyll Pink 10%, a newly formulated astaxanthin product that provides greater flexibility in feed manufacture, is among the most recent additions to the aquaculture range. The business also produces apocarotenoic ester, a yellow/yellow-orange pigment used as the yellow component of egg yolk and broiler pigmentation when added to poultry feed. 10.4.3 Feed enzymes DSM and Roche were both major players in the feed enzymes market, and concerns were expressed by European trade regulators about the impact of the DSM acquisition on levels of competition in the sector. Clearance of the deal was dependent on DSMs agreement to terminate its relationship with BASF in the feed enzymes market, and the disposal of related research and manufacturing capabilities. Accordingly, the Dutch company sold its existing interests in the field to BASF, and is now active in the sector through the alliance that Roche had established with the Danish company, Novo Nordisk. Under the terms of the agreement, DSM has exclusive marketing rights to products developed and manufactured by Novo Nordisks enzyme business, which was spun off recently and which now trades as Novozymes A/S. The alliance was originally restricted to markets in North America, but has since been broadened to include South America and much of Asia. Products sold by DSM under the agreement with Novozymes are sold under the Roxazyme and Ronozyme brands, and are available in both coated granulate and liquid formulations. Revenues generated by the range have increased rapidly since the middle of the 1990s, and sales have been driven up further in recent years by bans on the inclusion of meat and bone meal (traditionally a major source of phosphorous) in animal feed due to concerns surrounding BSE. Enzyme applications in animal feed have also been broadened, with Roxazyme G2, which was already approved for use in broilers and turkeys, authorised for use in laying hens and piglets by regulators in the EU. In 2005, the two companies were granted provisional EU authorisation for Ronozyme P 20000, a phytase-based enzyme for use in salmonids. Feed enzyme sales posted by Novozymes increased by around 15% in both 2003 and 2004, reaching DKr 734 million ($123 million) in the latter year. Revenues generated by the range are expected to slow in 2005 as a result of high stocking rates in distributor channels, but rising demand and the T&F Informa UK Ltd, 2005
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addition of more new products to the range will drive sales up further in 2006 and beyond. 10.4.4 Other products DSM received a definitive EU authorisation for the use of its microencapsulated probiotic feed additive, Cylactin LBD ME10 in chickens and fattening pigs during the first half of 2005. Based on the Enterococcus faecium bacterium, the product has been approved for use in bull calves since 2004. The company is pursuing broader applications, with sows and piglets the next targets on its list. The company has also begun marketing VevoVitall, a purified form of benzoic acid that improves piglet growth rates by up to 20% while reducing ammonia emissions from pig manure by up to one-third. Developed by DSMs fine chemicals business, the product was launched by the animal nutrition unit in 2004. Other non-antibiotic performance enhancers are being developed by the company, and will be added to the range in future.
10.5
R&D
Corporate spending by DSM on R&D totalled Euro 286 million in 2004 equivalent to 3.7% of group net sales. The nutritional products division currently invests in R&D at a slightly higher rate, spending Euro 75 million, or 3.9% of divisional sales in 2004. Spending by the animal nutrition unit at rates similar to the divisional average would see it plough just under Euro 40 million a year into R&D projects. Resources are focused on the application of new technologies to optimise production efficiencies, the development of new products, research into new applications for existing products and the development of advanced formulations. Process improvement involves the introduction of new chemical processes and the development of new biotechnology-based production methods, supported by technologies such as genomics and proteomics. Spending in this area accounts for around half of the nutritional products divisions total R&D budget, with results generally applicable to all of its main business segments. Shortly before the acquisition of the nutritional products division was completed, Roche signed a global licence agreement with the Danish company, UpFront Chromatography, under which the business will apply UpFronts expanded bed adsorption (EBA) technology in the production of ingredients for feed, food, pharmaceutical and cosmetics applications. DSM will also apply its own expertise in process technology to the nutritional products division in a bid to generate cost-savings. In the product development field, work in the animal nutrition sector is focused on new ingredients capable of improving animal health and performance, environmental benefits, and cost-savings in feed use. The company is working with its partner in the feed enzymes market, Novozymes, to develop new enzyme products and improved formulations of existing offerings. Several promising new candidates have been discovered as a result of recent work, and these are now being developed further.
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Programmes aimed at the development of new vitamin products and applications are focused largely in the food and human health/nutrition fields, but new products have also been added to the animal feed range. These include high-dose vitamin A formulations, combination products containing vitamin A and D3, and new beta-carotene products. Longer-term research projects aim to develop new approaches to animal nutrition and health based on an improved understanding of livestock genetics and physiological processes. Here, the company is involved in an alliance with the UK company, Axis Genetics, under which Axiss oral Epicoat vaccines are being evaluated for use in the animal production sector. A Eubiotics R&D programme, which aims to discover and develop alternatives to antibiotic-based livestock growth promoters, is also being pursued. Here, the animal nutrition business is able to draw on DSMs expertise in related fields, which gives it access to an extensive library of natural products as well as tools for compound screening at molecular, chemical and microbiological levels.
10.6
Strategy
DSM embarked on a major restructuring exercise at the beginning of the decade, aiming to build up interests in sectors with higher added value and divest poorly performing units. Its goal was to become a leading player in specific industrial segments capable of delivering strong growth and increased returns in investment. The acquisition of the Roche vitamins and fine chemicals business was a central plank in that strategy, complementing existing interests in the life sciences sector that span fine chemicals, pharmaceuticals, anti-infectives and food specialities. A bakery ingredients business, which was previously part of the life sciences operating segment, was divested in the first half of 2005. DSM believed that its existing expertise in the biotech sector would enable it to extract significant improvements in the efficiency and profitability of the former Roche business, and launched a project aimed at driving up margins generated by the division soon after it was acquired. The so-called Vital project is a three-stage initiative designed to separate the business from Roche, integrate people and systems into the DSM operating culture, improve performance, boost profits and create new opportunities for profitable growth. Integration of the nutritional products business will be virtually complete by the end of 2005. The initiative, which has involved significant staff reductions and a number of plant closures, has already had an impact on the profitability of the division, which posted a 31% increase in pre-tax earnings during the first half of 2005. At Euro 131 million, operating income was equivalent to a pre-tax margin of almost 14% well above projected targets. While staff cuts and plant closures have yielded short-term savings, longerterm cost reductions will also be pursued through capital spending programmes designed to optimise manufacturing, marketing and distribution functions and cut costs associated with production. In an industrial sector characterised by strong downward price pressure, the successful implementation of these measures will play a vital role in DSMs ability to maintain increased levels of profitability.
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The animal nutrition business has been affected more than some other parts of the division by pricing pressures over the past 2-3 years, and management will be particularly keen to reap the benefits of divisional-level initiatives designed to limit costs. The vitamins range that currently dominates animal nutrition revenues will always be susceptible to cyclical price trends, however, and DSM appears determined to limit its exposure to conditions in that segment of the market by broadening its existing portfolio. Interests in the feed enzymes market, where more new products will be added to the range in the second half of the decade, will spearhead growth outside the vitamins sector. DSM is also targeting the market for livestock performance enhancers, however, and will launch new offerings to sit alongside VevoVitall, which was rolled out in Europe during 2004.
10.7
Prospects
In common with those of most leading manufacturers in the nutritional feed additives market, DSMs revenues have been affected recently by downward pressure on the price of key products. With currency factors acting as a further break on international revenues (especially in dollar-denominated markets), sales reported for the animal nutrition business have declined significantly since the beginning of the decade. The impact of exchange rate factors on the business finally appears to be moderating, but pricing pressures continued to affect the animal nutrition business in the first quarter of 2005, offsetting higher volume sales reported by the company. While DSM does not publish interim sales figures for individual units within the nutritional products division, it hinted at a more positive performance by the animal nutrition business in the second quarter, noting that higher volume sales were only partially offset by lower selling prices. Total first half revenues are believed to have been down on yearearlier figures, however. Feed enzyme sales, which have been a source of rapid growth in recent years, were flat during the first half of 2005. The slowdown in that sector of the portfolio means that the animal nutrition units fortunes this year will be linked even more closely to conditions in the vitamins market. As a result, a further reduction in revenues is forecast, though reverses are expected to be more modest than those experienced in the past two years. A decline of 4% would see the company post a 2005 animal nutrition sales figure of around Euro 825 million. Beyond 2005, revenues generated by the feed enzymes range are expected to pick up again, and sales of other recent additions to the portfolio should also help to boost turnover. Vitamins will remain the dominant source of revenues for the business as a whole, however, and conditions in that segment of the market will determine the rate at which DSMs animal nutrition sales increase in the second half of the decade. Volume sales will continue to rise, but pressure on vitamin prices is expected to remain, limiting overall growth of the business to modest single-digit rates.
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Chapter 11: Elanco
CHAPTER 11 ELANCO
Elanco Suite 125 500 East 96th Street Indianapolis IN 46240 USA Tel: +1 317 276 3790 Fax: +1 317 276 4471 www.elanco.com www.lilly.com Key personnel Patrick James Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events December 2004 European regulators rule that Micotil 300 (tilmicosin) should only be administered by veterinary surgeons. Regulators in Canada authorise Paylean (ractopamine) for use in swine. $799 million 8th Feed additives, antibiotics North America, Europe President, Elanco Animal Health
July 2005
11.1
Company background
Elanco is the animal health subsidiary of the US healthcare multinational, Eli Lilly. The division is Lillys sole interest outside the human healthcare sector, but is one of the animal health industrys most profitable businesses indeed, Elancos pre-tax margin of just under 28% is currently higher than Lillys corporate operating margin. Lillys net sales fell back in 2002 following the expiry of patents on its Prozac (fluoxetine) antidepressant brand. New pharmaceutical product launches have spearheaded renewed growth since then, however, with revenues rising at double digit rates in both 2003 and 2004. Corporate net sales increased by 10% to just under $13.9 billion in 2004, but pre-tax profit fell back by 10% to $2.9 billion, and net income was down by 29% on yearearlier figures at $2.9 billion, reflecting a combination of asset write-downs, restructuring and higher spending on both R&D and marketing. Neurologicals and endocrinology treatments are the main contributors to Lillys corporate revenues, generating sales of $6.0 billion and $4.3 billion, respectively, in 2004. Together, these two therapeutic areas are responsible for almost three-quarters of the companys net sales. Its leading product is
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the schizophrenia and bipolar disorder treatment, Zyprexa (olanzapine), sales of which rose by 3% to $4.4 billion in 2004.
11.2
Animal health sales and operating income

Elancos performance matched that of its parent in 2004, with divisional sales up by 9.9% on year-earlier figures at $799 million. Currency factors inflated international sales as reported, but revenues generated in the US rose by a healthy 9%, and stronger domestic sales were a key factor behind the divisions improved performance at global level.
Table 11.1: Elancos animal health sales, 2000-2004
Year Sales ($ million) 669 685 693 727 799 % change +6.5 +2.5 +1.0 +4.9 +9.9
2000 2001 2002 2003 2004

Source: Eli Lilly.
Elanco is one of the animal health industrys most profitable businesses, having posted operating margins consistently at levels in excess of 25% since the late 1990s. Pre-tax income as a percentage of divisional revenues peaked at almost 32% in 2002, but the $223 million operating income reported for 2004 represented a record, exceeding the figure posted two years earlier. Elancos operating margin for 2004 was 27.9% almost seven points higher than that of its parent.
Table 11.2: Elancos operating income and margin, 2000-2004
Year Operating income ($ million) Operating margin (%) 2000 2001 2002 2003 2004
Source: Eli Lilly.
180 204 221 204 223
26.9 29.7 31.9 28.1 27.9
11.2.1
2003 performance Elancos sales rose by less than 3% in the first half of 2003, but the inflationary impact of currency factors on international revenues and improved conditions in the companys home market drove a stronger performance in the second half. By year-end, sales had reached $727 million up by almost 5% on 2002 figures. Buoyed by currency factors, sales in international markets rose by 7%, while revenues generated in the US increased by a more modest 2%.
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In November 2003, Elanco announced an agreement with Merial under which it gained exclusive marketing and distribution rights to the latters Ivomec (ivermectin) brands for pigs in the US. The deal has broadened Elancos existing portfolio in the sector, which includes leading brands such as Tylan (tylosin), Pulmotil (tilmicosin) and Paylean (ractopamine). 11.2.2 2004 performance As in the previous year, Elanco turned in a strong second-half performance in 2004, capped by a final quarter during which divisional sales rose by 18% on 2003 figures. As a result, a half-year gain of less than 7% was turned into a full-year increase of almost 10%, with sales reaching $799 million. Domestic sales were boosted by revenues from Merials Ivomec swine products, which Elanco began marketing late in 2003, and by the launch in April of the companys novel cattle ectoparasiticide, Elector (spinosad). Optaflexx, the cattle formulation of Elancos ractopamine performance enhancer, also made its first significant contributions to US revenues during the year following FDA approval of its use in combination with Rumensin (monensin) and Tylan (tylosin). All three of these brands were noted as strong contributors to growth of the business at global level. A less positive development in international markets was the suspension by French regulators of Elancos marketing authorisation for the livestock respiratory treatment, Micotil (tilmicosin). The move came following the death of a US cattleman in April which the French authorities said may have been caused by accidental self-injection with the product. Micotil was back on the French market by July after Elanco agreed to modify product labelling, but EU scientific experts ruled later in the year that Micotil should only be administered by qualified veterinary surgeons. Like divisional sales, operating income was boosted by a combination of favourable exchange rate movements, higher volume sales and the performance of new products in the US market. Pre-tax income rose by 9.3%, reaching a record level of $223 million. Elancos operating margin remained at approximately 28% as a result. 11.2.3 Interim 2005 performance The strong performance posted by Elanco in 2004 was continued into the first half of 2005, with a first-quarter gain of 7.2% being followed by a near12% increase in the April-June period. First-half sales totalled just under $397 million, up by almost $35 million, or 9.5% on year-earlier figures.
Table 11.3: Elancos interim 2005 sales performance
Period 2004 sales ($ million) 182.4 179.6 362.0 2005 sales ($ million) 195.5 201.0 396.5 % change +7.2 +11.9 +9.5
First quarter Second quarter First half total

Source: Eli Lilly.
The weakness of the dollar against international currencies continues to inflate sales as reported, but new products and combinations, along with a T&F Informa UK Ltd, 2005
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strong domestic performance, are also driving revenues. Volume growth was noted by the company as a major contributor to gains in the second quarter.
11.3

Elanco generated just over 42% of its sales in the US during 2004. The share of divisional revenues generated in the companys home market has fallen consistently since 2001 due in part to sluggish domestic demand for some of its leading brands, but primarily as a result of the weakening dollar, which has inflated sales as reported in international markets.
Table 11.4: Elancos US/international sales split, 2000-2004
Year US $ million 2000 2001 2002 2003 2004 308 323 304 310 339 % share 46.0 47.1 43.9 42.6 42.4 International $ million 361 363 389 417 460 % share 54.0 52.9 56.1 57.4 57.6 669 686 693 727 799 Total sales ($ million)
Source: Eli Lilly.
11.3.1
US Elancos global business is coordinated from the companys headquarters in Indianapolis, Indiana, which also serves as headquarters for domestic operations. Elanco products are manufactured in Lilly plants at Indianapolis, and at Clinton and Lafayette, both also in Indiana, while the divisions global R&D efforts are also coordinated from a base within its home state, at Greenfield. With no significant interest in the companion animal products market, Elancos domestic performance is reliant to a large extent on conditions in US livestock and poultry sectors. US sales posted by the company in 2002 were down by almost 6% on year-earlier figures, due to a combination of poor home market conditions and the long-established nature of most major Elanco brands sold there. Domestic sales staged a modest recovery in 2003, but were much stronger in 2004, rising by 9.4% to a record $339 million. Improved producer returns was a key factor behind the recovery, but the addition of new products to the US portfolio has also had an impact. Elanco began marketing and distributing Merials Ivomec (ivermectin) brands in the US swine sector under a deal announced towards the end of 2003, while that year also saw it handle the domestic launch of a ractopamine-based performance enhancer for use in cattle. The novel cattle insecticide, Elector (spinosad), was added to its US portfolio in the second quarter of 2004, while FDA approval of new claims for Rumensin (monensin) in dairy cattle late in the year should help to drive Elancos US sales up further in 2005.
11.3.2
International markets Sales as reported by Elanco in markets outside the US have been inflated in recent years by the weakness of the dollar against major international currencies. The company posted international sales gains of more than 7%
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in both 2002 and 2003, with revenues outside the US comfortably in excess of $400 million for the first time in the latter year. A further increase of just over 10% in 2004 took international sales to $460 million equivalent to almost 58% of the divisional total. Elanco has offices in more than 40 countries around the world, while its products are sold in more than 100 countries. Markets in Europe have traditionally been the main contributors to international sales, but revenues generated in Asia and Latin America have both risen as a result of expanding livestock and poultry output in those two regions. Like many of its competitors, Elanco has struggled to grow its business significantly in Europe over the past five years, during which time most of the regions major livestock markets have been relatively depressed. The suspension of approvals for the companys tylosin-based performance enhancer brands in 1999 as part of the EUs move towards the phasing out of all antibiotic-based livestock growth promoters also affected sales in the region. The handful of performance enhancers still authorised for use in the region, including Elancos avilamycin, will be withdrawn from the market at the end of 2005. The companys European business endured a further blow in 2004, when regulators in France suspended the approval of its injectable bovine respiratory disease treatment, Micotil (tilmicosin), citing user safety concerns. Micotils French marketing authorisation was reinstated within a few months on condition that the products labelling was altered, but EU regulators ruled later in the year that Micotil should in future be administered only by qualified veterinary surgeons. Elsewhere, Elanco is well placed to benefit from expanding pig and poultry production in Asias emerging economies. Business in several Asian countries has been affected recently by the impact of avian influenza outbreaks in the region, however. Markets in Japan and Australia have also been slow, though conditions in Australia have improved since the end of the drought that affected livestock producers there in 2002-2003. Operating conditions have also picked up in Brazil, where economic recovery has improved levels of profitability for the animal health industry, and where rapid expansion of the countrys livestock and poultry production sectors continues to fuel volume sales growth. The market in neighbouring Argentina, which came close to total economic meltdown earlier this decade, is also back on an upward trend, and Elancos revenues in both of these countries have been boosted since it took on the distribution of Boehringer Ingelheims livestock product range after the German company closed its local offices.
11.4
Product portfolio
The Elanco business is based entirely on products for use in food animal species. Its compact portfolio is dominated by anti-infectives, anticoccidials and performance enhancers. Some of its best-selling brands are based on active ingredients that came off patent many years ago, but the company has maintained a substantial share of key markets and continues to pursue additional indications for key products. Tylosin, tilmicosin and monensin are the three biggest contributors to Elancos global revenues, accounting together for an estimated two-thirds of divisional sales.
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11.4.1
Tylosin Tylosin is a macrolide antibiotic brought to market originally in the 1960s. Elancos brands, which include Tylan, Tylamix and Tylasul, continue to generate substantial revenues (believed to be in excess of $150 million a year at global level) in the cattle, pig and poultry sectors, with indications spanning disease treatment and control as well as performance enhancement in some key markets. Swine formulations are used primarily for the prevention and treatment of enteric and respiratory diseases such as swine dysentery and pneumonia. Tylosin was one of four antibiotics banned for growth-promoting purposes in EU markets during 1999, but Elanco responded by stepping up its promotion of indications for disease treatment and control. Additional indications, including prevention and control of ileitis in pigs, have also been registered. As with several of the companys established active ingredients, Elanco has been able not only to retain significant shares of the market for tylosin long after patents on the active ingredient expired, but has also done so profitably, thanks to its ability to manufacture the product at low cost. This has been a major contributor to the maintenance of divisional margins at such healthy levels.
11.4.2
Tilmicosin Tilmicosin is a macrolide antibiotic launched by Elanco in the early 1990s as an injectable product for the treatment of bovine respiratory disease. Sold as Micotil, it soon emerged as a leading brand in that valuable market segment, thanks to its broad spectrum of activity and rapid, sustained action. It remains the most widely used respiratory disease treatment in the US feedlot sector, which is the source of most Micotil sales in Elancos home market. Tilmicosins commercial potential was broadened later in the 1990s by the development of pre-mix formulations for use in pigs and poultry. The swine product, which is sold as Pulmotil, reached its first markets in 1995, with indications covering the prevention and control of respiratory disease. A liquid product for administration to poultry via drinking water is the most recent addition to the range, having reached the US market towards the end of the 1990s and been rolled out in Europe and other regions at the beginning of this decade. Micotil remains the leading contributor to tilmicosin revenues, but the addition of sales in the pig and poultry markets have seen the product replace tylosin as Elancos best-selling active ingredient. US patents on the product are due to expire in 2006, however, while the company has been forced to deal with safety issues in the wake of two deaths believed to have resulted from accidental self-injection with the product by users. Health warnings on Micotil packaging were amended following the first incident, both of which occurred in the US, but the widow of the rancher, who died in 2003, has filed a lawsuit against the company alleging that the product is unreasonably dangerous and that warnings were inadequate at the time. Label changes introduced by Elanco appear to have satisfied the FDA that no further action was required, but regulators in France suspended Micotils approval briefly during 2004 following the second incident. The product was
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absent from its biggest European market for around three months before the French authorities reinstated its licence after reviewing label/packaging changes that included more prominent safety warnings. Towards the end of 2004, the EUs Committee for Veterinary Medicinal Products (CVMP) recommended that administration of Micotil should in future be limited to qualified veterinary surgeons. 11.4.3 Monensin Monensin is a monovalent ionophore, developed originally for use as a poultry anticoccidial and available for use in that sector for more than 30 years. Sold as Coban, the poultry formulation still generates significant revenues, thanks in part to broader indications developed since its original introduction. These are outweighed, however, by sales of Rumensin a monensin-based product for use in cattle that was commercialised by Elanco in the mid-1970s. The cattle formulation is indicated for the control of coccidiosis and metabolic disorders, but also acts as a performance enhancer by promoting improved nutrient utilisation in cattle fed with rations that include monensin. Rumensin is used widely in the US feedlot sector, and also generates significant sales in international markets. US regulators approved its use in replacement heifers during the 1980s, while in 2004 Rumensins commercial potential in the US was further enhanced when it was granted approval for use as a milk-production efficiency enhancer in dairy cows. Trials have shown that inclusion in dairy cow rations improves rumen fermentation, resulting in the production of 24% more milk per pound of feed consumed. 11.4.4 Avilamycin Avilamycin is a mixture of oligosaccharides of the orthosomycin group. Brought to market by Elanco in the 1990s as a performance enhancer for use in pigs and poultry, it emerged as a significant contributor to the companys international revenues, but has not been commercialised in the US. The swine formulation is sold as Surmax, while the poultry product is marketed under the Maxus brand. Sales of avilamycin in Europe increased in the wake of the EUs 1999 ban on four more established livestock performance enhancers. The ban will be extended to all antibiotic growth promoters at the end of 2005, however, and the loss of European revenues will have a significant impact on global sales generated by Surmax/Maxus. 11.4.5 Ractopamine The beta-adrenoceptor agonist, ractopamine, is among the newer additions to Elancos portfolio. Indicated for improvement of weight gain and feed efficiency in treated animals, it also acts as a repartitioning agent, improving lean/fat carcase ratios. This makes it a potentially attractive alternative to producers denied access to antibiotic growth promoters, but betaadrenoceptor agonists are subject to a marketing moratorium in the EU. Elanco gained approval for the use of ractopamine as a performanceenhancing feed ingredient for swine in the US towards the end of 1999, and T&F Informa UK Ltd, 2005
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launched the product there as Paylean in 2000. The product has since been authorised in more than 20 countries around the world, with Canada the latest addition to that list, having issued an approval for Paylean in July 2005. Much of the original trial work with ractopamine in pigs was conducted a decade or more before the product was eventually approved in the US, and advances in swine genetics during that period have emerged as an issue for producers using Paylean. More recent research indicates that additional lysine should be included in rations if producers are to obtain maximum results from the product in the naturally leaner stock that predominate in the US herd today. In 2003, US regulators approved a second ractopamine-based performance enhancer for use in cattle. Sold as Optaflexx, it is indicated for inclusion in feedlot rations during the final 4-6 weeks before slaughter. Trial data indicate that treated steers reach slaughter weights averaging almost 8kg more than untreated animals. Like the swine product, Optaflexx also increases red meat yield in treated stock. Full marketing of Optaflexx did not commence until the Spring of 2004, by which time Elanco had secured combination approvals for the product. The strong conditions that prevailed in the US beef production sector through the remainder of that year are believed to have seen Optaflexx sales take off more readily than they did in the swine sector, however. 11.4.6 Other products In 2001, regulators in Australia approved a novel sheep ectoparasiticide submitted for authorisation by Elanco. Sold as Extinosad, it contains spinosad the first active ingredient from the spinosyn insecticide class to be approved for use in veterinary medicine. Extinosad is indicated for use as a sheep blowfly strike and lice control. More recently, Elanco has launched a spinosad-based ectoparasiticide for use in cattle on its home market. Sold as Elector, and indicated for the control of horn flies and lice, it was introduced to the US market in the second quarter of 2004. A premise spray containing spinosad has also been registered and commercialised in the US. Sales of both formulations contributed to the strong performance returned by Elanco in its domestic market during 2004. Most other products in the Elanco portfolio are based on more established active ingredients. Among the most significant in revenue terms are the companys anticoccidial brands. Elanco is a major player in the poultry anticoccidials market, offering a range of options in addition to the Coban (monensin) brand discussed earlier in this profile. Monteban (narasin) and a narasin/nicarbazin combination sold as Maxiban are among the most widely used products in the range. Elanco is also active in the market for hormone implants, where it sells a range of products based on various combinations of the three natural sex hormones (oestradiol, progesterone and testosterone) under the Compudose and Encore brands. International rights to these products were sold to Ivy Animal Health in 2002, and Ivy is now the exclusive global manufacturer of T&F Informa UK Ltd, 2005
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the Compudose and Encore product lines. Elanco retained US market rights, however. Elsewhere, the company has been working to broaden its portfolio in markets outside the US, taking on the distribution of Monsantos bovine somatotropin-based milk productivity enhancer (sold variously as Lactotropina and Posilac) in Latin America and Asia, and marketing Boehringer Ingelheims livestock range in Brazil and Argentina. It has also added bovine mastitis treatments to its range in Brazil, and has secured approvals for the use of several established products (including tilmicosin) in the dairy sector.
11.5
R&D
Elanco invests more than $70 million a year in research programmes aimed at the further development of existing brands and the eventual commercialisation of novel animal health products. Most of the divisions basic in-house research is carried out at its R&D headquarters in Greenfield, Indiana (US), which also coordinates development programmes being pursued at other locations. Its most significant development facilities outside the US are based in Europe, Japan and Australia. The company boasts a proven ability to maximise the commercial potential of long-established active ingredients, and continues to register new indications for products such as tylosin and monensin, both of which have been on the market for 30 years or more. Recent developments include the addition of ileitis control to tylosins list of indications in swine, the inclusion of tylosin in hormone implants as a means of reducing the incidence of infection at implant sites, and the addition of milk-productivity enhancement indications for the Rumensin (monensin) brand in dairy cows. Further work on newer active ingredients such at tilmicosin is also expected to result in new formulations and additional indications in the next few years. Ractopamine and the spinosad insecticide are the two most recent major additions to Elancos portfolio. The cattle formulation of ractopamine is expected to be registered and commercialised in a number of international markets during the next five years, but the EUs moratorium on betaadrenoceptor agonists is unlikely to be rescinded, blocking its introduction there. Spinosad will also be registered and commercialised more widely, with products for use in both sheep and cattle expected to be launched in key target markets. Elanco is one of the few leading animal health companies without a commercial presence in the companion animal market, but products for use in small animal species do feature in its R&D portfolio. These include spinosyn compounds with potential for use as flea/tick treatments, and products that have shown promise as potential treatments for cancer in small animals. In 2003, Elanco concluded an agreement with the Australian drug delivery company, Acrux, under which it has licensed rights to the use of Acruxs metered dose transdermal delivery technology. Potential applications include development-stage companion animal products. Elanco paid an up-front fee of $1 million on completion of the deal, and agreed to milestone payments that could reach almost $9 million. It will also pay Acrux royalties on the sale of products to which the delivery system is applied.
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11.6
Strategy
Few animal health companies have managed to sustain margins at the kind of levels achieved by Elanco in recent years, and the business remains one of the most profitable in the industry. That fact is all the more remarkable considering that the company generates those returns exclusively in livestock and poultry markets, where conditions have often been difficult, and where many of its competitors have struggled in recent years. Elancos success owes much to the focused nature of its portfolio and its long-established expertise in manufacturing, marketing and distributing key products efficiently. Its international distribution network may not be as comprehensive as some other leading players in the sector, but its determination to retain a sharp focus on core markets and product segments has been an asset rather than a hindrance. No business is immune to a changing market environment, however, and Elanco faces a number of major challenges if it is to maintain existing levels of profitability. These include the management of upcoming patent expiries on tilmicosin, but the single biggest threat to the business in the next 5-10 years may well be the current debate surrounding microbial resistance and the use of antibiotics in animal production. This issue has already seen a number of antibiotic performance enhancers withdrawn from markets in the EU, where avilamycin will be among the casualties when that regions ban on such products becomes absolute at the end of 2005. Crucially, regulators in Elancos home market have so far taken a more liberal approach to the use of livestock performance enhancers. Consumerdriven pressure is continuing to build in the US, however, especially where antibiotics are concerned. Major food retailers have already responded to this, calling on suppliers to produce meat without the use of antibiotic performance enhancers. Regulatory action is an increasing threat following the launch by a coalition of US medical organisations of a bill that calls for the withdrawal of in-feed approvals for no less than seven antibiotic classes, including penicillins, tetracyclines, macrolides, lincosamides, streptogramins, aminoglycosides and sulphonamides. The current bill is unlikely to succeed, but it will certainly raise the temperature of the debate surrounding antibiotic resistance. Aside from companies such as Alpharma and Phibro, Elanco is among those most exposed to the potential development of a more restrictive approach to the use of antibiotics in animal feed. While the debate surrounding animal antibiotic use has been gathering pace, Elanco has taken steps to broaden its portfolio, reducing the extent to which its business is exposed to potentially unfavourable regulatory outcomes. Initiatives in this regard have seen it register more therapeutic indications for existing products and bring new offerings such as ractopamine and spinosad to market. Ractopamine sales did not take off as expected in the swine sector, but the cattle formulation is believed to have performed well in 2004, and these products would be natural alternatives for producers seeking alternatives to antibiotic performance enhancers if and when the latter are removed from the market. Elanco has also concluded a number of marketing/distribution deals recently, taking on responsibility for Boehringer Ingelheims livestock product range in
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Brazil and Argentina, and adding Merials Ivomec brands for use in swine to its US portfolio. The company also handles Monsantos bovine somatotropin product in markets outside the US, though that is part of a more longstanding agreement. This approach mirrors the strategy being pursued by the divisions parent, which has established an explicit alliance management function within its administrative organisation, and more marketing/ distribution deals are anticipated in future. Elancos work on the development of companion animal therapeutics has been discussed openly for a number of years, prompting speculation that the company will eventually enter that sector of the market for the first time. With no existing expertise in the companion animal field, potential options include the establishment of out-licensing agreements or the acquisition of an existing business with capabilities in the sector. It is also worth bearing in mind that Lilly spun off its interests in the crop protection sector before selling its stake to erstwhile partner Dow. It is unlikely to go down that path with the Elanco business while it continues to generate profits at current levels, but a spin-off might eventually be considered if regulatory constraints begin to squeeze the divisions profit levels significantly.
11.7
Prospects
Having enjoyed a particularly strong end to 2004, Elanco continued to post substantial gains in the first half of 2005. Sales in the first quarter were up on year-earlier figures by a little over 7%, but a near-12% increase in the second quarter drove gains for the first half up to 9.5%, with sales for the six-month period reaching almost $397 million. With Paylean set to begin contributing to revenues in Canada for the first time, and new indications for Rumensin broadening that products market in the US, prospects for the business in the second half of 2005 should remain positive. Matching the performance posted in the second half of 2004 when gains reached 18% in the final quarter will be a tall order, however. Key new products such as Optaflexx and Elector were first-time revenue generators in the US during the second half of 2004, and were major contributors to the size of those gains. Nevertheless, Elancos performance in the second quarter of this year was certainly impressive, indicating that reasonable gains are certainly possible in the second half. Assuming that it manages a 5% increase on 2004 sales in the second half, the company will post a full-year 2005 revenue total of approximately $855 million up by 7% on year-earlier figures. Revenues will be hit in 2006 by the implementation of the EUs blanket ban on antibiotic growth promoters in food-producing animals. US patents on tilmicosin are also set to expire during 2006, and Micotil may face generic competition there by 2007. Major changes in the regulatory approach to antibiotic feed additives in the US are unlikely in the next two years, but remain a distinct possibility in the longer term. Elanco is expected to counter the risk that such developments pose to its business by broadening its portfolio further, and it would be no surprise to see it complete an acquisition possibly involving an entry into the companion animal market at some point in the next two years.
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Chapter 12: Fort Dodge
CHAPTER 12 FORT DODGE

Fort Dodge 9401 Indian Creek Parkway PO Box 25945 Overland Park Kansas 66225-5945 USA Tel: +1 913 664 7000 www.wyeth.com Key personnel E Thomas Corcoran Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events September 2004 Announces compliance with an FDA request to recall the long-acting heartworm preventative, ProHeart 6. Announces US approval of a DNA vaccine against equine West Nile virus (WNV). $837 million 7th Vaccines, antiparasitics North America, Europe President, Fort Dodge Animal Health
July 2005
12.1
Company background
Fort Dodge is the animal health business of the US healthcare major, Wyeth (formerly American Home Products). Corporate results posted by Wyeth have been affected in recent years by a series of one-time items, which boosted earnings in 2002, but which have had a negative impact on income in most recent years. Fort Dodges recent results also reflect the impact of special charges, but underlying earnings generated by both the animal health business and its parent company rose in 2004. Wyeth has set aside substantial amounts in recent years to fund litigation concerning two diet drugs previously marketed by the company. One-time charges related to that issue reached $4.5 billion in 2004, and were the main factor behind a corporate operating loss of $130 million posted by Wyeth. Pre-tax earnings rose by 9% on a pro-forma basis, however, and corporate net sales were almost 10% higher at just under $17.4 billion. Revenues are dominated by Wyeths prescription pharmaceuticals business, which accounted for 80% of the companys 2004 sales total. Its consumer healthcare business was responsible for a further 15% of corporate revenues, while the Fort Dodge animal health division generated just under 5% of group sales.
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Animal Pharms Top 20, 2005 Edition Table 12.1: Wyeths sales by reportable segment, 2004
Segment Sales ($ million) 13,964.1 2,557.4 836.5 17,358.0 % of total 80.5 14.7 4.8 100.0
Pharmaceuticals Consumer healthcare Animal health Total

Source: Wyeth.
12.2

Fort Dodges sales have fluctuated dramatically since the beginning of the decade. A near-20% gain in 2000 was followed by two years in which divisional revenues declined, with a 16% reverse reported in 2002. The business bounced back in 2003, when sales rose by more than 21%, but gains were limited to only 5% in 2004, despite the positive impact that exchange rates had on international revenues as reported. The 2004 sales total was just 5% higher than the figure posted in 2000.
Table 12.2: Fort Dodges animal health sales, 2000-2004
Year Sales ($ million) 797 776 653 793 837 % change +19.7 -2.6 -15.9 +21.4 +5.5
2000 2001 2002 2003 2004

Source: Wyeth.
Sharp fluctuations in divisional revenues have affected earnings reported by the animal health business, which has also been affected by the fortunes of its long-acting canine heartworm preventative, ProHeart 6 (moxidectin). Fort Dodges operating income fell back sharply in 2002 on the back of lower divisional sales and significant returns of the ProHeart 6 product.
Table 12.3: Fort Dodges operating income and margins, 2001-2004
Year
1 2 3
Sales ($ million) 776.2 653.3 793.4 836.5
Operating income ($ million) 163.3 64.1 127.4 134.8
Operating margin (%) 21.0 9.8 16.1 16.1
2001 2002 2003 2004
Notes: 1 Income includes goodwill amortisation of $31.3 million (the company ceased amortising goodwill in 2002 in accordance with new US accounting standards); 2 income affected by significant ProHeart 6 returns; 3 income affected by the September withdrawal of ProHeart 6 and subsequent returns. Source: Wyeth.
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Earnings recovered in 2003, driving margins back up to around 16%, but divisional income was limited again in 2004 by the withdrawal of ProHeart 6 from the US market in September of that year. Notwithstanding the negative impact of the ProHeart 6 withdrawal, pre-tax income increased by almost 6% in 2004, reaching $134.8 million. That figure equated to an operating margin of just over 16%. 12.2.1 2003 performance After two consecutive years during which global revenues generated by the business declined, Fort Dodge bounced back strongly in 2003, virtually doubling its operating income, which reached $127 million on sales that were 21% higher at $793 million. The turnaround was due in no small measure to a reversal of fortunes for ProHeart 6, sales of which were effectively more than $55 million higher than in 2002 as a result of high product returns in the latter year. The companys WNV vaccine also made strong gains in 2003, while at a broader level the business benefited from improved conditions in the US animal health market. Exchange rates also boosted revenues as reported, but gains were largely the result of a 14% increase in volume sales. Higher average selling prices contributed a further 2% to revenues as reported. Gains were led by the domestic business, where stronger ProHeart and WNV vaccine sales spearheaded a 29% increase in revenues. Volumes rose by a more modest 5% in international markets, but a 1% increase in average prices and the dramatic impact of exchange rate fluctuations resulted in a 15% increase in revenues as reported. 12.2.2 2004 performance Fort Dodge was on track to post a second consecutive year of high doubledigit sales growth at the mid-year stage in 2004, with revenues as reported up by almost 16% on 2003 figures. The withdrawal in September of the companys ProHeart 6 canine heartworm product dented its performance in the second half of the year, however. The divisions US sales fell back by more than 10% in the third quarter, and by 16% in the final three months of 2004, wiping out gains posted by the domestic business in the first half of the year. International sales as reported were up by 9% on year-earlier figures, thanks largely to the positive impact of exchange rate factors, but total revenues generated by the division increased by only 5%, reaching $837 million. Currency factors inflated global revenues by around 3% during 2004, while average selling prices were 5% higher, but volume sales fell back by 3%. Despite the problems with ProHeart 6, the increase in divisional revenues and higher gross profit margins were sufficient to offset increase in selling and other general expenses. Operating income rose by 6% to $134.8 million as a result, enabling the business to maintain an operating margin of around 16%. In the US, lower sales of ProHeart and a decline in revenues generated by the companys equine WNV vaccine offset gains reported for other products in both the livestock and companion animal sectors. Sales volumes in T&F Informa UK Ltd, 2005
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international markets were flat, but higher average selling prices and exchange rate factors drove revenues up by 9%. 12.2.3 Interim 2005 performance While the future of ProHeart 6 remained in doubt, other products in the Fort Dodge range enjoyed a strong start to 2005, enabling the company to post a near-12% gain in the first quarter. International revenues as reported were up on year-earlier figures by almost 15% in the first three months of 2005, while the domestic business posted a gain of almost 9%. The impact of exchange rate factors on results has begun to moderate, and was responsible for less than 2 points of reported gains. Sales expressed in local currencies were up by around 10% on 2004 figures.
Table 12.4: Fort Dodges first half sales, 2004-2005
Period Sales ($ million) 2004 First quarter Second quarter First half
Source: Wyeth.
% change
2005 244.7 244.8 489.5 +11.8 +2.5 +7.0
218.9 238.8 457.7
International sales remained strong in the second quarter, rising by almost 12%. The domestic business endured a more difficult quarter, however, with US sales down by 6% on year-earlier figures. This cut worldwide gains in the quarter to less than 3%, and limited first-half sales to just under $490 million up by 7% on 2004.
12.3

Currency factors, new product launches and problems with the ProHeart 6 product have all affected the relative contributions made by domestic and international sales to Fort Dodges global revenue total since the late 1990s. The split between US and international sales in 2004 was identical to that reported in 2000, however, with sales outside the companys home market responsible for a modest majority share of 53%.
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Animal Pharms Top 20, 2005 Edition Table 12.5: Fort Dodges US/international sales split, 2000-2004
Year US International Total sales ($ million)
Sales ($ million) 2000 2001 2002 2003 2004 375 378 301 388 396
% of total
Sales ($ million) 422 398 352 405 441
% of total 53 51 54 51 53 797 776 653 793 837
47 49 46 49 47
Source: Wyeth.
12.3.1
US Fort Dodges current US portfolio bears little resemblance to the range being marketed by the company in the first half of the 1990s, since which time the business has been transformed by a series of acquisitions and several new product launches. Wyeth purchased American Cyanamid and acquired animal health businesses previously owned by Syntex and Solvay in the three-year period from 1994 and 1997, trebling the size of its own animal health subsidiary in the process. Fort Dodge relocated its global headquarters to Overland Park, Kansas, in the wake of its acquisition spree. The companys home market is also a focus of both research and manufacturing activity, with major production facilities for both biologicals and pharmaceuticals located at Fort Dodge and Charles City in Iowa, and the divisions main R&D centre based in New Jersey. About half of its 3,500 employees are located in the US. The moxidectin endectocide was the most significant addition to the Fort Dodge portfolio following the American Cyanamid acquisition. Syntex Animal Health added livestock wormers and growth implants to the US range, while the purchase of Solvay Animal Health included a broad range of pharmaceuticals and a major veterinary vaccines business. Having integrated its various purchases, Fort Dodge has launched a steady stream of new vaccines on the US market, and has also commercialised some major new pharmaceutical products, including the NSAID, EtoGesic (etodolac). These helped to drive up US sales in the late 1990s, but domestic revenues were flat in the early part of this decade, and fell back sharply in 2002 when reported problems with ProHeart 6 saw the product returned through distribution channels at high volumes. Having recovered in 2003, domestic sales were hit by the withdrawal of ProHeart 6 in September 2004, and the companys US revenues rose by only $8 million in a year that saw most of its competitors post much stronger performances. Only $20 million was added to Fort Dodges US sales total between 2000 and 2004.
12.3.2
International markets Sales reported by Fort Dodge in markets outside the US have been boosted by the weakness of the dollar since 2002, and almost $100 million has been
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added to the companys international revenue total over the past two years. Currency factors were responsible for 7 points of the 9% increase in international revenues reported by the division in 2004, and for 9 points of the 15% gain posted in the previous year. Underlying growth has been limited by a combination of difficult conditions in major livestock markets, economic problems in Latin America and, more recently, the impact of avian influenza outbreaks on business in parts of south-east Asia. Manufacturing issues were also reported to have affected volume sales of some companion animal products in international markets during 2003.+ Europe and Latin America are the biggest regional contributors to international sales, while Japan and Australia are also key markets for the Fort Dodge business. The company manages biological production facilities in Brazil, Ireland, Spain and Australia, and possesses pharmaceutical production capability in Argentina, Spain, Italy, India and Taiwan. Fort Dodges European business was strengthened considerably by the acquisition of Solvays animal health division, which generated sales equivalent to more than $100 million at the time of its purchase in 1997. European operations have been restructured significantly since then, while the infrastructure gained as a result of the Solvay acquisition has been used to lever new product launches that have boosted sales in the region. The business generates sales equivalent to well over $40 million in France, while subsidiaries in the UK, Spain, Germany, Ireland and the Benelux countries are also significant contributors to the regional sales total. European revenues have been driven in recent years by a string of new vaccine launches, including significant additions to both the companion animal and livestock biological portfolios. Efforts have been made since the beginning of this decade to improve levels of efficiency and profitability in Europe. This has seen Fort Dodges European headquarters relocated from Weesp to Naarden in the Netherlands, while management responsibilities for business in Germany, the Netherlands and Belgium have also been consolidated at a site in Aachen, Germany, and the divisions French subsidiary has been moved to a new site in Tours. Business in Latin America is dominated by activities in Brazil, which is the regions biggest market. In common with its multinational competitors, Fort Dodge endured a difficult period early in this decade during which revenues and profits generated by subsidiaries in Latin America were affected by economic problems and the devaluation of national currencies in the region. Economies in both Brazil and Argentina are now growing rapidly, however, while agricultural output in Brazil is expanding fast, fuelling demand for animal health inputs. While rapid sales growth is now being reported in the country, Fort Dodge has moved to limit the impact of future exchange rate fluctuations on its business there by reducing its reliance on imports. Local manufacturing capabilities have been expanded accordingly, and Brazil has been earmarked as a manufacturing centre for the supply of most Latin American markets. Sales in Brazil have also been boosted by a series of recent product T&F Informa UK Ltd, 2005
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launches, and more new vaccines will be introduced there in the next 2-3 years. Elsewhere, Japan and Australia are the most significant contributors to Fort Dodges global revenues. The Australian market has been a major source of recent sales growth, and has been a first-launch target for a succession of innovative new parasite control products, including a seleniumsupplemented moxidectin formulation for use in sheep, a moxidectin/clostridial vaccine combination and the long-acting version of the companys ProHeart canine heartworm preventative. Business in Japan has remained relatively flat, however, and new product launches will continue to represent the most significant source of growth there while the Japanese animal health market remains depressed.
12.4
Product portfolio
With no significant involvement in the feed additives market, Fort Dodges revenues are generated entirely by veterinary vaccines and pharmaceuticals. The biologicals business is just the bigger of the two, generating 52% of divisional sales in 2004. Products for use in food animal species were responsible for 53% of the 2004 sales total, with companion animal products accounting for 47%. Revenues generated by the companys livestock portfolio rose by almost 7% in 2004, reaching $351 million, while sales of poultry lines (mainly vaccines) increased by around 5% to just under $95 million. Double-digit growth was reported for Fort Dodges small animal product range, with the recall of ProHeart 6 coming too late in the year to have a more major impact on revenues in that segment of the portfolio. Equine product sales fell back by 6%, however, as revenues generated by the companys equine WNV vaccine declined.
Table 12.6: Fort Dodges sales by species, 2004
Species Sales ($ million) 351.0 94.7 252.6 138.2 836.5 % of total 42.0 11.3 30.2 16.5 100.0
Livestock Poultry Small animals Equine Total

Source: Wyeth.
12.4.1
Biologicals Fort Dodge was already a significant player in the global market for veterinary vaccines, but its acquisition of Solvay Animal Health transformed it into a leading competitor in that sector of the animal health industry. With sales totalling approximately $435 million in 2004, it claims a share of almost 14% in the global market for veterinary vaccines. Products for use in companion animals (including equine as well as canine/feline lines) accounted for approximately 60% of the companys vaccine sales in 2004, generating global revenues of around $260 million.
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Livestock and poultry vaccines were responsible for the remaining 40%, or $170 million-plus.
. . . Companion animal range

Trade regulators forced Fort Dodge to sell Solvays North American companion animal vaccine business before clearing the acquisition, but the company remains a major force in the US market for both small animal and equine biologicals. It claims a leadership position in the US canine vaccines market, and has strengthened its position in the equine vaccines sector following the launch of several major new products since the beginning of this decade. Fort Dodges Duramune line is the best-selling canine vaccine brand in the US market, and generates substantial revenues internationally. Duramune products offer protection against parvovirus and distemper, with additional coverage in various combinations against adenovirus, coronavirus, parainfluenza and hepatitis. The most significant contributors to canine vaccine revenues are the combination products, Duramune Adult, Puppyshot and Puppyshot Booster. Duramune Adult, which was launched in the US during 2004, is the first USDA-licensed vaccine supported by three-year virus challenge data against canine parvovirus, distemper and adenovirus. Improved products offering broader protection against two clinically significant strains of the Leptospira pathogen have also been added to the range, while in Europe Fort Dodge has launched Duramune Dappi + LC, which includes protection against coronavirus, can be administered to puppies at an early stage, and offers improved levels of clinical safety and efficacy. Fort Dodge was the first company to reach the US market with a canine Lyme disease preventative, and its killed Borrelia burgdorferi bacterin, LymeVax, retains significant shares of that lucrative niche market. LymeVax has also been combined with the Puppyshot and Puppyshot Booster combination products, broadening their range of protection. A vaccine that helps in the prevention of canine Giardiasis caused by the waterborne protozoan parasite, Giardia lamblia, has also been added to the US range. Fel-O-Vax LV-K IV, which offers protection against Chlamydia psittaci, rhinotracheitis, calicivirus, panleukopaenia and feline leukaemia, is Fort Dodges flagship feline vaccine. Already well established in the US, it was rolled out in Europe at the beginning of this decade under the Fevaxyn Pentofel label, following receipt of a regional approval under the EUs centralised registration procedure in 1999. Monovalent protection against feline leukaemia is also available, while the US range includes the worlds first feline immunodeficiency virus (FIV) vaccine, Fel-O-Vax FIV, which was launched there in 2002. Fort Dodges equine vaccine sales have risen dramatically since the beginning of this decade following a string of major new product launches. These have included the Fluvac Innovator line of equine influenza vaccines, which contain updated strains of the influenza virus; Pinnacle IN, which is the first intranasal equine strangles vaccine to be made available in the US; a new vaccine against EPM, and West Nile Innovator, which was the first commercially available vaccine against equine WNV in the US. T&F Informa UK Ltd, 2005
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WNV had never been recorded in North America before 1999, but following a significant increase in the number of equine WNV cases reported during 2000 and 2001, regulators expedited the review process for Fort Dodges product, which was granted full US approval in the first half of 2002. It has also been licensed by regulators in Canada and Mexico, and the company booked almost $52 million in sales of West Nile Innovator during 2002. That figure rose to more than $64 million in 2003, but revenues fell back to $46 million in 2004 partly because initial two-dose coverage is followed by a one-dose booster regime in treated animals, but also because the Fort Dodge product has begun to encounter its first competition in the shape of Merials new WNV vaccine. In July 2005, the company announced that it had received a US approval to market a second-generation DNA-based vaccine against equine WNV. The new product will not be launched commercially until 2006, and may not have a major impact on existing revenues. Its approval is a landmark in vaccine technology development, however, since along with an aquaculture vaccine developed by Novartis it shares the distinction of being the first DNA vaccine ever approved for commercial use.
. . . Food animal range

Fort Dodge manufactures and markets a broad range of food animal vaccines, for which cattle, pigs and poultry are the main species targets. Cattle vaccines are sold under the Presponse, Pyramid and Triangle brands, offering protection against major respiratory and enteric pathogens. The Pyramid line of modified live virus vaccines, which covers IBR types I and II, BVDV, BRSV and PI-3, offers producers a single-dose regime with the option of subcutaneous or intramuscular administration routes. Fort Dodges proprietary MetaStim adjuvant has been incorporated into the Pyramid range, ensuring rapid production of high antibody levels in vaccinated animals. The Triangle line has been updated through the development of new-generation products (Triangle Plus) offering specific protection against Type II BVDV, while the Presponse range of cattle pneumonia vaccines covers treated animals against Mannheimia haemolytica and Pasteurella multocida. Fort Dodges Porsibac swine vaccine range was boosted considerably by the Solvay acquisition, which included that companys extensive Suvaxyn swine biologicals line. High-profile products include the Mycoplasma hyopneumoniae preventative, Suvaxyn Respifend MH and the more recently commercialised mycoplasma/Glssers disease combination product, Suvaxyn M Hyo-Parasuis. Aujeszkys disease vaccines are significant revenue generators in European markets, while sales in the US have been boosted recently by the commercialisation of a new swine erysipelas vaccine, Suvaxyn E-Oral, which enables mass application via drinking water. Interests in the poultry vaccines market are based largely on former Solvay products, which generated significant revenues in most of the worlds major poultry-producing countries. The infectious bursal disease vaccine, Bursine2, is among the most high-profile products in the range, which includes combination vaccines offering protection against most major pathogen targets. Vaccines are believed to account for the majority of Fort Dodges revenues in the poultry products sector, which totalled almost $100 million in 2004. T&F Informa UK Ltd, 2005
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In the final quarter of 2004, Fort Dodge was awarded a five-year contract to develop an avian influenza vaccine antigen bank for the US Department of Agricultures Animal and Plant Health Inspection Service (APHIS). Antigen material covering four viral sub-types will be stored at Fort Dodges facility in Charles City, Iowa, for use in the preparation of vaccines to help manage potential outbreaks of highly pathogenic avian influenza in the US. 12.4.2 Antiparasitics Fort Dodge was not involved in the parasite control market prior to the series of acquisitions completed by the company in the 1990s. American Cyanamid, which was purchased in 1994, had already begun to roll-out moxidectin in the livestock endectocides market, and also sold a range of established ectoparasite control products, while the Syntex Animal Health business acquired by Fort Dodge included a line of livestock and equine wormers based on the benzimidazole anthelmintic, oxfendazole. Fort Dodge has overseen the global roll-out of moxidectin, which is now available in a range of formulations and is registered for use in both livestock and companion animals. Revenues generated by the product have fluctuated in recent years as a result of problems encountered with the longacting canine heartworm formulation, but are believed to have totalled well over $150 million in 2003, and were heading for a figure in excess of $200 million before the US withdrawal of the canine heartworm formulation, ProHeart 6. Sales generated by other Fort Dodge antiparasitics are modest in comparison with moxidectin, and are thought to contribute less than $40 million to the companys global revenues.
. . . Moxidectin
When moxidectin reached its first markets in 1990 it provided the first direct competition to Merials blockbusting Ivomec endectocide. Like Ivomec the Fort Dodge product, which was commercialised as Cydectin, was launched initially as an injectable product for use in cattle. A cattle pour-on and formulations for use in other food animal species were developed during the 1990s, with equine (Quest/Equest) and canine (ProHeart) products contributing significantly to total sales by the end of the decade. A novel combination of moxidectin and a six-way clostridial vaccine has also been commercialised in some markets for use in sheep. Regulators in Australia approved an updated version of this product in 2004. Like Ivomec and Pfizers doramectin endectocide, moxidectin has been affected in recent years by the commercialisation of generic ivermectin products in major markets. Fort Dodges livestock and equine brands have held up reasonably well in the face of growing generic competition partly because the company has worked to differentiate moxidectin from other endectocides (it is closely related to ivermectin and doramectin, but is a member of the milbemycin chemical class, while ivermectin and doramectin are both members of the avermectin class). Overall revenues booked by Fort Dodge for moxidectin have continued to fluctuate, however, reflecting the problems it has experienced with the canine heartworm formulation. A canine heartworm product was launched in Japan during 1993, but did not reach other major markets until the end of the 1990s. It was introduced in the US, under the ProHeart trade name, in 1998. Two years later, regulators in Australia approved a long-acting injectable formulation of ProHeart T&F Informa UK Ltd, 2005
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offering protection for 12 months. A sustained-release version providing six months of cover was authorised in the US during 2001, and was brought to market as ProHeart 6. ProHeart 6 was an immediate hit with US veterinarians and dog owners, and Fort Dodge booked sales of almost $90 million for the product in 2001. Demand for the sustained release product which is presented in two separate vials that require mixing prior to use began to tail off in 2002, however, amid concerns surrounding the safety of the product. It was returned through distribution channels in such volumes that Fort Dodge reported negative net revenues of almost $19 million for ProHeart in 2002. A letter was sent by Fort Dodge to US veterinary surgeons outlining the results of postmarketing surveillance programmes and detailing possible adverse reactions, while package inserts for ProHeart 6 were altered in the second half of 2002 to include specific reference to outside risk of anaphylaxis. The companys efforts to rehabilitate its product appeared to have been successful, with sales recovering to reach almost $40 million in 2003. It generated a further $35 million in the first half of 2004, but with reports of suspected adverse reactions still being received by regulators, the FDAs Center for Veterinary Medicine asked Fort Dodge to cease production of ProHeart 6 and recall it from the market until safety concerns were resolved. The company issued a recall early in September 2004, the impact of which was reflected in its results for the second half of the year, with a near-16% gain at the six-month stage eroded to less than 6% for the whole of 2004. Regulators set up an independent advisory panel to review safety data on the product, and scheduled a meeting in January 2005 at which a decision on its future was due to be taken. In the event, the CVMs Veterinary Medicine Advisory Committee was unable to reach a consensus at the January meeting, and the commercial future of ProHeart 6 is still undecided. Fort Dodge maintains that the overall incidence of reported adverse reactions to the product, at less than one half of one percent, is no higher than would be expected, and that analysis of data on the product indicates that its safety profile is similar to that of other heartworm preventatives. Whatever the eventual outcome of the CVMs deliberations on ProHeart 6, however, it will be difficult for the company to resurrect sales of the brand for a second time in its home market.
. . . Other antiparasitics
Most of Fort Dodges other antiparasitic products are based on longestablished active ingredients that are available widely in generic form. The most significant brands in revenue terms are Synanthic and Benzelmin both of which are based on the benzimidazole anthelmintic, oxfendazole. Rights to oxfendazole were originally split between Syntex Animal Health and Coopers now part of Fort Dodge and Schering-Plough Animal Health, respectively. Fort Dodge does not market oxfendazole globally, but its US range includes several products based on the product. They include cattle formulations, which are sold under the Synanthic brand, and equine products, which are marketed under the Benzelmin trade name. The Synanthic line includes both drench formulations and an oral paste. The T&F Informa UK Ltd, 2005
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basic product for use in horses is also presented in past form, while a combination product containing oxfendazole and trichlorfon, which extends cover to horse bots as well as helminths, is sold as Benzelmin Plus Paste. Fort Dodge also markets a trichlorfon-only equine product in its home market under the Dyrex label. In addition to moxidectin, Fort Dodge also gained a line of livestock ectoparasiticides when it acquired American Cyanamid. These include brands such as Warbex (famphur), Flectron (cypermethrin) and Renegade (alphacypermethrin). Most of these products have been available for many years in the US, but some have been commercialised more recently by Fort Dodge in other markets. A pour-on sheep blowfly treatment was launched in the UK during 2003 as Dysect (alpha-cypermethrin), for example. 12.4.3 Other pharmaceuticals Aside from its interests in the parasite control market, Fort Dodges portfolio includes a broad range of anti-infectives and veterinary speciality products. Many generate relatively limited revenues, but global sales from this segment of the portfolio are comfortably in excess of $150 million, and some key brands are significant contributors to that total. Among a broad range of mostly well-established anti-infective products, offerings such as the bovine mastitis treatments, ToDay and ToMorrow (both containing cephapirin), feature prominently, and continue to perform well despite strong competition for shares of the mastitis market. Amoxycillin and oxytetracycline are other long-established active ingredients that feature in the Fort Dodge range, but sales in this segment of the market have also been boosted recently by the addition of the fluoroquinolone antibiotic, difloxacin, to the companys portfolio. Difloxacin was in late-stage development at Solvay when the Belgian companys animal health business was acquired by Fort Dodge. It has since been brought to market under the Dicural trade name. Early introductions were of a tablet formulation for use in dogs. The tablet version continues to be rolled out internationally, but an injectable formulation has also been commercialised. Dicural Injection was launched in France during 2001, less than a year after the initial introduction of the tablet formulation, and has since been the subject of an international launch programme. Difloxacin has also been commercialised for use in poultry (though not in the US, where regulators recently confirmed a long-standing proposal to ban the use of fluoroquinolones in that sector of the animal health market), while Fort Dodge is pursuing registrations in other food animal species, including cattle and pigs. Difloxacin has a longer elimination half-life than any other quinolone registered for veterinary use. As a result, it offers sustained activity from a single dose a characteristic that should help to drive sales in what has become an increasingly competitive market segment. Another recent addition to the Fort Dodge pharmaceutical range is the canine NSAID, etodolac, which was launched in the US as EtoGesic in 1998 and which has since been introduced in most major companion animal markets. Etodolac is an established part of Wyeths human pharmaceutical range (sold as Lodine), but has had a significant impact on veterinary NSAID markets where its once-daily dose regime for the treatment of canine T&F Informa UK Ltd, 2005
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osteoarthritis gives it a competitive edge over some other offerings in the sector. EtoGesic had emerged as the most serious competitor to Pfizers marketleading canine NSAID, Rimadyl (carprofen), prior to the recent launch of major new products in the canine osteoarthritis treatment market. The availability of generic carprofen will also affect both prices and market shares in the segment, but EtoGesic should hold its own more successfully than some other established NSAIDs. In the livestock sector, Fort Dodge gained an entry to the market for cattle growth promoters through its acquisition of Syntex Animal Health, which generated a significant proportion of its revenues through sales of a hormone implant range sold under the Synovex label. These products have been banned in the EU, but continue to generate significant sales in the US and a number of other international markets. The company obtained FDA approval to market a new trenbolone acetate/oestrogen combination implant, Synovex Choice, for use in feedlot steers in 2002.
12.5
R&D
Wyeth invested almost $2.5 billion, or 14.2% of turnover, in the R&D of new products during 2004. The company does not publish research spending figures for individual divisions, but investment in R&D for human pharmaceuticals accounts for well over 90% of the corporate total. Higher R&D spending by the Fort Dodge Animal Health division has been noted in each of its last two annual reports, however, and the business is currently believed to be investing around $90 million a year in the R&D of new veterinary pharmaceuticals and vaccines. A significant proportion of the divisions R&D budget is invested in the development and commercialisation of new biological products. Fort Dodge has rolled out a series of innovative new vaccines since the beginning of the 1990s, including the first available products offering protection against FIV and equine WNV. Its reputation as an innovator in the sector was further enhanced in 2005 when US regulators approved the use of a new DNA vaccine against WNV. The DNA version of its West Nile Innovator product will not be launched commercially until 2006, but receipt of authorisation represents a proof-of-concept milestone for a DNA vaccine platform that Fort Dodge hopes will eventually provide a succession of other novel products. Small-scale trials with a raccoon poxvirus vectored vaccine against feline infectious peritonitis were published by Fort Dodge several years ago, but no commercial product has emerged to date. The company is still believed to be working on the development of a vector platform for use with novel companion animal vaccines, however. Other novel delivery technologies have also been investigated. These include the use of a Bacterial Commensal Vector (BCV) technology platform patented by Siga Technologies, which was the subject of a collaborative deal announced towards the end of 2000. Fort Dodge is also working with the Iowa-based company, BioForce Nanosciences, on the application of its ViriChip concept for use as a quality control measure in veterinary vaccine production. The technology combines immunological recognition with highly sensitive surface profiling detection enabling the quality of vaccine formulations to be tested during production.
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In the pharmaceutical sector, line extensions and the development of combination products are the focus of significant R&D programmes, with active ingredients such as difloxacin and moxidectin featuring prominently. Efforts to gain approval for difloxacin in additional species are at an advanced stage, with products for the treatment of respiratory disease in cattle and pigs expected to reach the market in the near future as a result. In the parasite control sector, additional claims for moxidectin are in the pipeline, while Fort Dodge is also expected to commercialise combination products containing moxidectin and pet flea/tick treatments for use in small animals. The company has entered a deal with Bayer under which the German company has paired its imidacloprid insecticide with moxidectin, while Fort Dodge has added combination products containing imidacloprid to its range in certain markets. A canine spray containing permethrin, imidacloprid and fenoxycarb was added to its companion animal range in Mexico recently. Fort Dodge is also believed to have been working on the further application of formulation technology with a view to developing a sustained-release injectable version of moxidectin for use in cattle. It is not clear how advanced the project is, however, or how it may have been affected by events surrounding ProHeart 6. Still in the parasite control sector, the company has been working for some time on the development of novel ectoparasiticides, including products from the pyrrole insecticide class. It has trialled chlorfenapyr as a potential treatment for fly infestations on cattle with seemingly positive results, but has yet to bring a commercial product to market. In other segments of the veterinary pharmaceutical market, Fort Dodge is believed to be working on the development of additional crossovers from Wyeths human pharmaceutical range following the successful adaptation of etodolac for veterinary use. The Wyeth portfolio contains a number of potential targets, including products for the treatment of neurological, cardiovascular and gastroenteric conditions, as well as anti-infectives. Elsewhere, Fort Dodge will build on its recent deal with TransForm Pharmaceuticals to register and commercialise a novel anaesthetic for veterinary use. The agreement, which was announced in 2004, gives Fort Dodge an exclusive licence to TransForms proprietary formulation of an unspecified anaesthetic which is expected to offer significant clinical and convenience advantages over currently available products.
12.6
Strategy
Wyeth has been dogged since the late 1990s by litigation relating to two diet drugs, Redux and Pondimin, which it marketed prior to their withdrawal in 1997. The company has taken charges totalling $21 billion in relation to the two products since then, including $4.5 billion set aside in 2004. With charges relating to Redux and Pondimin continuing to drain its finances, Wyeths future has been the subject of widespread speculation in recent years. The company has also been involved in more than one failed merger attempt since the late 1990s, but may finally be about to enter a period of more stable growth. The $4.5 billion added to its litigation funds in 2004 brought total reserves to more than $7 billion, and management believes that figure should be sufficient to deal with outstanding actions against the company. If that is the case, earnings and net income should
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rise significantly in the next couple of years, and Wyeth may be able to look forward to a more positive future. Throughout a difficult eight-year period, Wyeth has retained its commitment to the animal health subsidiary that it did so much to build up in the mid1990s. Fort Dodge faces problems of its own following the voluntary withdrawal of ProHeart 6 in 2004, but that is unlikely to affect Wyeths view of the division. The commercial future of the product remains unclear, however, and rehabilitating it for a second time will be extremely difficult. While it awaits the outcome of investigations by US regulators into ProHeart 6, Fort Dodge must focus on generating profitable growth from other areas of what is an extensive portfolio. The commercialisation of new parasite control combinations featuring moxidectin, and the roll-out of new species indications for difloxacin promise to drive up pharmaceutical sales, while the steady stream of new vaccines brought to market by the company in recent years is expected to continue. Fort Dodge is expected to focus its resources on maximising the commercial potential of these new products, backing the most significant new brands with sizeable marketing campaigns in an effort to drive early returns. Other costs will be watched closely, however, as the company works to maintain or improve its operating margins which, while comfortably into double-digit territory, remain several points below those of some competitors.
12.7
Prospects
Fort Dodge enjoyed mixed results in the first half of 2005, with a strong first quarter being followed by a more modest performance in the April-June period. The net result was a first-half sales gain of 7%. Strong gains in international markets were the source of most growth, but increases in domestic revenues, while marginal, were nevertheless encouraging when one considers the absence of ProHeart 6 sales from top line figures since September 2004. Sales growth is expected to remain subdued in the third quarter, but should reach double-figure levels in the final three months of the year, during which revenues will be compared against a period during which ProHeart 6 had already been withdrawn from the market. Overall growth during the second half should match increases posted in the first six months of the year. That would see Fort Dodge report full-year sales of $895 million in 2005 up by 7% on year-earlier figures. Beyond 2005, the performance of the companys biologicals business and the impact of additions to its pharmaceutical portfolio will be among the main factors determining whether or not Fort Dodge sales outpace growth across the animal health industry as a whole. The company does not possess a potential blockbuster in its near-term pipeline, however, and gains from new product launches will be required to offset declining revenues from some older sectors of the portfolio. As a result, it is unlikely to grow at rates significantly in excess of the market average.
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Chapter 13: Idexx
CHAPTER 13 IDEXX
Idexx One Idexx Drive Westbrook Maine ME 04092 USA Tel: +1 207 856 0300 Fax: +1 207 856 0346 www.idexx.com Key personnel Jonathan Ayers Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events November 2004 December 2004 Acquires German-based veterinary reference laboratory business VML. Completes diagnostics Intervet. the acquisition of Swiss specialist Dr Bommeli from $549 million 13th Veterinary diagnostics North America, Europe, Asia/Pacific Chair and CEO, Idexx
13.1
Company background
Idexx is the worlds leading veterinary diagnostics company, and has built interests in a number of related sectors since its establishment in the mid1980s. Rapid diagnostic tests still account for a significant proportion of the companys business, but revenues are also generated by veterinary instrument systems and consumables, laboratory and consulting services, and water and dairy testing products. More recently, Idexx acquired an entry into the veterinary pharmaceutical market through the purchase of a development-stage company, Blue Ridge Pharmaceuticals. Now trading as Idexx Pharmaceuticals, the pharma subsidiary has launched several products on the US market, and has now begun to make a significant contribution to the companys corporate revenues. The pharmaceutical business is part of Idexxs companion animal group, which also includes immunoassays, veterinary instruments, laboratory and consulting services and informatics, and which is the major source of corporate revenues, accounting for just under 82% of sales in 2004. The companys other interests are grouped in a water quality products and services division and a food diagnostics group.
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13.2
Sales and income

After levelling off slightly at the beginning of this decade when Idexx undertook a restructuring exercise that saw it dispose of certain non-core assets, revenue growth has picked up again, and the company has now posted double-digit gains in each of the past two years. Having reassessed its strategic direction, it has made a number of further acquisitions in key areas, which have contributed to recent levels of sales growth, and which will boost revenues again in 2005. The 2004 sales total of $549 million represented a 15% increase on year-earlier figures, and was almost 50% higher than revenues being reported at the beginning of the decade.
Table 13.1: Idexxs sales, earnings and operating margin, 2000-2004
Year Sales ($ million) Operating income ($ million) Operating margin (%)
2000 2001 2002 2003 2004

Source: Idexx.
367.4 386.1 412.7 476.0 549.2
53.3 56.6 65.8 80.4 108.0
14.5 14.7 15.9 16.9 19.7
Pre-tax earnings and net income generated by the Idexx business have climbed rapidly since the beginning of the decade, and continued to outpace sales growth in 2004. Pre-tax earnings doubled between 2000 and 2004, reaching $108 million in the latter year. The companys operating margin rose consistently during that period, reaching almost 20% in 2004. 13.2.1 2003 performance Having increased by almost 21% in 2002, Idexxs net income rose by a further 26% in 2003, reaching $57 million. Operating income climbed by 22% to $80.4 million on revenues of $476 million (+15.3%), pushing the companys operating margin up to almost 17%. Gains were led by the companion animal group, where sales rose by 18% to more than $384 million. Currency factors had a positive impact on revenues as reported, but underlying growth was still well into double-digit territory, led by sales of the LaserCyte haematology instrument system which was launched at the end of 2002. Sales of rapid assay test kits were also up sharply, with higher volume sales of canine products leading an 18% increase. Elsewhere in the division, instrument consumable sales were up by 12% and laboratory service sales by 15%. The companys as-yet modest veterinary pharmaceutical business also contributed to growth, with sales rising by almost $2 million, or 35%. Revenues generated by the water products and services business rose by 12% to almost $47 million, while sales of products in the food diagnostics group were only 2% higher, at just under $44 million. Gains in that segment of the business were currency-related, and excluding the impact of exchange rates, revenues were down on year-earlier figures due to lower average prices and reduced volume sales. T&F Informa UK Ltd, 2005
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Chapter 13: Idexx
Idexx handled a number of new product launches during 2003, including an improved version of the Snap Beta-Lactam test kit used by dairy producers to detect antibiotic drug residues in cows milk. It also acquired additional interests in the US reference laboratory sector, purchasing Kentucky-based Equine Biodiagnostics Inc during the final quarter, and established a veterinary diagnostics joint venture with a local partner in China during the third quarter. 13.2.2 2004 performance Operating income rose by 34% in 2004 on sales that were 15.4% higher at $549 million. Idexxs operating margin reached almost 20% during the year, and net income posted by the company increased by 37% to $78.3 million. Currency factors were responsible for just over 3% of revenue gains, with underlying sales growth reported at a little over 12%. Growth was again led by businesses in the companion animal group, sales of which were up by almost 17% on year-earlier figures. In dollar terms, the biggest contributors to growth were the groups laboratory/consulting services and veterinary instrument sales. Sales of rapid diagnostic assays and veterinary pharmaceuticals both rose sharply, however, finishing the year approximately 13% and 50% higher, respectively, than 2003 levels, Gains posted for the laboratory services unit were driven partly by the inclusion of recently acquired businesses in results. These included Equine Biodiagnostics Inc, which was purchased in the second half of 2003, and the Ohio-based Veterinary Diagnostics Laboratory Ltd, which was acquired in February 2004. Idexx also handled a string of new product launches during the year, including a BSE postmortem test, a canine Giardiasis diagnostic and Surpass, a diclofenac-based equine anti-inflammatory drug. Revenues generated by the water products business rose by 13%, boosted by the impact of exchange rates, which contributed 4% to reported gains. Underlying sales growth for products in the food diagnostics group was limited, at just under 1%, but currency factors had a more significant impact on this segment of the business, driving up revenues as reported by more than 5%. Idexx continued to strengthen its business through acquisitions as well as product launches, purchasing the German-based laboratory services company, VML, in November, and acquiring the former Intervet diagnostics subsidiary, Dr Bommeli (Switzerland). 13.2.3 Interim 2005 performance Recently acquired business contributed to strong sales gains in the first half of 2005, during which Idexx sales rose by almost 16% to $313 million. Pretax earnings fell back by a little over 2% to $56.4 million, however, and net income was almost 10% lower at $37.6 million. The company attributed the decline in earnings to investments being made to drive long-term growth of the business.
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Animal Pharms Top 20, 2005 Edition Table 13.2: Idexxs first half sales, 2004 and 2005
Source: Idexx.
% change
2005 152.4 160.6 313.0 +14.2 +16.9 +15.6
133.4 137.4 270.8
Companion animal group revenues were 15% ahead of 2004 levels at the half-year stage, with sales again being led by laboratory/consulting services and instruments. Water segment revenues were up by 9%, while sales reported for the food diagnostics group were 27% higher, reflecting the inclusion of recently acquired business in 2005 results.
13.3

Idexx still generates more than two-thirds of its global sales in the US, but revenues reported in international markets have increased rapidly since the beginning of this decade, driven by a combination of in-house growth, acquisitions and the impact of the weakening US dollar. Markets in western Europe, Japan and Australia are the most significant contributors to overseas business. Sales in Europe will be boosted in 2005 following the integration of the VML and Dr Bommeli acquisitions, both of which were completed in the final quarter of 2004.
Table 13.3: Idexxs sales by region, 2004
Region Sales ($ million) 373.6 21.3 114.1 40.1 549.2 % of total 68.0 3.9 20.8 7.3 100.0
US Other Americas Europe Asia/Pacific Total

Source: Idexx.
13.3.1
North America The Idexx business is run from a global headquarters at Westbrook, Maine, where the companys distribution centre is also located. Idexx Pharmaceuticals operates from facilities at Greensboro and Durham, New Jersey, while the companys US laboratory services division is headquartered at Portland, Maine. Idexx acquired several laboratory service businesses in the US during the 1990s, and runs laboratory testing facilities at a growing number of locations across the country. US revenues have risen at double-digit rates during the past two years, driven by a combination of new product launches and acquisitions. A gain of 12.6% for the domestic business in 2004 saw sales rise to just under $374 million. The inclusion of revenues generated by reference laboratory
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interests acquired during 2003 contributed to higher domestic sales in 2004, but demand for new products also drove the domestic business. Chief among these was the LaserCyte haematology system, which was launched towards the end of 2002, and which was also a strong contributor to domestic sales growth in 2003. Animal health market growth in Canada has been limited since the middle of 2003 by the impact of BSE on the countrys livestock production sector. The Idexx business, which is dominated by sales of products for use in the companion animal sector, continued to grow at double-digit rates during 2004, however, with sales up by 12% to more than $16 million. Aggregate sales generated in the US and Canada during the year were just over $390 million equivalent to 71% of the global total. 13.3.2 International markets Revenues booked by Idexx in markets outside the US and Canada have risen by more than 20% in each of the past two years, and reached $159 million in 2004. Sales as reported for the international business have been boosted significantly by exchange rate factors since 2002, but acquisitions, new product launches and growth generated by established products have all contributed to gains. The international business is at its strongest in Europe, where the company posted sales of $114 million in 2004 equivalent to almost 21% of the global total. The UK, where sales reached more than $43 million in 2004, is the biggest contributor to European revenues, while Germany ($21 million) and France ($15 million) account together for almost one-third of the regional sales total. European revenues will increase sharply again in 2005 following the integration of new business acquired in the region during 2004. Idexx announced in November that it had completed the purchase of the European diagnostics and laboratory services company, VML. Headquartered in Germany, VML offers laboratory testing services to the veterinary profession in nine European countries, and generated revenues equivalent to approximately $25 million in 2004. A month later, Idexx announced that it had completed the purchase of Intervets Swiss-based veterinary diagnostics subsidiary, Dr Bommeli. The Bommeli business is focused on the development, manufacture and sale of diagnostic reagents and test kits for use in livestock. Outside Europe, Idexxs main source of international revenues is the Asia/Pacific region, where it generated 2004 sales of $40 million, or 7% of its global total. That figure is dominated by business conducted in Japan and Australia, with revenues in each of those markets equivalent to just over $16 million in 2004. Sales in other Asia/Pacific markets fell back during 2003, but climbed by 30% in 2004, reaching $7.3 million. Business in a number of countries has been disrupted by the impact of avian influenza outbreaks on demand for animal health inputs, but Idexx will anticipate further sales growth in emerging Asian markets following recent investments in the region. The companys most significant initiative is a joint venture established in 2003 to manufacture and distribute livestock diagnostics in China. Its partner, the Beijing Fortunate Century Animal Health Technology Company, T&F Informa UK Ltd, 2005
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is owned by the Chinese governments National Animal Husbandry and Veterinary Service. Idexx took an initial 40% equity interest in the venture, which trades as Beijing Idexx-Yuanheng Laboratories, but enjoys majority representation at board level, and consolidates its results in its corporate financial statements. It is committed to the purchase of an additional 20% share in the venture in 2005, subject to approval by the Chinese government.
13.4
Product portfolio
Idexx began reporting separately on the financial performance of its water and food diagnostics businesses in 2003. As a result, the company now operates three broad segments. The companion animal group, which spans diagnostic products and services, veterinary pharmaceuticals, informatics and internet businesses, is by far the most important contributor to group sales and earnings, generating almost 82% of Idexx revenues and 71% of pre-tax income in 2004.
Table 13.4: Idexxs sales by operating segment, 2003 and 2004
Division Sales ($ million) 2003 Companion animal group Water Food diagnostics group Total
Source: Idexx.
% change
% of 2004 total
2004 448.7 53.1 47.4 549.2 +16.7 +13.2 +6.3 +15.4 81.7 9.7 8.6 100.0
384.4 46.9 44.6 476.0
13.4.1
Companion animal group The Idexx companion animal business, which is dominated by diagnostic instrument systems, laboratory services and rapid assay tests, posted sales of almost $450 million in 2004 up by almost 17% on year-earlier figures. Gains were led by increased sales of laboratory and consulting services, and higher volume sales of instruments and consumables. Revenues generated by rapid assay tests, information products and services, digital radiography systems and pharmaceutical products also increased, however. Veterinary instrument and consumable sales reached almost $200 million in 2004, accounting for 44% of segment revenues, while laboratory and consulting services were responsible for a further 26% of companion animal group sales. The rapid diagnostic assay range generated sales of $93.5 million, or 21% of the segment total, while the companys veterinary pharmaceuticals business posted a gain of 50%, taking sales to just over $10 million.
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Animal Pharms Top 20, 2005 Edition Table 13.5: Idexxs companion animal group revenues by business sector, 2004
Sector Sales ($ million) 197.9 93.5 118.6 28.2 10.5 448.7 % of total 44.1 20.8 26.4 6.3 2.3 100.0
Instruments and consumables Rapid assays Laboratory/consulting services Information products/services and radiography Pharmaceuticals Total
Source: Idexx.
. . . Immunoassays
The point-of-care diagnostics business markets a range of products used by the veterinary profession to test the disease and health status of companion animals. Leading products are sold under the Snap trade name, and include tests for feline leukaemia virus (FeLV) and heartworm disease in dogs and cats. The line also features combination tests such as Snap Combo FeLV/FIV, enabling simultaneous testing for feline leukaemia and FIV; and the canine product, Snap 3Dx, which tests for Lyme disease, Ehrlichia canis and heartworm. Heartworm tests and the FeLV/FIV combination products are the biggest contributors to revenues in the sector. Other more established small animal assays include tests for thyroid hormone levels in dogs and cats, and for parvovirus in dogs. An equine product for testing the immune status of new-born foals is also available. A line of ELISA microwell-based test kits is marketed for use by high-volume customers (large veterinary clinics and independent laboratories) under the PetChek brand, which includes products for use in the diagnosis of feline leukaemia, FIV and canine heartworm disease. Idexx also markets a microwell-based test for feline coronavirus under the DiaSystems trade name. Sales of rapid assay products increased by around 13% in 2004, reaching $93.5 million. Gains were led by higher sales of canine diagnostic tests in the US, and strong demand for a new Snap test that enables screening of dogs and cats for Giardia infection, which was launched in the US during the first quarter of the year. Diagnosis of Giardia infection was previously undertaken via faecal float evaluation or faecal smears, both of which are relatively poor methods of detection. The product is the first pet-side test available to veterinary surgeons for identification of soluble Giardia antigen, providing results in less than 10 minutes.
. . . Veterinary instrument systems

Instrument systems and associated consumable products for use in veterinary clinics are the biggest contributors to Idexxs companion animal group revenues, generating global sales of almost $200 million in 2004. Established systems include the VetTest blood chemistry analyser; the VetLyte electrolyte measuring system; the VetTest Snap Reader, which enables quantitative measurement of hormones including thyroxine and cortisol; and the QBC VetAutoread haematology analyser. Revenues T&F Informa UK Ltd, 2005
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generated by some of these systems have declined in recent years, but this segment of the business has been given new impetus following the launch in 2002 of a new-generation haematology analysis system, LaserCyte. The LaserCyte analyser is the first instrument system developed and manufactured in-house by Idexx, and has had a major impact on the companys instrument sales, which rose by more than 120% in 2003, and by a further 12% in 2004. In 2005, Idexx added a new electrolyte and blood gas analyser to its diagnostic instrument range. Being sold under the VetStat brand, it provides analysis of blood gases, ionised calcium, anion gap and electrolytes in dogs, cats and horses.
. . . Laboratory and consulting services

Laboratory testing and consulting services contributed almost $120 million to Idexxs global revenues in 2004. The company offers laboratory testing services at a growing number of locations across the US, and has also established a presence in the UK, Japan and Australia. This segment of the business is set for further significant expansion in 2005 following the acquisition of the European laboratory services specialist, VML, which is expected to add around $25 million to sales. Based in Germany, VML operates veterinary reference laboratories in Germany and Switzerland, and possesses customer service sites in the Netherlands, the UK, France, Italy, Austria and Denmark. Idexxs US laboratory services network has also been strengthened in the past two years. A new reference laboratory serving practices in Atlanta, Georgia, and surrounding areas was established in 2003, while Veterinary Diagnostics Laboratory Ltd, based in Columbus, Ohio, and Kentucky-based Equine Biodiagnostics Inc have been added to the portfolio as a result of acquisitions. Equine Biodiagnostics, which was added to the Idexx portfolio in the final quarter of 2003, began offering two new Streptococcus equi (strangles) tests to customers in the first half of 2004. The new tests offer rapid detection of S. equi infection, and quantification of S. equi antibody levels in affected animals.
. . . Information products and services

Idexx has built up a leadership position in the provision of information products and services for the veterinary profession. Its practice management software business was formed in 1997 following acquisitions in the sector, and now supplies around one-third of all veterinary hospitals in the US. Principal software systems are sold under the Cornerstone and Better Choice labels. The companys practice management software and internet service businesses have now been combined under the VetConnect Systems name.
. . . Veterinary pharmaceuticals
Idexx entered the veterinary pharmaceuticals market in 1998 through the acquisition of Blue Ridge Pharmaceuticals, a development-stage company based in Greensboro, North Carolina, which had been founded two years earlier by former senior executives of Novartis. Blue Ridge adopted the Idexx name in 2002 and now trades as Idexx Pharmaceuticals Inc (IPI).
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The companys first product a chronic wound treatment for use in companion animals, sold as Facilitator was launched to US veterinary surgeons in 1999. First European launches of the product, which is a gel formulation containing hydroxyethylated amylopectin, were also handled in that year. IPI has launched several more significant products since then. Earliest to market was Acarexx, an ivermectin-based treatment for ear mites in cats, which received US FDA approval in 2000. PZI Vet, an insulin product for the treatment of diabetic cats, was launched in the US during 2002, while regulators there have approved two more Idexx drugs inside the past 12 months. Navigator (nitazoxanide), an oral paste for the treatment of EPM, was approved in the final quarter of 2003, while Surpass, a topical formulation of the diclofenac NSAID for the treatment of equine osteoarthritis, received US marketing authorisation in the second quarter of 2004. Pharmaceuticals contributed only $5 million to Idexxs revenues in 2002, but sales generated by IPI have doubled since then, reaching $10.5 million on the back of a 50% increase in 2004. The company has several other products in late-stage development, but no further launches are anticipated in 2005. Pharmaceutical sales will slow as a result. 13.4.2 Water products and services Revenues generated by Idexxs water products and services increased by 13% in 2004, reaching $53 million. A significant proportion of that total is achieved in markets outside the US, and exchange rate factors were responsible for 4% of reported gains. The business was expanded significantly at the beginning of this decade following the acquisition in 2000 of the UK company, Genera Technologies, which gave Idexx an entry into the Cryptosporidium testing market. Testing of water supplies for Cryptosporidia is mandatory in the UK. More established products in this segment of the business include the Colilert and Colisure tests for the detection of coliform bacteria and E. coli in water. The range also includes Enterolert, for the detection of enterococci in drinking and recreational waters, and the Quanti-Tray range of products used for quantitative measurement of microbial contamination. 13.4.3 Food diagnostics group Idexxs food diagnostics segment generated sales of more than $47 million in 2004 up by just over 6% on year-earlier figures. Exchange rate factors were responsible for the bulk of reported gains, however, with underlying growth limited to just under 1%. Production animal products and services lead sales in the food diagnostics group, generating revenues of almost $32 million in 2004. Sales of dairy testing products fell back slightly during the year, to a little less than $16 million. Revenues in this segment of the business have been subdued for several years, but will be boosted in 2005 by the acquisition of Dr Bommeli, a Swiss livestock diagnostics company acquired from Intervet at the end of 2004. Sales will also be driven by the launch of Idexxs HerdChek BSE Antigen test kit a rapid test for the postmortem detection of BSE, which was approved T&F Informa UK Ltd, 2005
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for use by regulators in the EU during the first quarter of 2005. With around 10 million BSE tests performed annually in the EU, sales of the product could have a major impact on Idexx revenues in the region if it is able to capture a significant share of the market. The product is already approved in the US. A new swine influenza H3N2 antibody test kit has also been added to the HerdChek range of production animal diagnostics in the US since the beginning of 2005. Key established targets for the HerdChek line include PRRS and Aujeszkys disease in pigs, and infectious bovine rhinotracheitis and Johnes disease in cattle. Recent additions to the HerdChek line include a rapid ELISA test for bovine viral diarrhoea virus and two new assay tests for porcine respiratory disease complex (PRDC) screening. A swine Salmonella test was added to the range in the US during 2002. Avian diagnostics are sold under the FlockChek label, offering detection of pathogens including Newcastle disease virus, infectious bursal disease virus, infectious bronchitis virus, reovirus, mycoplasma and Salmonella enteritidis. An avian pneumovirus antibody test was added to the FlockChek range in Europe during 2004. Idexxs main dairy testing product is the Snap Beta-Lactam test for the detection of antibiotic residues in milk. An improved version of the product was introduced in the US during 2003 following criticism that the original version was too sensitive for cephapirin, resulting in sub-violative positives that caused some farmers to dump milk that was actually safe for consumption.
13.5
R&D
Idexx has increased its spending on R&D by around 10% in each of the past two years, with investments reaching $35.4 million in 2004. R&D spending has not kept pace with revenues in recent years, however, and investment as a proportion of turnover has fallen from almost 8.0% at the beginning of the decade to a current figure of 6.4%. The decline is due in part to acquisitions completed since then, many of which have added to revenues in areas of the business that do not require significant R&D spending. The purchase of Dr Bommeli is expected to contribute to an increase in investments during 2005, however.
Table 13.6: Idexxs spending on R&D, 2000-2004
Year Spending ($ million) 28.3 28.4 29.3 32.3 35.4 R&D spend as % of sales 7.7 7.4 7.1 6.8 6.4
2000 2001 2002 2003 2004

Source: Idexx.
R&D budgets are focused primarily on the development of new diagnostic instrument platforms, immunoassay devices and diagnostic tests. The company also continues to work on improvements to existing products and services, and since the late 1990s has begun to invest in the development and commercialisation of new veterinary pharmaceuticals. T&F Informa UK Ltd, 2005
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Maintaining a leadership position in the highly competitive veterinary diagnostics market necessitates continued research into new products and technologies. The pace at which diagnostic technology continues to develop remains rapid, enabling the introduction of improved products and tests for the diagnosis of new disease conditions and indications of health status. Accuracy, ease-of-use and rapidity are the criteria by which products in the sector are judged and, accordingly, improvements in these areas are among the main goals of current development work. Advances in immunology, cell and molecular biology, microbiology, DNA probes and other novel technologies will all be incorporated in future products. In 2002, Idexx and Roche Diagnostics announced a collaboration on the development of polymerase chain reaction (PCR)-based diagnostic assays for the detection of veterinary pathogens. The tests will use Roches patented LightCycler PCR technology, which will be applied to reagents developed by Idexx. Idexx will have sole rights to distribute and market products resulting from the agreement. In the instrumentation sector, Idexx announced in 2003 that it had extended the terms of its collaboration with the Johnson & Johnson subsidiary, OrthoClinical Diagnostics Inc. The two companies will now collaborate in the veterinary clinical chemistry market until at least 2018. Idexx is currently applying Orthos dry-slide technology in the development of a nextgeneration chemistry analyser for the veterinary market. Idexx has invested significant sums in the development of veterinary pharmaceutical products since 1998, when it entered that sector of the market through the acquisition of Blue Ridge Pharmaceuticals (now trading as IPI). Revenues generated by products commercialised by IPI are limited to date, but recent launches have seen sales double in the past two years, and products in late-stage development promise to drive sales up further. Among the products in respect of which the company has filed for US approval is a long-acting injectable formulation of the antibiotic, tilmicosin, for use in cats, which the company believes will offer significant advantages over current products that require daily oral dosing regimes. The proprietary long-acting delivery technology applied to the tilmicosin product has potential as a platform for the development of additional companion animal antibiotics. Other pharmaceuticals in the IPI development pipeline include allergy treatments, anthelmintics and a product targeting improvements in bovine reproduction.
13.6
Strategy
David Shaw, who founded Idexx in the 1980s, retired as head of the company in 2002, appointing Jonathan Ayers previously head of United Technologies Carrier Corporation subsidiary and with a track record in industry, investment banking and strategic consulting as his successor. Ayers has since presided over the introduction of several strategic initiatives designed to improve the efficiency and profitability of the business. These have seen the integration of marketing, sales and service functions across the companion animal business, and the introduction of stronger sales and distribution capabilities. Investment in product training and selling skills has been stepped up, and technology support available to territory managers has also been strengthened.
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Most of these initiatives affect the core North American business, to which Jennifer Joiner was appointed head of commercial operations during 2004. The further development of sales and marketing functions has been placed high on her agenda, with the focus on leveraging increased levels of investment in direct sales, third-party distribution and support for veterinary customers. In May 2005, the company announced a deal with the US pet hospital chain, Banfield, under which it will supply the latters 450 sites with expanded laboratory systems and rapid assay product ranges. Having disposed of some non-core assets at the beginning of the decade, Idexx has continued to strengthen its remaining core interests through a series of acquisitions. Many of these have been designed to broaden the geographical spread of the companys laboratory services business, but the purchase of Dr Bommeli in the final quarter of 2004 will expand its position in the food animal diagnostics market. Efforts are also being made to strengthen Idexxs presence in key target markets. The company already generates substantial revenues in Europe, Japan and Australia, but has now begun to place more emphasis on growing the business in emerging markets such as China, where it established a joint venture in 2003. Idexx stated some time ago that its long-term goal was to generate half of its global revenues in markets outside the US. International sales currently account for 32% of the group total, but that figure will increase in 2005 following the two acquisitions completed in Europe during 2004. Veterinary pharmaceutical sales have doubled over the past two years, but still account for only 2% of Idexxs revenues. The veterinary drugs business has developed more slowly than the company originally anticipated partly as a result of delays in the receipt of marketing approval for some early products. Efforts have been made to recruit experienced regulatory affairs staff in a bid to accelerate approval times, and while no launches are anticipated in 2005, new products should begin to drive sales of the business towards the end of the decade.
13.7
Prospects
Having posted increases of 15% in each of the past two years, Idexx is on course to report a third consecutive double-digit sales gain. Revenues in the first quarter rose by just over 14% on 2004 figures, while an increase of almost 17% in the second quarter took first-half sales to $313 million up by 15.6% on year-earlier levels. Earnings fell back slightly, but the decline in operating income was attributed partly to spending on measures designed to fuel stronger growth of the business in the second half of the decade. Costs associated with the integration of VML and Dr Bommeli also depressed earnings. Recent acquisitions contributed 7% to the 14% increase in companion animal group revenues during the first half, and 11% to the 26% gain reported for the food diagnostics business. Water testing revenues were 8% ahead of 2004 levels at the half-year stage. New business will continue to drive double-digit growth in the third quarter, but gains will be slightly lower in the October-December period, since revenues were booked for VML and Dr Bommeli for part of the final quarter in 2004. Recent investments in sales and marketing operations, and the deal struck with Banfield during the first half of 2005 will help to boost revenues in the final quarter, however, and
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Idexx is forecast to post a full-year sales total of approximately $620 million up by 13% on 2004 figures. Beyond 2005, underlying growth of the Idexx business will continue to be driven by new product launches and the sales/marketing drive that is already underway. This should ensure that sales rise by an average of 5% or more during the second half of the decade. Senior management believe that measures currently being put in place will pave the way for double-digit growth of both sales and earnings in the next five years, however. New business in Asia may help to push up growth rates, but acquisitions are also certain to play a role.
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Chapter 14: Intervet
CHAPER 14 INTERVET
Intervet 35 Wim de Korverstraat PO Box 31 5830 AA Boxmeer Netherlands Tel: +31 8855 87600 www.intervet.com www.akzonobel.com Key personnel Dr Ruurd Stolp Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events December 2004 July 2005 August 2005 Sells Bommeli diagnostics business to Idexx Laboratories. Sells feed additives line to the Bulgarian company, Biovet. Announces agreement to acquire New Zealand-based vaccine specialist, AgVax Developments Ltd. Euro 1,024 ($1,272 million) 3rd Vaccines, antiparasitics, anti-infectives Europe, North America General manager, Intervet
14.1
Company background
Intervet is the animal health subsidiary of Akzo Nobel, a Dutch multinational with interests in the healthcare, coating and chemical industries. The Intervet business is part of the companys Pharma operating segment, which also comprises interests in the human pharmaceutical (Organon) and pharmaceutical active ingredients (Diosynth) sectors. The Diosynth unit was merged with Organon at the beginning of 2005, and Intervet is now one of four individual businesses for which Akzo reports detailed financial results. Akzo Nobel posted a net income of Euro 856 million ($1,063 million) in 2004 up by 42% on year-earlier figures, despite a modest decline in corporate net sales, which fell by just under 3% to Euro 12,688 million. Disposals and the negative impact of exchange rate fluctuations offset modest increases in sales volumes and prices across the companys businesses. The increase in net income was attributable largely to one-time costs incurred in 2003, and pre-tax earnings generated by the company were 10% lower at Euro 1,210 million.
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Revenues and pre-tax earnings generated by the Pharma division were both down on year-earlier figures, with operating income totalling $522 million (24.6%) on sales of Euro 3,246 million (-8.6%). Intervet posted sales of Euro 1,024 million, accounting for just under 32% of Pharma division revenues and 8% of Akzo Nobels corporate net sales total.
Table 14.1: Akzo Nobels sales by operating segment, 2004
Segment Sales (Euro million) 3,246 5,249 4,305 12,800 (112) 12,688 % of total 1
Pharma Coatings Chemicals Gross total Corporate Total reported
25.4 41.0 33.6 100.0 ---
Note: 1 Shares are of gross total, before corporate reductions. Source: Akzo Nobel.
14.2
Animal health sales

Intervet expanded rapidly in 1999 and 2000 following a series of acquisitions, the most significant of which was HRV a global business that was itself ranked among the worlds 15 biggest animal health and nutrition companies. Full-year sales of former HRV products were reported by Intervet for the first time in 2000 when, with other more modest acquisitions and gains from established business also contributing to growth, the companys sales virtually doubled, reaching Euro 1,020 million. Growth was reported at a more modest 7.5% in 2001, and the strength of the euro notably against the US dollar has affected Intervets results since then, contributing to reverses posted in 2002 and 2003, and limiting reported growth to little more than 1% in 2004, when sales grew by 4% in local currency terms.
Table 14.2: Intervets animal health sales, 2000-2004
Year Sales (Euro million) 1,020 1,096 1,081 1,010 1,024 % change +98.1 +7.5 -1.4 -6.6 +1.4
2000 2001 2002 2003 2004
Source: Akzo Nobel.
14.2.1
2003 performance The weakening dollar, which began to affect global sales reported by Intervet in 2002, continued to depress revenues posted by the company in 2003. The business reported a 2% increase in local currency sales during the year, but exchange rate factors transformed that into a near-7% decline
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when revenues generated outside the euro-zone were converted for reporting purposes, leaving sales for the year at Euro 1,010 million. Sales in Europe were flat, with poor conditions in the regions major aquaculture markets (notably Norway) and much of the pig production sector affecting demand. Outbreaks of avian influenza also had a significant impact on sales to the poultry sector in the Netherlands. Revenues reported by the business in other regions were depressed by exchange rate factors, but underlying trends were mixed. Results in major Latin American markets improved significantly during the second half of the year, but business in Asia was patchy and Intervet continued to make limited headway in North America. A new life sciences centre at Intervets DeSoto, Kansas site in the US was opened in May, while the company also embarked on a major investment programme at its Boxmeer headquarters facility in the Netherlands during the year. The Boxmeer project was designed to modernise the existing site and expand vaccine production capacity there. 14.2.2 2004 performance With underlying growth rates gaining momentum and the impact of currency factors on results moderating slightly, Intervet enjoyed a more positive year in 2004. Sales in local currencies increased by 4%, and with exchange rate movements knocking less than 3% off sales as reported, the company posted global revenues of Euro 1,024 million up by 1.4% on year-earlier figures, and equivalent to $1,272 million at annual average rates of exchange. Sales in Europe rose by around 6%, boosting the companys already strong position in its home market region. The European business was driven by a combination of established products and new introductions, which included several additions to the Intervet vaccines range. Stronger performances were also reported in a number of Latin American markets as key economies in that region recovered momentum, and as livestock and aquaculture production continued to expand. Double-digit growth was reported in Brazil, but sales in Mexico fell back as conditions in that market remained difficult. Elsewhere, while sales as reported in North America were well below yearearlier figures, Intervet described its overall performance in the US market as encouraging, noting stronger demand for its antiparasitic and small animal ranges there. Conditions were more challenging in the Asia/Pacific region, however, and despite strong performances in some Asian markets, overall sales reported in the region declined as a result of exchange rate factors and the disruptive effect of avian influenza outbreaks in several countries. In May 2004, Akzo Nobel announced the transfer of the Crina and Bredol feed additive businesses from its surface chemistry unit into Intervet. The surface chemistry unit will continue to manufacture Bredol products, but Intervet will produce the Crina line and will be responsible for R&D and marketing of both ranges. The two businesses are both based in Europe, where they will have a modestly positive impact on Intervet revenues. Their effect on sales outside Europe will be negligible.
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Towards the end of the year, Intervet announced the sale of its Swiss veterinary diagnostics subsidiary, Dr Bommeli AG, to the US diagnostics specialist, Idexx. The Bommeli business was a modest part of Intervets business, and its disposal will not have a significant impact on global sales or earnings. 14.2.3 Interim 2005 performance Intervets performance continued to improve during the first half of 2005, with higher volumes and prices both contributing to growth and the impact of currency factors on results as reported moderating further. Exchange rates knocked around 1% off local currency sales in the first quarter, but inflated international revenues in the second quarter by a similar amount. Gains as reported were 1.6% and 8.6%, taking half-year sales to Euro 539 million up by just over 5% on year-earlier figures.
Table 14.3: Intervets first-half sales, 2004-2005
Period Sales (Euro million) 2004 First quarter Second quarter First half
Source: Akzo Nobel.
% change
2005 262 277 539 +1.6 +8.6 +5.1
258 255 513
Akzo began publishing earnings figures for the Intervet business at the beginning of 2005, and operating income generated by the unit also developed positively. Pre-tax earnings for the first half totalled Euro 113 million up by 36% on year-earlier figures and equivalent to an operating margin of 21% for the first six months of the year. Improvements were attributed primarily to cost-containment programmes implemented during the past couple of years, though the balance sheet was also boosted to the tune of Euro 6 million in the second quarter by a one-off item relating to the settlement of a legal action filed by the company. Sales in Europe rose by 4% in the first quarter, while revenues generated in Latin America increased by 7%, led by a strong performance in Brazil. New product launches in the vaccines market helped to boost sales in the US, but conditions in Asia remained difficult as a result of avian influenza outbreaks in the region. The strong second-quarter performance was led by business in Latin America, where sales were 20% ahead of year-earlier figures thanks to substantial growth in Brazil and Chile. More modest expansion was reported in Europe and the US, while strong gains in Oceania, Russia and the Middle East helped to offset lower sales in Asia. Restructuring of the business continued, with Intervet announcing in June that it had agreed the sale of its MFAs line to the Bulgarian company, Biovet. Led by poultry anticoccidials, the business was inherited as part of the HRV acquisition, and had been widely tipped as a candidate for disposal by Intervet. In August, Intervet announced that it had agreed to acquire the New Zealand-based vaccine specialist, AgVax Developments Ltd, from the stateowned research institute, AgResearch. The deal will add around Euro 10 T&F Informa UK Ltd, 2005
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million to Intervets global revenues, and will also benefit the companys vaccine research programmes.
14.3

Intervet holds a leadership position in the European animal health products market, which was the source of almost 60% of the companys revenues in 2004. That figure has risen significantly in the period since 2001, largely because of exchange rate factors, which have depressed revenues as reported in some other regions. Remaining sales are generated in North America (16% of revenues in 2004), Latin America (14%) and the Asia/Pacific region (11%).
Table 14.4: Intervets sales by region, 2004
Region Sales (Euro million) 1 604 164 143 113 1,024 % of total 59 16 14 11 100
Europe US and Canada Latin America Asia/Pacific Total
Note: 1 Sales values are approximate, based on rounded percentage shares. Source: Intervet.
14.3.1
Europe Europe was already a major contributor to Intervets global sales total prior to the companys acquisition of HRV in 1999. The HRV business boosted revenues in the region considerably, and with European interests also strengthened by the purchase of Gellini and Nuova in Italy, Intervet now realises annual sales of around Euro 600 million in Europe. Some of the regions major markets have been depressed in recent years, and growth has been hard to come by. Recent product launches, including a stream of new vaccines, helped the Intervet business to grow at a rate of around 6% in Europe during 2004, however, and sales remained reasonably strong in the first half of 2005. Recent additions to the European portfolio include the fluoroquinolone antibiotic, Ibaflin (ibafloxacin), which reached its first markets in 2001, and a string of new vaccines. Additions to the biologicals range include the infectious bovine rhinotracheitis preventative, Bovilis IBR, additions to the companys poultry and pig vaccine ranges (including an improved version of the Salenvac poultry salmonella product) and new companion animal biologicals such as the feline influenza preventative, Nobivac Bb. In 2004, the company received European approval to market several other new vaccines, including an innovative product for the protection of pigs against Glssers disease and a genetically modified vaccine against equine strangles. The latter was the first genetically modified bacterial vaccine to be approved by European regulators. In the wake of its acquisitions in the region, Intervet embarked on a restructuring programme that has seen it rationalise manufacturing and
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research networks in Europe as well as parts of its product portfolio. Vaccine research has been centralised at Boxmeer in the Netherlands and Milton Keynes in the UK, with investment programmes undertaken at both sites, while pharmaceutical research is now focused at a new laboratory complex in Schwabenheim, Germany, and at the centre constructed by HRV at Beaucouz, near Angers in France shortly before its acquisition. The major investment programme being pursued at Boxmeer was continued through 2004, and will eventually result in the modernisation of Intervets multifunctional headquarters as well as increased vaccine production capacity there. A major refurbishment programme at the Milton Keynes (UK) facility was completed during the year, while further investment was also made at a manufacturing site in Salamanca, Spain. While Intervet possesses established subsidiaries in all of Europes biggest markets, the company has invested in the development of a stronger presence in southern, central and eastern European countries over the past decade. This has seen subsidiaries established in a number of new markets, including Turkey, Romania and Russia as well as the new EU member states, Hungary and the Czech Republic. 14.3.2 Americas Markets in the western hemisphere were responsible for 30% of Intervets global revenues in 2004, with 16% accounted for by the US and Canada and 14% generated in Latin American countries. Sales as reported in both regions have been affected since the beginning of the decade by the weakness of the dollar and economic problems in several Latin American markets. Results in both North and South America have improved recently, however. Intervet remains relatively under-represented in the US, which is responsible for less than 15% of its global revenues. Efforts have been made to strengthen the companys portfolio there, with the acquisition of interests in the vaccine sector previously held by Bayer, AmBio, Ambico and Bio-Trends International. Launch programmes for in-house products have also been stepped up, and these now appear to by paying dividends. Demand for Intervets US antiparasitic lines strengthened in 2004, while the reintroduction of the Prestige line of equine vaccines, new small animal vaccine launches and strong demand for Intervets cattle products have all contributed to growth in the first half of 2005. As in Europe, Intervet has rationalised its vaccine development and manufacturing networks in North America following the string of acquisitions completed there. The number of active sites involved in the sector has been cut from 12 to just three as a result, with viral vaccine production, warehousing, marketing and distribution functions all now centred at Intervets US headquarters in Millsboro, Delaware. A second site at Worthington in Minnesota is also involved in viral vaccine production, but the most significant aspect of the restructuring programme is the Euro 40 million investment at DeSoto, Kansas, which is now a major centre for R&D, production and administration. Intervets presence in South America was boosted significantly by the acquisition of HRV, which generated almost 20% of its global sales in the region. Intervet posted a Latin American sales total of just over Euro 140 T&F Informa UK Ltd, 2005
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million in 2004, reporting strong growth in a number of the regions key markets. Sales in Brazil were 14% higher than year-earlier figures following conversion to euros for reporting purposes, while in Chile the business reported a 37% surge in sales thanks to sharp increases in demand for its aquaculture vaccines. An 8% decline in Mexican sales limited regional growth to single digit levels in 2004, but Intervet reported a 20% increase in sales across Latin America during the second quarter of 2005, and a strong performance over the full year is anticipated. 14.3.3 Asia/Pacific Like many of its competitors, Intervet has struggled to grow its business in Asia over the past 18 months in the face of avian influenza outbreaks, which have disrupted several of the regions major markets. As a result, while stronger performances were recorded in some countries, the companys regional sales total of just over Euro 110 million in 2004 was around 7% lower than year-earlier figures. Long-term prospects in the region remain positive, despite the current problems, and Intervet has invested considerable sums in its Asian business. A major new development facility established in Japan has provided a platform for the rapid market entry of new biologicals in Asias leading market, while in China Intervet is involved in joint ventures with two local vaccine manufacturers. Its alliance with Shanghai Songjiang Biological Medicines Factory, under which a GMP-certified vaccine production facility has been constructed, will focus initially on inactivated poultry vaccines, but live and tissue culture-based products and vaccines for use in pigs will be manufactured there eventually. A joint venture with a second local company, Bioproducts Factory Jilin, which covers the production of viral and bacterial vaccines for the local market, was inherited from HRV. Elsewhere in Asia, Intervet has established a new aquaculture research unit in Singapore and strengthened product portfolios in South Korea, Taiwan, Malaysia and Thailand. The companys first aquaculture vaccines are now being rolled out in Asian markets, and will be introduced at a broad level across the region in the next 2-3 years. Like livestock production in Asia, the aquaculture sector has the potential to generate sizeable increases in demand for animal health inputs over the next 10-20 years. In Oceania, the purchase of HRV strengthened Intervets market position considerably, and the former HRV infrastructure is being used to lever the introduction of additional products from the established Intervet range in Australia and New Zealand. The acquisition of local vaccine manufacturers in both Australia (AusVac Pty) and now New Zealand (AgVax Developments Ltd in a deal announced at the beginning of August 2005) will further strengthen its position in Australasia. While further growth is being pursued in the biologicals sector, Intervet has reviewed its operations in other parts of the Australian market recently, with the result that a range of its OTC parasite control products (including brands such as Arrest, Fleececare, Stampede, Panacur and Taktic) have been licensed out to Virbac.
14.4
Product portfolio
Intervet holds a clear leadership position in the global market for veterinary vaccines, where it generates annual revenues of almost Euro 500 million. Vaccines dominate the companys business, accounting for 47% of its sales
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in 2004. The remaining 53% of sales are realised by a broad range of antiparasitics, anti-infectives, pharmaceutical specialities and feed additive products. Interests in the feed additives sector, most of which were acquired when Intervet purchased HRV at the end of the 1990s, are being wound down, however, and the company announced in June 2005 that it had agreed the sale of several feed additive brands to the Bulgarian company, Biovet.
Table 14.5: Intervets sales by product sector, 2004
Sector Sales (Euro million) 1 481 133 123 236 51 1,024 % of total 47 13 12 23 5 100
Biologicals Antiparasitics Anti-infectives Other pharmaceuticals Feed additives Total
Note: 1 Sales values are approximate, based on rounded percentage shares. Source: Intervet.
14.4.1
Biologicals Already a major player in the global market for veterinary vaccines, Intervet has strengthened its position in that sector considerably over the past decade through a series of acquisitions. HRV was the most significant, but other purchases have included the Norwegian-based aquaculture vaccine specialist, Norbio; a series of businesses in the US (including AM BioTechnologies, Ambico, Bio-Trends International and the former Bayer US vaccine unit); and modest acquisitions in Australasia (AusVac and AgVax Developments), India (B E Animal Health) and Europe (Gellini and Nuova). Acquisitions have broadened the vaccine portfolio as well as driving up revenues generated by the biologicals business, which was previously dominated by products for use in poultry. Norbio provided an entry into the aquaculture vaccine market, while canine and porcine ranges were added in the US through the acquisitions of AmBio and Ambico, respectively, and BioTrends International has strengthened Intervets position in the feline vaccines market. HRVs biologicals range was extensive, but included substantial interests in the ruminant and equine product sectors. Intervets comprehensive poultry vaccine range is sold under the Nobilis brand. It includes both monovalent and multivalent products against all of the major diseases affecting commercial poultry, including Mareks disease, Newcastle disease and infectious bronchitis. It also includes a live coccidiosis vaccine, Nobilis Cox ATM, offering protection against field infections caused by Eimeria acervulina, E. tenella and E. maxima; salmonella vaccines, including Nobilis Salenvac T, which is the first commercially available vaccine offering protection against both S. enteritidis and S. typhimurium; and Nobilis E. coli inac, the first inactivated subunit vaccine that protects against over 90% of all E. coli strains isolated from chickens. Intervet has struggled to meet demand for its salmonella vaccines recently, and announced early in 2005 that it was withdrawing its Nobilis SG9R
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product from the UK market, where it had been launched in the previous year. The company said it would focus production capacity on the supply of markets such as Italy, Spain and the Netherlands, where it already possessed an established market share, or where there was no alternative product available. Revenues in the livestock biologicals sector are led by an extensive swine vaccine line offering protection against a broad range of viral and bacterial Actinobacillus pleuropneumoniae, pathogens. Aujeszkys disease, Mycoplasma hyopneumoniae, swine influenza, atrophic rhinitis, erysipelas, parvovirus, E. coli and PRRS are all covered by the range, which includes a number of marker vaccines enabling differentiation between vaccinated and naturally infected animals. Intervets Aujeszkys disease vaccine, Porcilis AD Begonia, was the first Aujeszkys disease marker vaccine to receive centralised approval in the EU, and has sold over 200 million doses worldwide, making it the leading product in its field. More recently the company has launched Porcilis Pesti, a marker vaccine against classical swine fever, in a number of markets were classical swine fever is a major problem. Vaccines offering protection against PRRS are sold as Porcilis PRRS and PRRomiSe. Intervet announced in 2005 that it was withdrawing the PRRomiSe product from the US market, however, and said it was shelving efforts to commercialise new PRRS technologies there. Legal and patent considerations were cited as the reason behind the decision, which Intervet said would not affect PRRS preventatives marketed by the company in Europe. Its Porcilis PRRS product was recently approved for use in breeding sows by regulators there. Subunit vaccines against atrophic rhinitis (Porcilis ART DF) and E. coli (Porcilis Porcoli) are significant contributors to swine vaccine revenues in Europe, where a new vaccine against Glssers disease was also approved in 2004. Across the Atlantic, the ProSystem range of multivalent swine vaccines acquired from Ambico has been extended and updated since the 1996 acquisition. The ruminant vaccine range has been strengthened appreciably by the acquisition of HRV and Bayers North American livestock biologicals business. Cattle vaccines, which are sold most widely under the Bovilis brand, include combination products offering protection against various combinations of IBR, BVD, PI-3, BRSV and leptospirosis, as well as enteric pathogens such as rotavirus, coronavirus and E. coli. Rhinobovin, a marker vaccine against IBR, is a key part of the European range, while Bovilis Bovipast RSP, a unique product based on IRP technology, offers protection against BRSV, PI-3 and Mannheimia haemolytica, which are the three most important respiratory pathogens affecting cattle. The cattle vaccine range also includes a number of novel antiparasitic products, the most established of which is the lungworm vaccine, Bovilis Huskvac. A subunit vaccine against the cattle tick, Boophilus microplus, which is sold as TickGard, has been marketed in Australia for a number of years now, while a more recent addition to Intervets US range is the inactivated bovine neosporosis vaccine, NeoGard, which was launched fully there in 2002.
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Intervets existing interests in the sheep vaccine market are largely the result of the HRV acquisition. Key products include a line of clostridial vaccines sold variously as Heptavac, Lambisan and Lambivac (some of which also include protection against Mannheimia), and Toxovax, a modified live vaccine against abortion caused by Toxoplasma gondii. The latter has been distributed by Intervet for a number of years under an agreement with AgVax, which it agreed to acquire from New Zealands state-owned research institute, AgResearch, in the third quarter of 2005. The deal will see Intervet begin marketing the remainder of AgVaxs existing sheep biologicals line, including Androvax, which improves fertility in ewes by stimulating the immune system, and the inactivated campylobacteriosis vaccine, CampyVax3. Like the sheep vaccine range, Intervets interests in the equine biologicals market stem largely from its acquisition of HRV. Vaccines against various combinations of equine influenza, rhinopneumonitis and tetanus are sold under the Equilis and Prevac brands. Influenza components have been updated to provide improved cover against major strains of the virus, while a novel vaccine against equine strangles was approved by regulators in Europe during 2004. Being rolled out under the Equilis Strep E brand, the strangles product is the first live bacterial vaccine developed using recombinant DNA technology to be licensed in the EU. Intervets small animal vaccines are sold most widely under the Nobivac brand, though canine products are also marketed under the Proguard label in the US. The range includes a number of multivalent offerings as well as specialist products such as the subunit feline leukaemia preventative, Nobivac FeLV. Significant additions to the companion animal line brought to market in recent years include Nobivac Parvo-C, the first vaccine approved for the immunisation of puppies against parvovirus infections in the face of maternal immunity, and Nobivac Bb, for the immunisation of cats against Bordetella bronchiseptica. A new subunit vaccine offering protection against the Babesia canis parasite in dogs will be added to the small animal range in Europe during 2005, having received EU marketing authorisation in 2004. Continuum DAP, a new three-way canine vaccine offering protection for up to three years against distemper virus, canine adenovirus type-1 and parvovirus, will also be made available soon in Europe, having already been approved by regulators in the US at the beginning of 2005. Against a background of concerns surrounding the range and frequency of companion animal vaccinations required with existing products, Continuum DAP is expected to prove popular with both the veterinary profession and pet owners. 14.4.2 Antiparasitics Intervet was not involved in the parasite control market prior to its recent acquisition spree, but now generates annual sales of around Euro 130 million in the sector. Its antiparasitic range is dominated by former HRV brands, but also includes products purchased with the Gellini and Nuova businesses. The benzimidazole anthelmintic, fenbendazole, is the main contributor to antiparasitic revenues. Sold variously under the Panacur, SafeGuard and Axilur brands, fenbendazole is approved for use in a broad range of species, including livestock and companion animals. The active ingredient has been T&F Informa UK Ltd, 2005
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available generically since the middle of the 1990s, but the Intervet franchise has been bolstered by the registration of new indications and formulations, including a sustained release ruminant bolus and a medicated feed formulation for use in dairy cattle. Suspension, granule and tablet formulations are all available for use in dogs and cats, and a flavoured chewable tablet has been launched in several markets since the beginning of this decade. Aside from fenbendazole, the antiparasitic range also includes generic ivermectin products sold under the Ivotan and Rank labels. Commercialised initially in southern hemisphere cattle markets by HRV, they have been launched more widely by Intervet since the acquisition, and the company is currently pursuing the launch of an ivermectin-based wormer for horses in the US. HRV also brought Intervet interests in the ectoparasite control sector, including a range of sheep dips and other livestock treatments. These are sold most widely in the UK and major southern hemisphere markets such as Australia and Brazil. Intervet recently handed Australian rights to a range of ectoparasiticides, as well as the Panacur wormer, to Virbac in a brand licensing agreement there. Ectoparasiticide brands included in the agreement included Arrest (ethion and deltamethrin), Fleececare and Stampede (both diflubenzuron), and Taktic (amitraz). 14.4.3 Anti-infectives Intervets anti-infectives range generated sales of approximately Euro 120 million in 2004, accounting for 12% of the divisional total. Revenues in this segment of the market have been boosted recently by the companys new fluoroquinolone antibiotic, ibafloxacin, which was approved under the EUs centralised registration procedure in 2001, and which has since been launched in most of the regions biggest markets. Sold as Ibaflin, ibafloxacin was approved initially as a once-daily treatment for canine skin and soft tissue infections. A gel formulation was approved by EU regulators for the treatment of dermal infections in cats and dogs during 2003. The most significant established product in the Intervet anti-infectives portfolio is the cephalosporin antibiotic, cefquinome, which is sold as Cobactan and Cephaguard. Its core indication is for the treatment of bovine respiratory infections, but approvals for the treatment of bacterial foot infections and calf septicaemia have also been obtained. A mastitis treatment containing cefquinome has been commercialised in some markets, while a formulation for use in pigs has been submitted for regulatory approval in several countries. Cefquinome was added to the Intervet range following the acquisition of HRV, prior to which the Dutch companys anti-infective revenues were generated by a largely generic portfolio based on long-established active ingredients such as penicillin, streptomycin and oxytetracycline. Major targets for these products include the bovine mastitis and companion animal treatment sectors. Sales are relatively flat, however, and this part of the portfolio is unlikely to be a major contributor to future growth.
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14.4.4
Other pharmaceuticals Pharmaceutical speciality products accounted for almost 25% of Intervets sales in 2004, generating global revenues of more than Euro 230 million. The companys range of fertility products and reproductive aids is a major contributor to that figure, but it has also built a growing interest in the companion animal pharma speciality sector. Reproductive products include major brands such as Crestar (norgestamet/oestradiol), Chorulon (chorionic gonadotropin), Chronogest (fluorogestone), Fertagyl (gonadorelin), Folligon (serum gonadotropin) and Laurabolin (nandronlone). More recent introductions include Incurin (oestriol), a treatment for urinary incontinence in spayed bitches, which was launched in its first European markets during 2000. The oestrus synchroniser, Regumate (altrenogest), was among the products added to Intervets portfolio following its acquisition of HRV, but marketing rights to Regumate have been sold in a number of countries. Among the most significant pharmaceutical speciality products brought to market by Intervet since the mid-1990s is the NSAID, vedaprofen, which is sold as Quadrisol. Gel-based oral formulations for use in dogs and horses have been rolled out in Europe, while a new injectable product for use in horses with additional indications for the treatment of colic has been launched in the region more recently. The canine ACE inhibitor, ramipril, is another recent addition to the companion animal speciality range. In late-stage development at HRV when the German company was acquired by Intervet, ramipril has since been registered and commercialised in Europe and a number of international markets under the Vasotop label. It has yet to reach the US market, however. Intervet has sold a canine insulin formulation, Caninsulin, in several major markets for a number of years, while insulin products for use in cats have also been launched recently in some markets. A breakthrough in this sector was achieved in 2004, when US regulators approved the companys Vetsulin canine insulin formulation. Veterinary surgeons in the US have traditionally been obliged to treat canine diabetes with products manufactured for human use, and Vetsulin is expected to emerge as a significant revenue generator for Intervet there.
14.4.5
Feed additives Livestock feed additives and growth promoters contributed around Euro 50 million (5%) to Intervets sales in 2004. The range, which includes anticoccidials, performance-enhancing feed additives and hormone implants, is comprised entirely of former HRV products, and did not fit particularly well with Intervets existing core interests. It came as no surprise, therefore, when the company announced in 2005 that it had agreed to sell rights to a number of feed additive brands to the Bulgarian company, Biovet. Products included in the Biovet deal include the Sacox poultry coccidiostat and the Salocin livestock performance enhancer (both containing salinomycin), Flavomycin (flavophospholipol), Gainpro (bambermycins), Stenorol (halofuginone) and the Hostazyme feed enzyme brands.
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For the moment at least, Intervet has retained its other feed/growth products, which include the cattle hormone implant, trenbolone, and the beta-adrenoceptor agonist, Zilmax (zilpaterol). Trenbolone is marketed alone as Finaplix, and in combination with oestradiol as Revalor. The bulk of its sales are generated in North America, and like other anabolic growth implants its use in the EU is banned. Zilpaterol, which reached its first markets in 1998, is also from a class that is subject to an EU marketing moratorium, and has yet to be commercialised in the US. In 2004, Akzo Nobels Crina and Bredol feed additives businesses were transferred from the companys surface chemistry division into the Intervet unit. Both businesses are based in Europe, where they generate the majority of what are believed to be modest sales totals, and the move has not had a significant impact on Intervets global revenues. Akzo Nobels surface chemistry unit will continue to produce Bredol products for Intervet, but the animal health business will manufacture the Crina line in house.
14.5
R&D
Intervet continues to invest the equivalent of more than 10% of divisional sales (ie more than Euro 100 million in 2004) in R&D programmes, making it one of the animal health industrys three biggest spenders on R&D. More than 15% of the companys workforce is employed in R&D-related functions, and it operates more than 10 R&D sites, including major centres in Germany, France, the Netherlands, the UK and the US. R&D has undergone substantial restructuring in the wake of recent acquisitions, with European biologicals research centralised at sites in Boxmeer (the Netherlands) and Milton Keynes (UK). Pharmaceutical research in the region is now focused at Schwabenheim in Germany (antiparasitics and anti-infectives) and Angers in France (pharmaceutical speciality development). In the US, R&D has been concentrated at Millsboro in Delaware and at the companys new complex in DeSoto, Kansas. Biologicals research has traditionally dominated Intervets development efforts, and remains a key focus of current R&D programmes. Existing vaccines are being improved through the inclusion of new viral and bacterial strains and the application of new technologies including novel adjuvants. Vectored vaccines for the control of respiratory infections in livestock are among projects in the large animal biologicals pipeline, including a vectored product against Actinobacillus pleuropneumoniae developed by the Australian company, VectoGen, which uses an adenoviral vector technology platform. Vector systems are also being applied to a range of poultry vaccines, while DNA-based poultry vaccines are in development. In the companion animal sector, Intervet began rolling out Nobivac Piro, its new subunit vaccine offering protection against the Babesia canis parasite in dogs, during 2005. Nobivac Piro was developed through a collaboration with researchers at Montpellier University in France, and the teams responsible for the product are already working on related vaccines for use in other species. Still in the companion animal sector, the acquisition of Bio-Trends International gave Intervet access to a number of feline vaccine development projects, including candidate vaccines against FIV.
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Immunological approaches to the treatment of cancer in small animals are also being pursued through the application of gene therapy techniques. In 2003, Intervet acquired rights to a therapeutic cancer vaccine in development at the UK company, Oxford BioMedica. The product, TroVaxVET, which is an offshoot of human cancer therapy research programmes, comprises a tumour-associated antigen delivered using a modified poxvirus vector. Other long-term programmes include the development of vaccines against economically important parasites such as helminths and the application of immunological approaches to the management of livestock fertility and reproduction. Existing resources in some of these areas will be boosted by the acquisition of AgVax, through which Intervet will gain links to AgResearch, a state-owned research institute in New Zealand. Pharmaceutical research targets include novel antiparasitics and antiinfectives, with work on an unidentified parasite control molecule believed to be at a relatively advanced stage. Further development of existing products is also being pursued, with molecules such as cefquinome, ibafloxacin and ramipril featuring prominently in that respect. Intervets ability to access potential crossovers from within the Akzo Nobel group is relatively limited. Organons established areas of expertise are in contraception, fertility and hormone replacement a fact that is reflected in Intervets own portfolio, where reproduction control products have traditionally been a significant source of revenues. Other in-house avenues may be opening up as Organon attempts to build a stronger position in the neurologicals sector, however. Longer term pharmaceutical discovery programmes are invariably based on tie-ups with a number of commercial and public sector partners. These include software licensing agreements with companies such as Accelrys (US) and Lion Bioscience (Germany). In 2002, Intervet signed a three-year deal with Accelrys under which the latters molecular modelling, simulation and combinatorial chemistry applications will be used at the Schwabenheim R&D centre to enhance pharmaceutical drug discovery programmes. Intervets collaboration with Lion Bioscience involves work that aims to generate novel anti-infective drug leads for the treatment of respiratory and enteric diseases in livestock and poultry. A collaboration with the Canadian company, PharmaGap, announced in 2004, aims to develop a compound screening assay to select drug candidates for companion animals and livestock.
14.6
Strategy
It has taken some time for Intervet to digest HRV and the various other acquisitions completed since the late 1990s. Integrating these businesses has not been straightforward, since it has involved a considerable degree of restructuring at both R&D and manufacturing levels, and it was perhaps inevitable that the companys profit levels would suffer during the process. It has made a determined effort to drive margins back up over the past two years, however, and there are definite signs that earnings are improving. Cost-containment and efficiency initiatives are being pursued at a number of levels, including logistics, manufacturing and marketing. The logistics and manufacturing programme launched in 2003 has already made significant progress, and is due for completion in 2006. Marketing strategies are also
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being assessed, while the infrastructure supporting the development and registration of new products is being strengthened. As part of its efficiency drive, Intervet has also looked closely at its portfolio, and has begun to divest product lines that do not fit its core business. As a result, it sold the Swiss-based diagnostics unit, Dr Bommeli, in the final quarter of 2004, and announced in the second quarter of 2005 that it had agreed the sale of several feed additive lines. It has also licensed out rights to a range of OTC products in the Australian market. While further disposals cannot be ruled out, they are unlikely to have a significant impact on global sales, and should eventually help to drive up divisional margins. And while non-core product lines are being divested, Intervet clearly remains keen to acquire new products and businesses in areas that have been identified as central planks for future growth. Hence the announcement in 2005 that it had agreed yet another purchase in the vaccines sector. Efforts to strengthen the companys US business will also continue. These have already seen Intervet purchase interests in the vaccines sector there, but will also see it step up efforts to register and launch some major brands that are an established part of its business in Europe. Among the leading targets in this respect will be the anti-infectives, cefquinome and ibafloxacin, neither of which has yet reached the US market. The US also appears set to be the focus of a move by Intervet into the generics sector. The company has requested permission to file dossiers in support of several generics in the past couple of years. They include versions of Merials Eqvalan (ivermectin) wormer and UlcerGard (omeprazole) gastric ulcer products for use in horses, and Pfizers Rimadyl (carprofen) canine NSAID. All feature changes to either the dosage or presentation of the relevant original brand. Competition for shares of the US generics market is intensifying, with some human generic specialists entering the fray. Intervet appears to be targeting the added-value sector of the market by tweaking formulations or dosages, however, and will no doubt hope to avoid direct competition with manufacturers at the lower end of the generic price range. 14.7 Prospects With exchange rates having a neutral impact on Intervets business for the first time since 2001, and with underlying growth rates beginning to pick up, the company appears set to post an improved set of results in 2005. A strong second quarter was the key to Intervets impressive first-half performance, which saw revenues increase on year-earlier figures by a little over 5%, reaching Euro 539 million in the January-June period. The disposal of its feed additives line will have a moderately negative impact on revenues in the second half of the year, but underlying growth appears strong, and sales of the AgVax business acquired in New Zealand will also offset part of the reduction in feed/growth sales. Assuming that Intervet can sustain its second quarter performance during the final six months of the year, second-half sales could rise by 8-9%, reaching approximately Euro 556 million. Coming on top of the first half total T&F Informa UK Ltd, 2005
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of Euro 539 million, that would see the company post a full-year sales total of Euro 1,095 million up by 7% on 2004. Earnings are also on the increase, having reached Euro 113 million in the first half of 2005. That figure included a one-off gain of Euro 6 million, but even factoring that out of calculations, operating income was up by around 29% on year-earlier figures, and the divisions first-half operating margin reached almost 20%. If Intervet books full-year earnings at that level it will report an operating profit of around Euro 220 million in 2005. Intervet is currently posting growth in its home region at rates in excess of the market average, and will continue to do so if the recent stream of new vaccine launches in Europe is sustained. With business in Latin America currently buoyant, and a stronger portfolio contributing to growth in the US, the company should enjoy another strong year in 2006. Gains from the established Intervet business may moderate towards the end of the decade, but global sales appear almost certain to receive a boost from further acquisition activity.
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Chapter 15: Merial
CHAPTER 15 MERIAL
Merial 3239 Satellite Blvd Duluth GA 30096 USA Tel: +1 678 638 3681 www.merial.com Key personnel Gerald Belle Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events August 2004 Sanofi-Synthlabo completes the acquisition of Aventis, which holds a 50% stake in the Merial joint venture. Gerald Belle succeeds executive chair of Merial. Alan Reade as $1,836 million 2nd Antiparasitics, vaccines North America, Europe Executive chair, Merial
November 2004 March 2005
Announces the sale of the Hubbard broiler breeding business to Groupe Grimaud La Corbiere. Announces further disposals in the poultry breeding sector, selling British United Turkeys to Aviagen.
August 2005
15.1
Company background
Merial is an animal health and poultry breeding joint venture owned on a 50:50 basis by Merck & Co (US) and Sanofi Aventis (France). The company began trading in 1997 following the spin-off and merger of Rhne-Poulencs animal health subsidiary, Rhne Mrieux, with Mercks animal health/poultry genetics business, Merck AgVet. Rhne-Poulencs interest in the venture was transferred to Aventis in 1999 when Rhne-Poulenc itself merged with the German company, Hoechst AG, and passed to Sanofi Aventis in 2004 following the acquisition of Aventis by Sanofi-Synthlabo. Poultry breeding operations have always been a relatively modest contributor to Merials revenue and income totals, which are dominated by interests in the animal health products market. Poultry breeding activities have been wound down further in 2005, with the sale of the Hubbard broiler breeding business to Groupe Grimaud La Corbiere announced in March, and
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Chapter 15: Merial
the disposal of British United Turkeys (to be acquired by Aviagen) agreed in August. Revenues generated in the poultry genetics sector declined by around 5% to $138 million in 2004, accounting for just 7% of Merials corporate net sales total. Sales generated by the companys animal health products rose by 9% during the year, reaching $1,836 million.
Table 15.1: Merials sales by business area, 2004
Sector Sales ($ million) 1,836 138 1,974 % of total 93.0 7.0 100.0
Animal health Poultry genetics Total

Source: Merial.
While the former headquarters facilities of both Rhne Mrieux (France) and Merck AgVet (US) were retained by Merial as regional operating centres, the venture established a new global headquarters facility on neutral ground in the UK. The UK site is still listed as its official headquarters, but global operations are now co-ordinated from its recently established US operating centre in Duluth, Georgia.
15.2
Animal health sales

Merials animal health sales began to slip back towards the end of the 1990s as revenues from its market-leading endectocides franchise declined in the face of generic competition. Sales have increased consistently since 2001, however, driven by the strong performance of its fipronil-based pet ectoparasiticide, Frontline, and boosted by the weakness of the US dollar, which has inflated international revenues as reported.
Table 15.2: Merials animal health sales, 2000-2004
Year Sales ($ million) 1,394 1,447 1,505 1,684 1,836 % change -3.7 +3.8 +4.0 +11.9 +9.0
2000 2001 2002 2003 2004

Source: Merial.
Frontline replaced the endectocides franchise as the leading contributor to Merials global animal health sales in 2002, and sales of the product rose at high double-digit rates in both 2003 and 2004. The performance of the Frontline brand was a major factor behind increased growth rates reported for the business as a whole in both of those years. Animal health sales reached $1,836 million in 2004 almost $450 million, or 32% higher than the figure posted by the company in 2000.
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15.2.1
2003 performance The dollars slide, which had begun in 2002, continued through 2003, inflating international sales as reported. Merial posted corporate net sales of $1,838 million up by 10.6% on year-earlier figures. Revenues from the poultry genetics business were down slightly on 2002 figures, but animal health product sales rose by almost 12% in dollar terms, reaching $1,684 million. While currency factors were responsible for the bulk of reported increases, animal health sales are thought to have risen by close to 4% in local currency terms. Frontline continued to spearhead divisional gains, but dollarbased sales of vaccines and other veterinary pharmaceuticals were both comfortably into double-digit territory. Increases in these segments of the portfolio were offset by endectocide sales, which rose by less than 3% in dollars, and were down on year-earlier figures in local currency terms.
15.2.2
2004 performance Merial posted a net sales total of $1,974 million in 2004 up by 7.6% on year-earlier figures. Revenues generated by interests in the poultry breeding sector continued to decline steadily, contributing only 7% to total sales. The Merial animal health products business reported global revenues of $1,836 million 9% higher than 2003 figures. Currency factors continued to inflate sales as reported, but underlying growth of the animal health business remained positive, thanks to another strong performance by the Frontline pet ectoparasiticide. Dollar-based sales of the Frontline brand rose by almost 18% for the second consecutive year. Revenues generated by Merials biologicals range also increased at doubledigit rates, while more modest gains elsewhere in the pharmaceuticals portfolio also helped to offset a 5% decline in sales of the companys endectocide brands. Alan Reade retired as executive chair of Merial in November 2004, and was replaced by Gerald Belle, who was previously president of Aventiss North American pharmaceuticals business. The year also saw a change in ownership for the company, with the 50% stake previously owned by Aventis passing into the hands of Sanofi-Synthlabo following its acquisition of the former. The deal was completed in August, and the merged business, which trades as Sanofi-Aventis, is now the worlds third largest pharmaceutical company.
15.2.3
Interim 2005 performance Merial made a particularly strong start to 2005, posting a gain of 18% for its animal health business in the first quarter. Growth in the April-June period did not quite match those levels, but the company still reported a doubledigit increase in animal health sales, pushing first-half revenues past the $1 billion mark for the first time in its history. Frontline sales continued to follow an apparently inexorable upward growth curve, rising by 20% in the first half, while double-digit increases were also reported for the Merial biologicals range. These elements of the portfolio have been growing at broadly similar rates for the past couple of years, however, and the real key to the stronger performance for the animal health
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business as a whole was an upturn in sales generated by the companys endectocides franchise. Endectocide sales have been in gradual decline since the second half of the 1990s, thanks largely to strong competition from generic ivermectin products. That trend was reversed in the first half of 2005, however, with sales generated by Merials endectocide brands increasing by 15% on year-earlier figures.
Table 15.3: Merials first half animal health sales, 2004-2005
Source: Merial.
% change
2005 495 512 1,007 +18.1 +12.5 +15.2
419 455 874
Sales generated by the remainder of the companys pharmaceutical products were more subdued, rising by less than 6% in the first six months of the year. Revenues in this sector of the portfolio will be boosted in the second half by first contributions from Merials new canine osteoarthritis treatment, Previcox (firocoxib), which was launched in Europe and the US during the second quarter. Firocoxib is the first product from the COX inhibitor NSAID subclass to be approved by European regulators for use in veterinary medicine, while in the US, Previcox will challenge Novartiss first-in-class product, Deramaxx (deracoxib), for shares of the canine osteoarthritis market.
15.3

Merial is a leading player in all of the worlds major animal health markets, generating sales in around 150 countries around the world. North America and Europe are the two biggest contributors to the companys global sales total, accounting together for around three-quarters of its revenues. Elsewhere, Brazil and Australia are among Merials most important markets, with Brazil in particular generating a significant share of global sales.
15.3.1
North America Merial is a leading player in the US market, where its sales are believed to be approaching $800 million. With substantial revenues also generated in both Canada and Mexico, North America is easily the biggest regional contributor to the companys global sales total. US sales of both Frontline and Merials avermectin brands are believed to be in excess of $200 million, while the worlds biggest animal health market is also a major source of demand for the companys vaccines and pharmaceutical speciality products. Avermectin sales have been affected by growing competition from generic ivermectin products in recent years, but Frontline revenues have continued to increase strongly, while sales have also been boosted by additions to the vaccine and pharmaceutical speciality ranges.
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Merial transferred its operational headquarters from London (UK) to its new facility at Duluth, Georgia, in 2002. The Duluth site, which was originally earmarked as a regional headquarters for the companys North American business, was opened in the first half of 2001. Staff were transferred there from five US locations, including Merials erstwhile North American headquarters at Iselin in New Jersey. The Duluth site is close to two of Merials US vaccine production facilities, at Athens and Gainesville (both in Georgia). The administrative consolidation followed significant restructuring of Merials manufacturing operations undertaken in North America since the company began trading in 1997. This saw its Canadian subsidiary, J Webster Laboratories, sold to Vtoquinol in 1999 and two US manufacturing facilities (along with associated minor product lines) divested in the same year. Merial began marketing BIVs Metacam (meloxicam) NSAID in the US following its launch there in 2003, but BIV now handles the product directly following the launch by Merial of Previcox. The two companies have continued to work together, however, entering a new alliance at the beginning of 2005, when a number of BIVs cattle vaccines were added to the SureHealth programme operated by Merial in the US feedlot sector. 15.3.2 Europe France, the UK, Germany and Italy all feature among Merials 10 biggest markets, and Europe is the second largest regional contributor to the companys animal health revenues. Market growth in the region has been limited since the beginning of the decade, but the weakness of the dollar has inflated European sales as reported. Europe is also an important centre of manufacturing activity for Merial. The legacy of the Rhne Mrieux business is still visible in France, where the company operates no less than four production plants, including three in the Lyon area and one in Toulouse. A further two sites are located in Italy, where activities are focused on the production of Merials avian vaccines, while in the UK, the company manufactures FMD vaccines at its specialist production facility in Pirbright. The Merial business is at its strongest in France, where Rhne Mrieux held a clear leadership position prior to the creation of Merial in 1997, and where the companys Frontline pet ectoparasiticide, endectocide brands and growing range of vaccines all enjoy prominent positions in their respective market segments. Frontline has been the main contributor to recent sales growth in other key European markets, including the UK, Germany and Italy, while additions to Merials European vaccines range have also boosted revenues in the region. The companys new canine osteoarthritis treatment, Previcox (firocoxib), was launched across Europe in the second quarter of 2005, and will be a further source of sales growth in the region over the next couple of years. 15.3.3 South America Merial holds leading positions in most of South Americas biggest animal health markets, but like its competitors in the sector the company endured a difficult period in the region earlier this decade when economic conditions in Brazil and Argentina worsened sharply. Dollar-based sales in Argentina were T&F Informa UK Ltd, 2005
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halved, but have begun to recover strongly in the past two years, reaching approximately $14 million in 2004. The dollar value of sales in Brazil was also eroded as a result of economic problems experienced there in 1999 and in the early part of this decade. Again, however, market values are now rebounding strongly, and doubledigit sales growth is the order of the day. Brazils massive livestock and poultry production industries are booming as a result of buoyant domestic demand and rapidly rising export trade, which in turn is fuelling sharp increases in demand for animal health inputs. Merial is a leading player in the market, which is by far the biggest in South America, and which is one of the leading contributors to the companys global sales. Merial operates vaccine production facilities at Montevideo in Uruguay, and at Paulinia in Brazil. A new $9 million endectocide manufacturing plant has been constructed at Paulinia, and came on-stream in 2004. The facility, which has an annual production capacity of 150 million doses, has been constructed to FDA manufacturing standards, and will eventually supply markets around the world. Merial is keen to capitalise on improving conditions in leading South American markets, and is lining up a string of new product launches in the region. A range of equine vaccines and the companys cattle genetic tests are being rolled out in Argentina, while Frontline Plus has been introduced in several South American countries over the past three years. Along with other companion animal products, demand for the Frontline Plus formulation is expected to pick up as economic growth in the region strengthens. 15.3.4 Other markets Markets outside Europe and the Americas account for approximately 12% of Merials global animal health revenues equivalent to some $200 million in 2003. Australia, Japan and South Africa are among the most important contributors to that total. Frontline has been a particularly strong performer in Australia, but competition for shares of that countrys endectocide market is particularly fierce, with a host of companies offering generic ivermectin and abamectin products to Australian livestock producers at low prices. In Japan, Merial inherited a joint venture established in 1996 between Rhne Mrieux and Nippon Zenyaku Kogyo. The venture, which traded as Merial Nippon Zenyaku Ltd following the establishment of Merial, was merged into Merial Japan Ltd in 2001. Nippon Zenyaku continues to act as a distributor for some of Merials leading brands in Japan, including Frontline and Ivomec. The company also began distributing the Cardomec (ivermectin) canine heartworm range and Merials canine ACE inhibitor, Enacard (enalapril), at the beginning of 2005, following the termination of a previous agreement between Merial and Dainippon Pharmaceutical covering those two brands. In China, Merial operates a manufacturing site at Nanchang, and is also involved in a joint venture with Nanjing Pharmaceutical Instrument Factory, which is focused on the production of poultry vaccines. Merial has invested more than $12 million at the Nanjing site, which has an annual production capacity of close to 400 million vaccine doses. T&F Informa UK Ltd, 2005
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15.4
Product portfolio
The Merial business is dominated by antiparasitics, with avermectin-based endectocides and the Frontline (fipronil) pet flea/tick treatment responsible together for more than 60% of the companys global animal health sales. Merial is also a major player in the veterinary biologicals market, where it generates annual sales of more than $400 million, and handles a growing range of pharmaceutical speciality products for use in both companion animals and livestock.
Table 15.4: Merials animal health sales by product category, 2004
Category Sales ($ million) 452 679 477 228 1,836 % of total 24.6 37.0 26.0 12.4 100.0
Avermectins Fipronil Biologicals Others Total

Source: Merial.
15.4.1
Avermectins Merials endectocide, Ivomec (ivermectin), had been on the market for the best part of a decade before it encountered direct competition from Pfizers doramectin and Fort Dodges moxidectin. Merial brands retained a substantial share of the branded endectocide market following the entry of these competitor products, but ivermectin and a second Merial endectocide, abamectin, became popular targets for generic manufacturers following the expiry of patents on the two active ingredients in the 1990s. Revenues generated by the avermectin franchise began to decline in the face of growing generic competition, and by 2003 were close to $200 million below peak levels. Exchange rate factors saw the dollar value of the business rise slightly in that year, but sales fell back again in 2004, totalling just over $450 million.
Table 15.5: Merials avermectin revenues, 2000-2004
Year Sales ($ million) 532 495 462 475 452 % change -5.8 -7.0 -6.7 +2.8 -4.8
2000 2001 2002 2003 2004

Source: Merial.
Products for use in ruminants account for around half of Merials total endectocide revenues. Remaining sales are generated mainly by products for use in small animals, horses and pigs, though formulations administered to minor species make a modest contribution to total sales. Interestingly, revenues generated by the franchise have risen significantly during the first T&F Informa UK Ltd, 2005
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half of 2005, with the company posting a 15% increase in endectocide sales. Stronger demand for canine heartworm formulations is believed to have been a key factor behind the upturn, following the withdrawal of Fort Dodges ProHeart 6 competitor product in September 2004.
. . . Ivermectin
Ivermectin was first commercialised by Merck AgVet in the early 1980s as an injectable treatment for use in cattle. Sold as Ivomec Injectable, it revolutionised the treatment by farmers of both internal and external parasites affecting their stock, and sales rose rapidly as the product was rolled out worldwide. Formulations for use in other species (notably sheep, pigs, horses and dogs) were also commercialised at an early stage, while the company developed a growing range of formulations to complement the early injectable product. Pour-on products for use in the livestock sector, the Heartgard/Cardomec tablet formulation for heartworm control in dogs and cats, and the Eqvalan/Zimecterin equine wormers, presented variously in paste and liquid forms, are among the most significant in revenue terms, but Merial now markets ivermectin in around 20 different formulations for use in 11 animal species around the world.
Table 15.6: Leading formulations in the Merial ivermectin range
Trade name Ivomec Injectable Ivomec Plus Ivomec Pour-on Oramec Drench Ivomec Premix Ivomec Bolus Ivomec Gold Eqvalan/Equimec Paste Eqvalan/Equimec Liquid Zimecterin Zimecterin Gold Heartgard-30 Heartgard-30 Plus Heartgard-30 FX Description Core formulation, livestock Combination with clorsulon flukicide, livestock Livestock pour-on formulation Oral formulation, cattle and sheep In-feed formulation, pigs First endectocide bolus, cattle High-potency formulation, cattle Core equine formulation Equine formulation Equine formulation New equine formulation combining ivermectin and praziquantel Canine heartworm treatment Combination with pyrantel, dogs Feline heartworm treatment
Pour-on and drench formulations were brought to market for use in livestock during the late 1980s, ensuring that the Ivomec range retained an edge over branded competitor products launched by Pfizer and Fort Dodge in the early 1990s. A bolus formulation was also developed for use in cattle, reaching its first markets at the beginning of that decade. The Ivomec Bolus product has since been introduced in a number of other major markets, and was launched in the US during 1997. A high-potency tixotropic product for use in cattle has been rolled out across South America since its initial launch in Brazil during 1998. In the companion animal sector, substantial revenues were generated at an early stage by a monthly canine heartworm formulation sold as Heartgard (Cardomec in some markets). Chewable tablets and palatable formulations of the heartworm product have since been developed, and by combining the product with pyrantel pamoate (Heartgard Plus) Merial extended its T&F Informa UK Ltd, 2005
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spectrum of parasite control to cover hookworms and roundworms. A feline heartworm formulation reached its first markets in 1995. The equine sector also became a significant source of revenues following the roll-out of paste and liquid formulations for use in horses. Equine brands include Eqvalan and Zimecterin. While competition from Pfizer and Fort Dodge endectocide brands and poor livestock market conditions affected Merials ivermectin revenues in the second half of the 1990s, generic competition has been the most significant factor behind recent declines in global sales of the franchise. Markets in South America and Australasia were early targets for generic competitors, but generics are now being sold by an increasing number of companies in the US and Europe. Merial entered agreements with several generic producers as its patents on ivermectin approached expiry, allowing it to gain early shares of the generics market in a number of countries, but these have since been terminated. Phoenix Scientific was first to market with a direct generic competitor product in the US, launching a pour-on formulation in 1998 and following up with an injectable product. Phoenix and a growing number of other companies have since brought generic equine ivermectin products to market, while Virbac and Heska have registered generic copies of the Heartgard Plus canine heartworm brand. Virbac has also developed ivermectin-based equine wormers, which are sold under licence by Pfizer in the US, while Schering-Plough markets Heskas canine heartworm product under licence there. Similar developments have been witnessed in European markets, where ivermectin-based generics for use in the ruminant and equine sectors are now available from a growing number of sources, including multinational competitors as well as generic specialists. Merial continues to develop its own ivermectin-based range in an effort to soften the impact of generic competition on older formulations. Recent launches include a combination drench containing ivermectin, albendazole and levamisole, developed under an alliance with the Australian company, Nufarm, and an ivermectin/praziquantel combination that was approved by US regulators in 2003. Sold as Zimecterin Gold, the latter extends parasite coverage provided by ivermectin to equine tapeworms. Claims against more than 60 species and stages of equine parasites have been authorised for the product. Merial also markets an ivermectin-only equine wormer under the Zimecterin brand following the dissolution of its alliance with former partner Farnam, which previously sold the Zimecterin brand through US OTC channels under an agreement between the two companies. Farnam is now among the growing number of competitors to Merial in the US ivermectin market, having commercialised its own generic products. In 2003, Merial announced an agreement with Elanco under which the latter has taken on responsibility in the US for marketing Ivomec products aimed at the swine species segment, including injectable and premix formulations. Elancos strong position in the US swine market will help to maximise sales of the Ivomec brand in that sector, while the deal will enable Merial to focus resources on its core ruminant, small animal and equine ivermectin brands.
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. . . Abamectin
Abamectin was the second avermectin molecule commercialised by Merial. Similar to ivermectin in biological and toxicological terms, it was used primarily as a tactical weapon in markets where ivermectin faced early branded or generic competition. The product was licensed to third parties in a number of countries, and has generally been sold at prices below those commanded by Ivomec brands. Like ivermectin, patents covering abamectin have begun to expire, and a number of generic abamectin products have been commercialised, mostly in southern hemisphere markets.
. . . Eprinomectin
Eprinomectin is the most recent addition to Merials endectocide range, having reached its first markets in 1997. It has been developed exclusively as a pour-on formulation for use on livestock, and is sold as Ivomec Eprinex. Eprinomectin has a spectrum of activity similar to that of ivermectin, but possesses more persistent activity claims and a favourable residue profile (zero milk withdrawal periods have been established in the US and a number of other markets). Based on those factors, Merial introduced eprinomectin at prices slightly above those of established ivermectin formulations. Additional claims against two adult roundworms (Strongyloides papillosus and Trichostrongylus longispicularis) were approved by US regulators in 1999 and have since been authorised in a number of other markets. 15.4.2 Fipronil The success of Merials fipronil-based pet flea/tick treatment has more than compensated for declines in revenues generated by avermectin products since the mid-1990s. Developed for veterinary use by Rhne Mrieux prior to the establishment of Merial, it reached its first markets in 1994. Sold as Frontline, it was rolled out across Europe in the mid-1990s, was launched in the US during 1996 and reached the Japanese market in 1997. Frontline offers protection against fleas for up to three months and against ticks for one month on dogs, and provides 40-day cover against fleas on cats. Its activity against ticks, and the fact that it was presented in userfriendly spray and spot-on formulations made the product a popular choice with both veterinary surgeons and pet owners from an early stage. As a result, it soon emerged as the leading product in the rapidly expanding global market for pet flea and tick controls. Sales of the product were already rising fast before its US launch, but its success there has been the key to its emergence as the clear leader in the pet ectoparasite control market. The launch of a highly successful combination product containing fipronil and S-methoprene, and sold as Frontline Plus, has also been a major factor behind the size of recent increases in its global sales. Frontline Plus was launched in the US at the beginning of this decade, but has reached major European and international markets more recently, sustaining global sales growth at high double-digit levels.
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Year Sales ($ million) 346 410 486 576 679 % change +9.5 +18.5 +18.5 +18.5 +17.9
2000 2001 2002 2003 2004

Source: Merial.
Global sales of Frontline reached $300 million as recently as 1999, but have more than doubled since then, and a fourth consecutive annual increase of around 18% in 2004 saw revenues from the product reach $679 million. Its growth still shows no sign of abating, with revenues up by a further 20% in the first half of 2005. Assuming that a similar increase is achieved in the second half, global revenues of Frontline will pass the $800 million mark this year. Having consolidated a clear leadership position in the pet flea/tick treatment market, the latest challenge to Frontline is emerging in the shape of combination products developed by Merials competitors. These include both flea/heartworm combinations and insecticides containing a second active ingredient designed to match fipronils activity against ticks. Merial is watching claims presented for these products closely, and took legal action against Bayer in July 2005 after the German company ran an advertising campaign in which it allegedly claimed that its imidacloprid/permethrin combination, Advantix, offered more effective protection against ticks. 15.4.3 Biologicals Merials extensive veterinary vaccines business has posted solid growth in recent years. In common with other elements of the portfolio, dollar-based sales have been inflated by exchange rate factors, but reported gains of 12% in 2003 and 13% in 2004 indicate solid underlying growth for the range, which generated global revenues of $477 million in 2004. The company is a significant competitor in each of the poultry, livestock and companion animal vaccine markets, while revenues are boosted further by its activities in the specialist FMD sector. It has handled a steady stream of launches in all major species segments since the early 1990s, including a number of products featuring the application of novel technologies. These have been a major factor behind its ability to continue posting healthy sales growth for its vaccine business. Merial has strong historical roots in the FMD vaccines market, dating back more than 50 years to the breakthrough products developed by the Institut Francais de la Fivre Aphteuse (IFFA), which was part of the Rhne Mrieux business. The company retains a leading position in the market today, distributing FMD vaccines worldwide under the Aftobov, Aftobax and Aftopor trade names. Its FMD vaccine manufacturing laboratory at Pirbright in the UK is capable of supplying many millions of vaccine doses at short notice, and stores antigenic material matching all of the major FMD viral strains.
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Merial is also a leading player in the rabies vaccine market, where it supplies products for use in livestock and companion animals, as well as wild animal species that act as reservoirs for the rabies virus. Its range includes a number of vectored products, including Raboral-VRG, used widely in European fox populations, which are the main reservoir of infection there, and Purevax, a non-adjuvanted product for use in cats that has been incorporated into other Merial feline vaccines. The inactivated rabies vaccines, Rabisin (small animals) and Imrab (large animals) are more established parts of the range. Poultry vaccines have long been a major component of the Merial biologicals range, and are believed to generate well over a quarter of the companys revenues in the vaccines market. The Gallivac line of multivalent products offering protection against targets such as Newcastle disease, infectious bronchitis and infectious bursal disease is a mainstay of the poultry range in Europe, while infectious bronchitis vaccines sold under the Rispens and Bioral brands, along with the modified live Mareks disease vaccine, Lyromex, are major contributors to revenues in Asia. A modified live Newcastle disease vaccine, Avinew, and the inactivated Salmonella enteritidis vaccine, Gallimune SE, are also high profile products in a number of major poultry producing markets, while an avian rhinotracheitis preventative, Nemovac, has been added to the European portfolio recently. Merial has marketed a fowlpox-vectored avian influenza vaccine, Trovac AIV H5, in Mexico and a number of Central American markets since the end of the 1990s. The product has also been shown to provide significant levels of protection against the highly pathogenic viral strains of the disease that have affected poultry production in a number of Asian countries recently. A second major new avian influenza vaccine, Gallimune Flu H5N9, which has been shown to be effective specifically against the H5N1 viral strain, was launched early in 2005. In the livestock sector, Merial markets a broad range of multivalent vaccines for use in cattle and pigs, and has added a number of innovative products to its portfolio in recent years. In the US, the companys bovine vaccine range includes the Respishield range of multivalent inactivated products offering protection against IBR, BVD, PI-3, BRSV and Leptospirosis, while live and inactivated products against IBR, BVD, PI-3 and BRSV are also sold under the Reliant and Fusion labels. Respishield HM, a single-dose vaccine offering protection against both Mannheimia haemolytica and Pasteurella multocida, was added to the Merial cattle vaccine range in the US during the second half of 2004. The product contains Tandem M, a non-toxic polymer adjuvant that helps to ensure antigens in the vaccine are routed to the lymph nodes. Subunit and gene-deleted marker vaccines also feature in the bovine range. Examples include the subunit IBR product, Ibepur, the IBR marker vaccine, Ibraxion, and the subunit E. coli vaccine, Imocolibov. Mucobovin, a bivalent BVDV/mucosal disease vaccine, and Pastobov, an inactivated Mannheimia haemolytica product, have boosted revenues generated by the range across Europe in recent years. Key elements of the Merial swine biologicals range include Hyoresp, an inactivated Mycoplasma hyopneumoniae vaccine, and the Aujeszkys disease preventatives, Akipor 6.3 (modified live) and Geskypur (subunit). Neocolipor, a recombinant E. coli vaccine for administration to sows for the prevention of neonatal diarrhoea in piglets, and Progressis, an inactivated PRRS T&F Informa UK Ltd, 2005
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vaccine, are among recent additions to the European swine vaccines range. Progressis was developed under an agreement with Boehringer Ingelheim, which possesses broad patents covering PRRS vaccine technology. Like other areas of the Merial vaccine portfolio, the companys companion animal range has been strengthened appreciably by the development and commercialisation of innovative new products, including subunit vaccines and a range of vectored vaccines for use in all three major companion animal species. Merial is a leader in the application of vector technology, and markets products based on this platform under the Recombitek (canine), Purevax (feline) and ProteqFlu (equine) brands. Multivalent feline vaccines offering protection against calicivirus, rhinotracheitis virus, panleukopaenia, Chlamydia and rabies have been rebranded under the Eurifel label in a number of markets recently. A vectored feline leukaemia vaccine, Eurifel FeLV, is available singly or as part of multivalent products. Eurifel FeLV (sold as Purevax in the US) was the first feline leukaemia vaccine containing a non-replicative, recombinant viral vector to be made available commercially. A transdermal version of the companys Purevax FeLV product, which was launched in the US at the beginning of 2005, is the first vaccine to feature the commercial application of the Vet Jet transdermal delivery technology licensed by Merial from Bioject. Merial rolled out its first vectored companion animal products in the second half of the 1990s, commercialising a new line of canine vaccines featuring a canarypox-vectored canine distemper fraction under the Recombitek brand. A vectored Lyme disease vaccine has been added to the canine range since then, and is sold variously as Recombitek Lyme and Merilyme, while a subunit canine herpesvirus vaccine, Eurican Herpes, has been added to the European range. More established multivalent canine products offering protection in various combinations against adenovirus, coronavirus, hepatitis, distemper, parvovirus, parainfluenza, leptospirosis and rabies, are sold under the Eurican, Caniffa, Canimed and RM Canine brands. Revenues generated by Merials equine vaccines have risen sharply in the past two years following significant launches in both the US and Europe. In Europe, the company obtained EU marketing authorisation for its vectored equine influenza vaccine, ProteqFlu, in 2003, and began rolling the product out across the region during 2004. In the US, it began competing in the recently emerged market for WNV vaccines in 2004 following the launch of its Recombitek WNV product, which is also based on vector technology. 15.4.4 Other products Avermectins, the fipronil insecticide and the biologicals range are responsible together for almost 90% of Merials animal health sales. Remaining products in the portfolio including anti-infectives and a growing range of companion animal specialities generated global sales of $228 million in 2004 up by around 8% on year-earlier figures. Companion animal pharmaceuticals include the canine ACE inhibitor, enalapril; the cerebral vasodilator, nicergolene; and the equine ulcer treatment, omeprazole. All three have been adapted for veterinary use following success in the human pharmaceutical market, while the most recent addition to the range the Previcox (firocoxib) NSAID, was T&F Informa UK Ltd, 2005
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developed as an offshoot of research programmes responsible for Mercks human COX inhibitor drugs, including the ill-fated Vioxx (rofecoxib) brand. Previcox was approved for use in the treatment of pain associated with canine osteoarthritis by regulators in both Europe and the US during 2004, but was not brought to market by Merial until 2005. A Europe-wide launch programme was initiated early in the second quarter, while its US introduction was announced at the beginning of June. Novartis already markets a competitor product in the US, but Previcox is the first product from the COX inhibitor NSAID subclass to be commercialised for veterinary use in Europe. The safety concerns that have affected COX inhibitors in human medicine are not a factor in the veterinary field, and the impressive performance of Previcox in comparative trials with leading established products such as Rimadyl (carprofen) should ensure that it gains a significant share of the canine osteoarthritis market. Enalapril, sold most widely as Enacard, was the first ACE inhibitor approved for use in the veterinary sector, reaching its first markets in 1994. It has since encountered significant competition in international markets, but remains the only veterinary-approved product of its type in the US. Nicergolene, which is sold as Fitergol, is indicated for the treatment of agerelated conditions in dogs, while omeprazole is sold in a gel formulation as Gastrogard, with indications covering the treatment and prevention of equine ulcers. Gastrogard was introduced in the US during 1999, and has been launched in international markets more recently. A non-prescription version of the product, sold as Ulcergard, was rolled out in the US towards the end of 2004. While companion animal products now generate over half of Merials animal health sales, the company has not neglected the livestock segment, where a steady stream of new vaccines have been brought to market, and where several new pharmaceuticals have also been commercialised recently. Among the latter are Tetradure 300 Injection (oxytetracycline), a prescription antibiotic for use in cattle at high risk of bovine respiratory disease, and a new hormone growth implant range, Duralease (oestradiol benzoate), both of which have been launched in the US during the past year. Merial has also begun marketing a cattle DNA testing service, Igenity, rights to which were acquired through a deal with the Canadian company, Quantum Genetics. Igenity L, a test for the leptin protein, which gives an accurate measure of genetic potential in cattle, was launched in the US during 2003 and was introduced internationally in 2004. Other tests are being added to the range as a result of licensing agreements, through which Merial recently acquired global distribution rights from BoviQuest to two gene marker tests that identify milk yield and composition.
15.5
R&D
Merial does not publish details of its R&D budget, but assuming that it ploughs back around 10% of turnover into R&D, annual spending must be approaching $180 million. The company operates a network of around 20 research laboratories and trial centres around the world, including a recently commissioned pharmaceutical research facility in New Brunswick, New Jersey (US), where $21 million has been invested in analytical chemistry, pharmacokinetic testing and formulation development capabilities.
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Pharmaceutical R&D programmes are focused on four major areas: parasite control, antibiotics, pain management and products for the treatment of chronic health problems in companion animals. The companys new COX inhibitor NSAID, Previcox (firocoxib), reached its first markets in 2005, and new offerings in the other three fields are expected in the next 2-3 years. A companion animal dermatological treatment and a reproductive control product (possibly a contraceptive vaccine) are also believed to be among late-stage development projects at Merial, while its pipeline also contains a number of human drugs being developed for veterinary applications. The company has an excellent track record where the development of crossovers from human medicine is concerned, having been responsible for the first veterinary-approved ACE inhibitor and handled the successful development of an omeprazole-based antiulcer treatment in horses. Further work is also being conducted on the development of products such as ivermectin and fipronil. This will result in the registration of additional claims and indications, while the application of formulation and delivery technologies will be used to offer improvements or alternatives to existing products. The Duralease growth implant launched by Merial in the US during 2004 was developed as a result of a collaboration with PR Pharmaceuticals, and utilises the latters TheraPhase micro-encapsulation technology to ensure consistent release of active ingredients over prolonged periods. The two companies have extended the terms of their agreement, and the collaboration is expected to result in the commercialisation of other products featuring the application of the TheraPhase platform. Biologicals research is focused at Merials R&D complex in Lyon, France. The company has brought a string of novel vaccines to market over the past decade, including a growing range of vectored products. It boasts extensive in-house expertise in biological research, but is also involved in a broad range of collaborative R&D programmes. Merial is working with the UK company, Microscience, on the development of avian vaccines against Salmonella enterica and Pasteurella multocida using Microsciences signature-tagged mutagenesis (STM) technology. This enables the rapid identification of virulence genes involved in generating infection, which are used to form the basis of vaccine candidates. Merial has licensing rights to the products. Elsewhere, the company has been working since 1995 with Vical (US) on applications of the latters naked DNA technology in the development of veterinary vaccines. Fort Dodge and Novartis reached the market with DNA vaccines in 2005, but Merial will not be far behind, and the company expects to receive a conditional US registration for a plasmid DNA vaccine against canine melanoma in the near future. The product, which could become the worlds first commercially available cancer vaccine, is being developed in a collaboration with the US Memorial Sloan Kettering Cancer Center. Merial also has exclusive rights to candidates being developed by the US biotech vaccine specialist, Remedyne, using that companys DNA Adenine Methylase (DAM) technology, which could result in improved vaccines for use in both companion animals and livestock. Merial has been working for some time on the development and application of novel vaccine delivery systems. Among its key partners in this area is the needle-free delivery specialist, Bioject Medical Technologies, which has T&F Informa UK Ltd, 2005
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licensed its Vitajet platform to Merial. A transdermal version of the Purevax feline leukaemia vaccine was launched in the US at the beginning of 2005, and will be followed onto the market by a succession of novel, transdermally delivered products. Merial is also working on the further development of vector delivery technology, which it has already applied successfully to its Recombitek vaccine range. An agreement signed with the French company, Transgene, during 2004 gives Merial access to Transgenes expertise in vector technology and gene delivery, while rights to canarypox and fowlpox cell lines have also been secured in other recent deals. Immunological approaches to livestock performance enhancement are also being investigated. Here, Merial has acquired rights to cytokine-based productivity enhancers being developed by the Australian company, Imugene. The products comprise cytokines delivered using an adenoviral vector system. By boosting the natural immune system and increasing protection against disease, they have been shown to improve growth rates in poultry and pigs. Merial has acquired rights to applications in the poultry sector, and also has options to use the vector technology as a delivery vehicle for its swine vaccines. In 2003, Merial acquired Qiagens Pecura business, including veterinary rights to a novel class of drugs with potential applications as immunostimulants in both livestock and companion animals.
15.6
Strategy
Recent developments at parent-company level have fuelled speculation about the future of Merial. Sanofi-Synthlabo, which inherited a 50% stake in Merial when it acquired Aventis in 2004, divested its own interests in the animal health sector during the 1990s, while the creation of Aventis itself triggered the eventual sale of both HRV and the former Rhne-Poulenc animal nutrition business (now trading as Adisseo). With Merials other parent, Merck & Co, being forced to deal with the fall-out that followed the global withdrawal of its Vioxx (rofecoxib) anti-infammatory drug in September 2004, the commitment of both parents to their animal health joint venture has been questioned in some quarters. Mercks sales were flat in 2004, following the withdrawal of what was a $2.5 billion blockbuster product, and the companys net income fell by 12% after it set aside funds to finance anticipated legal actions relating to the Vioxx withdrawal. In the first case to reach court, a Texas state jury found against Merck, awarding damages of more than $250 million to the widow of a patient who died after taking the drug. Shares in the company fell by almost 8% in the immediate aftermath of the verdict, which Merck says it will appeal. Potential liabilities faced by the company over Vioxx have been estimated variously at $4 billion to more than $20 billion. Most analysts believe the eventual total will be closer to the lower of those two figures, but Merck is bound to face a lengthy and very costly period of litigation over the next few years. While neither parent includes revenues generated by Merial in their corporate net sales totals, both benefit from income generated by the joint venture. And since Merial does not represent a direct drain on their
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resources, both will probably be content to continue booking earnings from the business while Frontline continues to perform well. Their commitment to Merial in the longer term is more debatable, but trade regulators would probably prevent the business being sold to a company with significant existing interests in the animal health sector. Merial has gradually wound down its involvement in the poultry breeding industry, but the companys long-anticipated exit from that sector gathered pace in 2005 when it announced the sale of its Hubbard and British United Turkeys subsidiaries in two separate deals agreed within the space of a few months. Divesting its poultry breeding businesses will leave it free to focus resources entirely on the animal health sector though it should also be noted that jettisoning subsidiary interests would also make Merial itself a more attractive purchase if the company were to be put up for sale. The performance of the Merial animal health business has almost certainly exceeded the best expectations of its management in recent years, thanks primarily to the outstanding results obtained with Frontline. The hard work and investment ploughed into the companys biologicals business has also paid dividends, however, with novel products boosting sales in that part of the portfolio. Maintaining growth of the business as a whole will become increasingly difficult towards the end of this decade, however, when patents on fipronil will begin to expire. Merial is certain to face another generic onslaught in the ensuing period, and will have to bring some significant pharmaceutical offerings as well as new vaccines to market if it is to avoid falling into a long-term sales slump. Merial has increased its involvement in product distribution and marketing deals recently, and this may be a tactic that is pursued further in a bid to freshen up the portfolio. An agreement to market Boehringer Ingelheims Metacam NSAID in the US was terminated prior to the introduction of Previcox there, but the two companies are co-marketing Metacam in Japan, and recently struck a deal covering bovine vaccine sales in the US. Merial has also licensed out rights to some products, including its Ivomec line for pigs in the US, which has been handed to Elanco. This, too, is a strategy that may be replicated elsewhere, leaving Merial free to concentrate its resources on core brands and species sectors. Merial has recently experienced a change at the top of its management pyramid, with Gerald Belle taking over the reins from Alan Reide, who retired in November 2004. Belle was a long-standing employee of Aventis, employed most recently as president of that companys global manufacturing division.
15.7
Prospects
While exchange rate factors have lent a gloss to Merials recent results, gains of 12% and 9% posted in 2003 and 2004, respectively, indicate that underlying sales of the business are certainly rising. Nevertheless, the size of the increases posted by the company in the first half of 2005 have surprised most observers. An 18% gain in the first quarter was followed by a near13% rise in the April-June period, driving first-half sales up by more than 15% to $1,007 million. Frontline sales were up sharply again in the first half, rising by 20% on figures reported in the corresponding period of 2004, while double-digit
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growth was also reported for the biologicals range. Neither of these developments was particularly surprising, but the turnaround reported in sales of Merials endectocide franchise was less predictable. Sales booked for its avermectin brands rose by fully $30 million in the first half, reaching $226 million. A significant part of that increase is believed to have been generated in the US heartworm market following the withdrawal of Fort Dodges ProHeart product in the third quarter of 2004. Sales of endectocide products for use in other species must also have strengthened somewhat, however. Gains from established products are unlikely to match first-half levels in the final six months of the year. The introduction of Previcox in Europe and the US will help to boost sales in the second half, however. Novartiss COX inhibitor product generated revenues of almost $30 million in its first year on the US market, and while Previcox is unlikely to match that figure in the US, it should make significant inroads in Europe, where Novartis has yet to reach the market. Assuming that Previcox does begin to contribute significantly to revenues, and that gains generated by Frontline and the biologicals range remain reasonably close to recent levels, Merial should post a full-year sales total comfortably in excess of $2 billion. A full-year increase of 14% would see it report 2005 sales of $2,095 million. Beyond 2005, gains are expected to fall back into single-digit territory, and Merial will find it increasingly tough to grow its animal health business towards the end of the decade. Frontline, which has continued to defy predictions of a slowdown in sales, will almost certainly generate more modest growth beyond 2006, and will be exposed to generic competition by the end of the decade. The current upturn in endectocide revenues is also expected to be temporary, leaving vaccines and pharmaceutical specialities as the main contributors to divisional growth. Additions to the portfolio are expected in both of these areas, but new products are unlikely to possess the revenue-generating power that Frontline has exhibited consistently since the mid-1990s.
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Chapter 16: Novartis
CHAPTER 16 NOVARTIS
Novartis CH-4002 Basel Switzerland Tel: +41 61 324 2200 Fax: +41 61 324 3300 www.novartis.com Key personnel George Gunn Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events June 2005 Obtains first injunction against an Internet pharmacy preventing the import of Novartis products authorised in other markets for sale in the US. Announces receipt of Canadian approval for a DNA aquaculture vaccine. $756 million 10th Antiparasitics North America, Europe CEO, Novartis Animal Health
July 2005
16.1
Company background
Novartis is a Swiss-based multinational with interests in the pharmaceutical and consumer healthcare fields. The company was established in 1996 by the merger of Ciba and Sandoz. Both partners divested chemical and other industrial interests shortly after the merger, while a crop protection and seed business was later spun off, leaving animal health as Novartiss only interest outside the human healthcare sector. The company is headquartered in Basel, Switzerland, but generates a substantial proportion of its revenues in the US, and switched its reporting currency from Swiss francs to US dollars at the beginning of 2003. Results as reported have been boosted significantly by exchange rate fluctuations since then. Group net sales rose by 9% in local currency terms during 2004, but at $28.2 billion were up on year-earlier figures by almost 14% following the conversion of international revenues to dollars for reporting purposes. Corporate operating income rose by 11% to $6.5 billion, while net income was up by 15% at just under $5.8 billion. Prescription pharmaceuticals generated almost two-thirds of group net sales in 2004, with consumer health businesses responsible for the remaining 35%. Novartis Animal Health is part of the consumer health segment, which in 2004 also included generic and OTC human drug businesses, medical nutrition, infant and baby products and the CIBA Vision eye care unit.
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Animal health sales totalled $756 million, accounting for 7.8% of consumer health segment revenues and 2.8% of the Novartis corporate net sales total.
Table 16.1: Novartiss sales by business sector, 2004
Sector Sales ($ million) 18,497 3,045 1,975 756 1,121 1,441 1,412 28,247 % of total
Pharmaceuticals Generics OTC medicines Animal Health Medical nutrition Infant and baby products CIBA Vision Total
Source: Novartis.
65.5 10.8 7.0 2.7 4.0 5.1 5.0 100.0
The generic drugs division, which trades as Sandoz, was already the biggest business in the consumer health segment, posting sales of more than $3 billion in 2004. It has been expanded further since then, following the acquisition of the German generics specialist, Hexal, and a majority stake in a related US generics company, Eon Labs. As a result, Sandoz is now the worlds biggest generic drug company, with pro-forma sales of more than $5 billion. Since the beginning of 2005 Sandoz has been run as a separate business, with Novartis now reporting financial results for three distinct segments: prescription pharmaceuticals, the Sandoz generics division and remaining consumer health businesses, which continue to be grouped together.
16.2

The $756 million sales total posted by Novartis Animal Health in 2004 was almost 11% higher than year-earlier figures, but exchange rate were responsible for around half of reported gains, and sales expressed in local currencies were up by a more modest 5% on 2003 levels. Novartis has restated results for 2002 and 2001 following its switch to the dollar as its corporate reporting currency. Results for 2000 have been converted from Swiss francs to dollars at average annual rates of exchange for comparative purposes only.
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Animal Pharms Top 20, 2005 Edition Table 16.2: Novartiss animal health sales, 2000-2004 1
Year Sales ($ million) 641 570 623 682 756 % change
2000 2001 2002 2003 2004
+3.7 -11.1 +9.3 +9.5 +10.9
Notes: 1 Figures for 2001 and 2002 restated by Novartis; figure for 2000 converted at annual average rates of exchange for comparison only. Source: Novartis and Animal Pharm Reports.
The divisions operating income has fallen sharply since the late 1990s, at which point it was posting pre-tax margins in excess of 20%. Profits have been affected by a range of factors, including acquisition-related costs, higher spending on R&D and marketing functions, and restructuring charges. The 11.4% decline reported in 2004 was attributable largely to a one-time inventory write-down of $18 million, without which the divisions operating income and operating margin would both have risen during the year. The pre-tax earnings figure of $78 million posted after taking one-off charges into account pushed divisional operating margins down to 10.3%.
Table 16.3: Novartiss animal health operating income and margin, 20002004 1
Year Operating income ($ million) 106 82 92 88 78 Operating margin (%) 16.5 14.4 14.8 12.9 10.3
2000 2001 2002 2003 2004
Notes: 1 Figures for 2001 and 2002 restated by Novartis; figure for 2000 converted at annual average rates of exchange for comparison only. Source: Novartis and Animal Pharm Reports.
16.2.1
2003 performance Reporting results in dollars for the first time, Novartis posted animal health sales of $682 million in 2003. That figure was 9.5% ahead of the restated 2002 total, but exchange rate factors accounted for well over half of gains as reported, with sales in local currencies up by a little less than 4%. Divisional operating income fell back by 4% to $88 million, equating to a pre-tax operating margin of just under 13%. Higher spending on R&D, marketing and sales functions were among the factors that limited earnings. Growth was led by the companion animal portfolio, with recently launched products such as Deramaxx (deracoxib) and Milbemax (milbemycin and praziquantel) driving sales in that sector of the business up at double-digit rates. New products were also rolled out in food animal markets, and Novartis said recently launched brands contributed more than $40 million to
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the 2003 sales total across the division as a whole. Deramaxx accounted for more than half of that figure, generating sales of around $27 million in the US after regulators there approved its use for the control of chronic pain and inflammation associated with canine osteoarthritis. Milbemax was rolled out in 11 new markets, mostly in Europe, while the canine atopic dermatitis treatment, Atopica (cyclosporine), reached its first markets (including the US, the UK and Italy). The farm fly control product, Agita, was introduced in additional markets across Europe, Latin America and the Asia/Pacific region, while the flea/wormer combination, Sentinel Spectrum, was launched in Australia. Conditions were tougher for some more established Novartis brands, especially in the livestock sector, where growth remains harder to come by. Sales of the companys therapeutic anti-infectives suffered as a result of increased generic competition, especially in the swine market segment. 16.2.2 2004 performance At $756 million, Novartis Animal Health sales were up on year-earlier figures by 10.9% in 2004. Exchange rates continued to exert a significant impact on sales as reported, accounting for approximately half of total gains posted by the business. Underlying earnings were up on 2003 figures, but the division booked a one-time charge of $18 million in the form of inventory writedowns associated with the disposal of some old antiparasitic product lines, including the Neocidol (diazinon) and Nuvan (dichlorvos) brands. As a result, reported pre-tax income declined by 11% to $78 million, equating to an operating margin of just over 10%. Despite the negative impact of discontinued lines such as Neocidol and Nuvan, local currency sales growth was reported at a healthy level of 5%. Increases were led by a strong performance in the US, where sales were up by around 15% at the six-month stage and finished the year almost 21% ahead of 2003 figures. Strong demand for recently launched products such as Deramaxx and Atopica was a major factor behind the strength of the US business, while these and other new products also drove sales up in other markets as they were introduced more widely. Deramaxx reached the Canadian market during 2004, while Atopica was launched in Germany, the Netherlands, Spain and Ireland. Results outside the US and Europe were less positive. Sales as reported were flat in the rest of the Americas, while like many of its competitors, Novartis struggled to achieve significant growth in Asia, where avian influenza outbreaks disrupted a number of key markets. 16.2.3 Interim 2005 performance In the wake of restructuring undertaken at corporate level, Novartis stopped reporting interim financial results for individual businesses in its consumer health segment at the beginning of 2005. But while exact sales figures are not available it is clear that the animal health unit has continued to perform strongly. Sales generated by the business were reported to have risen at double-digit rates in each of the first two quarters, and gains in the AprilJune period are believed to have been significantly higher than 10%. T&F Informa UK Ltd, 2005
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Strong performances were noted in the US and major European markets during the first quarter, while by the end of the half-year period the company reported double-digit gains in all four if its geographical operating regions. Strongest growth was achieved in the US, Latin America and Asia. With underlying growth rates on the increase, and with exchange rate factors still boosting international sales as reported, Novartis is thought to have booked first-half revenues of just over $400 million up by some 14% on year-earlier figures. The company continued to roll-out new products, and will launch a revolutionary aquaculture vaccine in Canada during the second half of the year. Along with Fort Dodges new equine WNV vaccine, the Novartis product, which offers protection against infectious haematopoietic necrosis (IHN) in farmed Atlantic salmon, shares the distinction of being the first worlds first commercially approved DNA vaccine. Both products received their initial regulatory authorisations in July 2005. Novartis continued its efforts to prevent internet pharmacies in the US selling versions of its products authorised in other countries. The company has initiated legal action against a number of internet pharmacy outlets, and won preliminary injunctions against businesses based in Australia and the UK within a two-month period in June and July.
16.3

The US is a more significant contributor to Novartiss animal health revenues than to those of most other European-based companies, and strong performances in the US have spearheaded recent growth of the business. The 2004 US sales figure of $308 million was equivalent to almost 41% of the divisions global total. With sales in Canada, Mexico and central/south America totalling $83 million, the Americas region as a whole was responsible for more than half of Novartiss global animal health revenues. Markets in Europe account for almost one-third of the divisional total, with the Asia/Pacific region and other markets around the world responsible for a 16% share.
Table 16.4: Novartiss animal health sales by region, 2003 and 2004
Region Sales ($ million) 2003 US Other Americas Europe Rest of the world Total
Source: Novartis.
% change
% share 2004
2004 308 83 246 119 756 +20.8 -+12.3 -4.8 +10.9 40.7 11.0 32.5 15.8 100.0
255 83 219 125 682
The division adopted a new organisational structure in 2003, under which the business was split into four regional operating units (North America, Latin America, Europe and Asia/Pacific). Regional managers were given increased decision-making control as a result of the reorganisation, which T&F Informa UK Ltd, 2005
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was adopted as a means of enabling the company to adapt more flexibly to changing local market conditions. 16.3.1 US The US business has been the strongest contributor to divisional growth in recent years, and sales generated there are now around $90 million higher than the total achieved by Novartis across Europe. The success of the companys flea treatment product, Program (lufenuron), drove a period of rapid growth in the US market during the second half of the 1990s, but recent expansion has been the result of other new introductions, acquisitions completed in the vaccines sector and the impact of an expanded US sales force, which has helped to drive up sales of some more established products. Management of recently acquired vaccine businesses has been transferred from Kansas City to Novartiss US headquarters in Greensboro, North Carolina. The purchase of Grand Laboratories and Immtech at the beginning of 2002, for an initial combined price of $99 million, has added around $30 million to Novartiss US sales total. Revenues have also been boosted by the launch of new products such as Deramaxx, which generated sales of close to $30 million in its first full year on the market. Other recent additions to the US portfolio include Adequan (polysulphated glycosaminoglycan) which, like Deramaxx, targets the canine osteoarthritis market; the cyclosporine-based atopic dermatitis treatment, Atopica; and a line of veterinary suture products manufactured by Johnson & Johnsons Ethicore subsidiary, which Novartis now distributes in the US. Plans to launch internationally established brands such as the swine feed additive, Econor (valnemulin), in the US, have also been put in train. Vaccine research and manufacturing facilities operated by Grand and Immtech have been retained at Larchwood, Iowa (a former Grand Labs site), and Bucyrus, Kansas. Five new vaccines were launched in the US during 2003, and further expansion of existing lines is expected in the near future. US sales are dominated by pharmaceutical brands, however, with Deramaxx and the established antiparasitics, Interceptor (milbemycin) and Sentinel (milbemycin and lufenuron) accounting together for more than three-quarters of total revenues there. 16.3.2 Other Americas Markets in Canada, Mexico and Central/South America contributed $83 million (11%) to the Novartis animal health sales total in 2004. That figure was similar to year-earlier totals, and remains below 2002 levels, reflecting the difficult conditions that have prevailed in parts of the region. The Canadian market took a knock following that countrys first reported case of BSE in May 2003, which triggered widespread export bans. Trade in cattle between Canada and the US was not resumed until July 2005, and the 26month hiatus in shipments between the two countries is estimated to have cost the Canadian cattle industry some Can$4 billion. The resumption of trade with its southern neighbour is expected to result in improved market conditions in Canada, where Novartis will also benefit from the recent approval by Canadian regulators of its Deramaxx canine osteoarthritis treatment. As in the US, the companys Canadian business is T&F Informa UK Ltd, 2005
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benefiting from a combination of new product launches and acquisitions. Purchases there include the Biostar veterinary vaccine business and the aquaculture vaccine specialist, Cobequid, both of which were acquired in 2000. Biostar has an agreement with Diamond Animal Health (US), under which Novartis now also markets a range of Diamond livestock vaccines in Canada, while the company also holds distribution rights there for Heskas intra-nasal equine influenza vaccine, Flu Avert IN. The aquaculture vaccine business purchased through Cobequid is also launching a range of new products, including one of the worlds first two DNA vaccines to receive regulatory approval. Like many of its competitors, Novartis struggled to operate profitably in some key Latin American markets during the early years of this decade as economies in Mexico, Brazil and Argentina all ran into trouble. Operating conditions in the region have improved more recently, however, and the Brazilian market in particular looks set to enjoy a period of rapid growth. 16.3.3 Europe Novartiss European sales rose by 12% to $246 million in 2004, accounting for just under one-third of the divisional total. The continued weakness of the dollar against the euro inflated sales as reported, but underlying growth was clearly reasonable, thanks largely to the roll-out of new products in the region. Brands such as Milbemax, Atopica and Agita were all available in a number of European markets by the end of 2003, and the company handled further introductions during 2004, when Atopica made its debut in Germany, Spain, the Netherlands and Ireland. A new presentation of the companion animal cardiovascular product, Fortekor, was also launched in Europe during 2004. The anticipated launch of Deramaxx should give Novartiss European sales a further significant boost, but while it was first to market with a product from the COX inhibitor anti-inflammatory class in the US, Merial has stolen a march in Europe, where it has already launched a competitor product. 16.3.4 Other markets Novartis generated sales of $119 million in markets outside the Americas and Europe in 2004. That was around 5% lower than year-earlier figures largely as a result of the disruption to markets in Asia caused by outbreaks of avian influenza. The Japanese market also remained relatively subdued, while sales in Australia did not rise as rapidly as many observers had predicted following the recovery of that countrys livestock sector from a severe drought. Longer-term prospects in mainland Asian markets remain positive, despite the regions current difficulties. Novartiss pig and poultry product lines in particular will benefit from future expansion of output in those sectors, notably in China. The company will be working hard to maximise returns in more developed markets such as Japan and Australia, however. The latter is a key target for Novartiss extensive range of parasite control products, and the company operates a major R&D centre at Yarandoo, where novel antiparasitics are the focus of most work. T&F Informa UK Ltd, 2005
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Novartiss animal health sales in India fell back sharply in 2004 partly due to the phase-out of the companys Nuvan (dichlorvos) insecticide brand, but also as a result of avian influenza outbreaks that disrupted the poultry sector there. The business still generates annual revenues of around $7 million in India, and is targeting a return to growth through a combination of product licensing agreements and new approaches to marketing.
16.4
Product portfolio
Products for use in companion animals continued to spearhead growth reported by Novartis in 2004, accounting for 57% of divisional sales (up from 52% in 2003). The companys farm animal portfolio generated a further 35% of sales, with aqua health products and vaccines responsible for the remaining 8%. Parasite control has traditionally been the companys main area of expertise, and antiparasitics were responsible for 48% of the divisions global revenues in 2004. That figure has fallen back in recent years, however, due to a combination of factors including the disposal of some old antiparasitic lines, the acquisition of interests in the vaccine sector, and the launch of major new products in other segments of the market.
Table 16.5: Novartiss sales by major product segment, 2004
Segment Sales ($ million) 1 363 98 295 756 % of total 48 13 39 100
Antiparasitics Anti-infectives Pharma specialities and vaccines Total
Note: 1 Value figures based on rounded percentages. Source: Novartis.
16.4.1
Antiparasitics Novartiss extensive line of parasite control products generated global sales of $363 million in 2004, accounting for just under half of divisional revenues. That figure was around $30 million lower than the total posted in 2003, with competitive pressure on some major brands and the disposal of older antiparasitic lines in the farm animal sector responsible for the decline.
. . . Companion animal parasite controls

Well over half of Novartiss antiparasitic sales are generated by products for use in companion animals. Milbemycin oxime and lufenuron are the two most important active ingredients in this segment of the business, generating global revenues of more than $200 million either alone or in combination products. Rights to milbemycin oxime were licensed from the Japanese company, Sankyo. It is the active ingredient in Novartiss Interceptor canine heartworm brand, which generates sales of around $80 million in the US and is sold in other major heartworm markets outside Japan. The registration of claims against hookworm, roundworms and whipworms has enabled T&F Informa UK Ltd, 2005
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commercialisation of the product on a more widespread basis, while revenues from milbemycin have also been boosted by the development of additional formulations and combination products. The most established of these is a milbemycin/lufenuron combination providing control of both heartworm and fleas (see below). More recent additions to the range include a topical formulation sold as Milbemite, which is approved for the treatment and control of ear mites, while a milbemycin/praziquantel combination, sold as Milbemax, provides additional protection against tapeworm. Milbemax reached its first markets in 2002, and has been commercialised widely since then. Launches in Australia, South Africa, Brazil and a number of European markets were handled in 2004. Lufenuron was the first of the new-generation flea control products which revolutionised that segment of the market in the second half of the 1990s. Sold through veterinary channels under the Program brand, the insect development inhibitor achieved peak global revenues of around $200 million, transforming the Novartis animal health business in the process. Program was originally presented in tablet form for dogs and as a suspension for cats. A sustained-release injectable product, offering protection for up to six months, was launched in the US during 1998, and has since been rolled out in other major markets. Program sales have declined sharply since the late 1990s partly as a result of strong competition from other novel flea treatments, but also following the launch by Novartis of a combination flea/heartworm control containing lufenuron and milbemycin oxime, which is sold as Sentinel or Program Plus. Sentinel generates revenues of around $70 million in the US alone, and global sales of the combination product are approximately $100 million. A three-way combination containing milbemycin, lufenuron and the tapeworm control, praziquantel, was approved by Australian regulators in 2003. Sold there as Sentinel Spectrum, it will be rolled out internationally in the near future.
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Table 16.6: Key products in the Novartis antiparasitic range

Product (active ingredient) Acatak (fluazuron) Agita (thiamethoxam) Capstar (nitenpyram) Clik (dicyclanil) Depidex (ivermectin) Endex (levamisole/triclabendazole) Fasimec (triclabendazole/ivermectin) Fasinex (triclabendazole) Interceptor (milbemycin) Lopatol (nitroscanate) Milbemax (milbemycin/praziquantel) Program (lufenuron) Program Injection (lufenuron) Sentinel (lufenuron/milbemycin) Sentinel Spectrum (lufenuron/milbemycin/praziquantel Vetrazin (cyromazine)
Species Cattle Premise spray Dogs, cats Sheep Cattle, sheep Cattle, sheep Cattle Cattle, sheep Dogs Dogs Dogs, cats Dogs, cats Cats Dogs Dogs Sheep
Target parasites Ticks Flies Fleas Blowflies Broad range Worms, fluke Broad range Fluke Heartworms, intestinal worms Intestinal worms Heartworms, intestinal worms Fleas Fleas Fleas, heartworms Fleas, heartworms, intestinal worms Blowflies
A second novel pet flea control was added to the Novartis companion animal portfolio in the late 1990s. Sold as Capstar, it contains the flea adulticide, nitenpyram, which was accessed through a licensing agreement with Takeda. First introductions of Capstar were handled in 1999, while a US launch was achieved in 2001. Capstar is now available in most major companion animal markets.
. . . Livestock parasite controls

Novartis markets a broad range of parasite control products for application to livestock and in farm animal premises. No active ingredients in this segment of the portfolio match milbemycin oxime or lufenuron in revenue terms, however, and some older brands have been sold off recently. Disposals include the Nuvan (dichlorvos) and Neocidol (diazinon) insecticides. Several new insecticides have been added to the range in recent years, including premise treatments containing active ingredients from new insecticide classes. Prominent among these are the spinosad-based paint-on product, Spy, and the premise spray, Agita, which contains the broadspectrum neonicotinoid insecticide, thiamethoxam. Spy has been launched in a number of European markets over the past two years, while Agita was rolled out in 14 countries across Europe, Latin America and the Asia/Pacific region during 2003. Additional launches handled during 2004 saw the product reach markets in Greece, Portugal, Peru and the Middle East. Clik (dicyclanil) is another relatively recent addition to the farm animal parasite control business, having made its commercial debut in Australia at the end of the 1990s. Approved as an all-season blowfly control, it has since been launched in New Zealand and was rolled out in major European markets at the beginning of this decade. T&F Informa UK Ltd, 2005
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More established blowfly controls include brands such as Vetrazin, Larvadex and Neporex, which are based on the insect growth regulator, cyromazine, while tick controls containing chlorfenvinphos and cypermethrin also feature in the livestock ectoparasite control range. A long-acting pour-on product for the control of the cattle tick, Boophilus microplus, was added to the portfolio in the mid-1990s. Based on the fluazuron active ingredient, it is sold as Acatak. Novartiss interests in the livestock worming sector are more limited, but have been enhanced recently through the development of a position in the generic endectocides market. The company sells ivermectin-based products in a number of southern hemisphere countries, and launched pour-on and injectable ivermectin products in the UK at the beginning of this decade under the Depidex brand. More established products include the flukicide, triclabendazole, which is sold as Fasinex. Combination products containing triclabendazole and levamisole are marketed variously as Endex, Parsifal and Combinex, while a triclabendazole/ivermectin combination has been commercialised as Fasimec. A new combination sheep wormer containing levamisole and the tapeworm product, praziquantel, was launched in the UK during the first half of 2004. Sold as Levitape, it was developed originally by the New Zealandbased company, Ancare. 16.4.2 Anti-infectives Novartiss interests in the anti-infectives product segment, including MFAs, generated global revenues of around $100 million in 2004, contributing 13% to the divisional sales total. The most significant brand in this sector of the portfolio is the tiamulinbased product, Tiamutin, which is sold widely in injectable, soluble and premix formulations for the prevention and treatment of bacterial infections in pigs, poultry and calves. Growth promoting indications are also approved in the US and some international markets, but have been withdrawn in the EU. Key indications for Tiamutin include the prevention and treatment of respiratory and enteric infections, including swine dysentery and pneumonia in pigs and chronic respiratory syndrome in poultry. Tiamutin is now exposed to competition from generic tiamulin products in a number of key markets, but Novartis has commercialised a related product, valnemulin, in Europe and some international markets. Sold as Econor, its key target is the treatment of swine dysentery and enzootic pneumonia, but additional indications against porcine proliferative enteropathy (PPE) and colonic spirochaetosis have been registered in major markets since first introductions were handled in the late 1990s. Econor has not been commercialised in the US to date, but is one of several established brands being lined up by the company for entry into the US market. It was suspended briefly in the EU at the beginning of this decade following reports of adverse reactions in some treated pigs, but subsequent investigations showed that these were limited to a specific breed. Labelling advice was amended accordingly, and EU regulators recently ceased annual monitoring of the product.
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Recent acquisitions completed by Novartis have been aimed primarily at the purchase of interests in the veterinary vaccines market. A number of antiinfectives have also been added to its range as a result of certain deals, however. These include chlortetracycline-based products and the potentiated sulphonamide, Cosumix (sulphachloropyridazine and trimethoprim). The company also markets a range of established antiinfectives for use in livestock, including the Vetimast (cefacetrile) cephalosporin antibiotic and penicillin/ streptomycin combinations. 16.4.3 Other pharmaceuticals While new antiparasitic brands spearheaded sales growth in the 1990s, pharmaceutical speciality products launched in the past 2-3 years are now the main drivers of expansion at Novartis. Most are for use in companion animal species, and their success has been the main factor behind recent increases in the proportion of divisional sales generated by companion animal products. Deramaxx (deracoxib) became the first product from the COX inhibitor NSAID subclass to be approved for use in veterinary medicine when it was authorised by US regulators in 2002. Its initial approval was for the control of postoperative orthopaedic pain, but in February 2003 it gained US approval for the control of pain associated with canine osteoarthritis, which is the products main target market. US sales of Deramaxx reached almost $30 million in the remainder of 2003. Novartis acquired rights to deracoxib from Pharmacia, which supplied the product to the Swiss company under an agreement concluded in 1999. Pfizers acquisition of Pharmacia, completed in 2003, would have given it a virtual monopoly in the US canine osteoarthritis treatment market, where its Rimadyl (carprofen) brand already held a dominant position. As a result, US trade regulators demanded that Pfizer renegotiated the terms of its licence with Novartis before they agreed to clear the Pharmacia acquisition. The amended agreement eliminates any control that Pfizer might otherwise have gained over Deramaxx, enabling Novartis to operate as an independent competitor rather than a business partner. Deramaxx was approved by regulators in Canada during 2004, but has yet to be commercialised in Europe, where Novartis has been beaten to market by Merial, which received approval to begin marketing its own COX inhibitor product last year. EU authorisation is expected in the near future, however, and Novartiss established position in the companion animal speciality products sector should enable it to compete effectively against Merial for shares of the canine osteoarthritis market. COX inhibitors have been the focus of health concerns in the human health sector, where Merials Vioxx (rofecoxib) was withdrawn from the market during 2004, and EU scientific experts are conducting a review of the class in human medicine. Their veterinary counterparts have concluded that there are no parallel risks in dogs, which are not susceptible to the type of cardiovascular problems experienced in some human patients treated with drugs from the class. Like Deramaxx, dogs are the main species target of two other major new products Atopica (cyclosporine) and Adequan (polysulphated glycosaminoglycan) brought to market by Novartis recently. Atopica, which T&F Informa UK Ltd, 2005
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reached its first markets in 2002, is indicated for the treatment of canine atopic dermatitis. The active ingredient, cyclosporine A, on which the Novartis human drug brands Neoral and Sandimmun are based, relieves symptoms of the condition without causing long-term side effects often associated with corticosteroids. Revenues generated by Atopica began to take off in 2003, when full-year sales were reported in its first markets, and when launches were handled in the US, the UK and Italy. It was introduced in several other European markets during 2004, including Germany, the Netherlands, Spain and Ireland. Like Deramaxx, Adequan targets the canine osteoarthritis market. It was developed by Luitpold Animal Health, which has marketed a similar product for use in horses since the 1980s. Luitpold received FDA authorisation to market its Adequan Canine formulation, which is the only product of its type to have been recognised as a disease modifying agent, in 1997. Novartis began marketing the canine product in the US during 2004 under an agreement with Luitpold. More established brands in the Novartis veterinary speciality portfolio include the canine dermatological treatment, Panalog (a combination product containing nystatin, neomycin, thiostrepton and triamcinolone), the ACE inhibitor, Fortekor (benazepril) and the canine behavioural therapy, Clomicalm (clomipramine). Fortekor and Clomicalm, which were added to the range during the 1990s, are both crossovers from the Novartis human pharmaceutical business. Fortekor has yet to be launched in the US, but is well established in Europe, Japan and most other major companion animal markets, where it was introduced in the second half of the 1990s. It claims a leadership position in the European market for canine ACE inhibitors, and revenues have been boosted recently by the approval of indications for the treatment of chronic feline renal insufficiency. A palatable formulation for use in cats reached its first markets in 2003, and was launched in France, Ireland, Italy, Belgium and the Netherlands during 2004. Clomicalm is indicated as an aid to the treatment of separation anxiety in dogs a condition that Novartis believes affects up to 15% of all animals, resulting in behavioural problems such as excessive barking and destructiveness. It is recommended as part of a combined treatment regime alongside behavioural therapy. Clomicalm was launched in Switzerland during 1997, and in 1998 became the first small animal product to be approved for use in all EU member states under the centralised registration procedure. It was rolled out across the region in the following 2-3 years. Other veterinary specialities have been added to the Novartis range in the UK following its acquisition of Vericore. Some provide a good fit with existing Novartis offerings, including the theophylline-based product, Corvental-D, which sits well alongside Fortekor, allowing Novartis to offer broader options for the treatment of congestive heart disease in companion animals.
regulators in 2001. Novartis already markets the product in Sweden and Finland, and handled launches in Chile and three European markets during 2003. T&F Informa UK Ltd, 2005
Saprolegnia parasitica infections in salmonid eggs, was approved by UK
Pyceze (bronopol), a new antifungal for the treatment and control of
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16.4.4
Vaccines Novartis has begun to build an interest in the veterinary vaccines market over the past five years. Its first purchase was the UK company, Vericore, through which it also landed a 40% stake in the Canadian aquaculture specialist, Cobequid. The latter was subsequently acquired outright, while the veterinary vaccine business of Biostar (Canada) and two US animal biological specialists, Grand Labs and ImmTech Biologics, were added to a growing portfolio during the next two years. The Novartis vaccine/aqua health business now generates global sales of approximately $60 million, accounting for 8% of divisional revenues. More than half of that total is accounted for by sales realised in the US. Major contributors to vaccine revenues include the Bovidec bovine viral diarrhoea virus vaccine, the Virashield range of cattle respiratory vaccines and the Scourbos and Somnustar ranges, which provide protection against bovine enteric infections. Leading aquaculture vaccine brands include the Birnagen Forte and Furogen products for the protection of farmed salmon against infectious pancreatic necrosis. Novartis launched several new vaccines during 2003, and expanded existing ranges into new geographical markets. Among the most significant developments during the year were extensions to the cattle, swine and equine ranges in the US, the introduction of its respiratory and enteric vaccines for pigs in Brazil and south-east Asia, and the launch of a poultry coccidiosis vaccine, Coxabic, in South Africa. Coxabic was launched in Thailand and Argentina in 2004, while line extensions to the US cattle pig and equine vaccine ranges were handled during the year. Among the most significant additions to the US range was ViraShield 6, the first three-way bovine viral diarrhoea virus vaccine available to that countrys cattle producers. The product contains non-cytopathic Type 1 and Type 2 virus strains and cytopathic Type 1 strains, and offers additional protection against infectious bovine rhinotracheitis, parainfluenza3 virus and bovine respiratory syncytial virus. In the aquaculture vaccine segment, five new products were launched in Europe during 2003, while the Aqua Health range has also been expanded in Canada and Chile. In July 2005, Canadian regulators approved Aqua Healths Apex-IHN product, which is the first effective vaccine for the prevention of IHN in farmed Atlantic salmon. The product is a DNA vaccine, developed using technology licensed from the US company, Vical.
16.5
R&D
Like revenues reported by the company, dollar-based spending on R&D has been inflated since 2002 by exchange rate factors, since most R&D work is undertaken in Europe and Australia. Novartis has increased levels of investment in R&D significantly in real terms since the late 1990s, however, and R&D spending as a percentage of divisional sales has risen from 7% in 1999 to a current figure of almost 11%. Recent increases have been particularly sharp, with spending rising from $60 million to $82 million between 2002 and 2004.
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Animal Pharms Top 20, 2005 Edition Table 16.7: Novartiss animal health R&D spending, 2000-2004
Year Sales ($ million) 641 570 623 682 756 R&D spending ($ million) 52 55 60 73 82 R&D as % of sales 8.1 9.7 9.7 10.7 10.9
2000 2001 2002 2003 2004

Source: Novartis.
Novartis operates major research centres at St Aubin in Switzerland and Yarrandoo in Australia. Both are GLP-accredited, enabling pivotal target animal safety and dose-finding studies to be undertaken in preparation for the submission of registration dossiers on a global basis. New products often make their commercial debuts in either Switzerland or Australia before being rolled out internationally. Biological R&D capabilities have been purchased as part of the recent string of acquisitions completed in the veterinary vaccines sector. Novartis now operates vaccine development facilities at Larchwood, Iowa (US), and also possesses vaccine research sites in Canada (aquaculture vaccine development) and the UK. Parasite control is still a major focus in terms of both development programme numbers and spending. The Yarrandoo site is focused entirely on antiparasitics, while work in this sector is also a significant part of programmes being pursued at St Auban. Novartis is one of a handful of animal health companies that possesses comprehensive in-house screening capabilities designed to identify and develop both natural and synthetic products with the potential for use as parasite controls. It is also pursuing the further development of existing antiparasitic compounds, including the registration of additional indications and the application of novel formulation and delivery technologies to established products. The company has also maintained an involvement in research programmes that aim to develop immunological approaches to parasite control. Here, projects include a collaboration with the Victorian Institute of Animal Science in Australia on the development of a novel liver fluke vaccine, and candidates for the biological control of parasites such as the blowfly. Mainstream biologicals research is aimed at the development of both improved and novel vaccines for the protection of livestock and farmed fish. The portfolio of products acquired in these segments of the market since the beginning of the decade has already been expanded significantly, and will be boosted further in the next five years as a result of both in-house and collaborative research programmes. The novel DNA vaccine for the prevention of IHN in farmed Atlantic salmon, which was approved by Canadian regulators in July 2005, is the most significant recent addition to the Novartis vaccine range. Along with Fort Dodges new equine WNV vaccine, which was approved by US regulators in the same month, it shares the distinction of being the worlds first DNA T&F Informa UK Ltd, 2005
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vaccine authorised for use in either human or veterinary medicine. The product was developed using technology licensed from the California-based company, Vical Inc. Prior to full authorisation in July 2005 it had been available on a pre-approval basis in support of extensive field trials. In the pharmaceutical sector, Novartis has developed and commercialised a growing number of human drugs for use in veterinary medicine. Recent additions to the animal health portfolio accessed from the divisions parent company include benazepril, clomipramine and cyclosporine. The Novartis human pharmaceutical range includes interests in several therapeutic areas with potential applications in veterinary medicines, including cardiovascular drugs, metabolic treatments, cancer therapies, CNS products, dermatological and respiratory treatments. Other crossovers will certainly be added to the animal health range in future.
16.6
Strategy
The acquisition by Novartis of Hexal and Eon Labs, which will cost around $8 billion in total, has eased speculation surrounding the Swiss company, which has been regarded for some time as a potential merger and acquisition predator in the human pharmaceutical sector. Novartis CEO Daniel Vasella has said he would not rule out a prescription drug acquisition if the right opportunity arose, however, and the possibility that Novartis Animal Health could be reshaped in future by a parent-level purchase should not be ruled out completely. Novartiss Sandoz division is now the leading player in the world market for generic pharmaceuticals, and the Swiss companys major interest in the generic sector is unique among its peers. With a host of major veterinary pharmaceutical brands approaching patent expiry, and with some other human generic specialists beginning to dip their toes into the veterinary waters, it is possible that Novartis Animal Health might consider calling on its sister divisions expertise to develop a more aggressive position in the veterinary generics market. A more likely near-term scenario for the animal health business is the acquisition of additional interests in the veterinary vaccines market, where Novartis has built up a significant holding, but where it remains a relatively minor player in comparison with the five or six companies that dominate the sector. A national or regional business based in Europe, or a company with interests in the Asia/Pacific region might be possible targets. In the meantime, Novartis will continue to invest in its existing biologicals portfolio, which has already been strengthened significantly by the commercialisation of new products, including some based on novel technologies. Elsewhere, the focus will be on maximising sales of new pharmaceutical brands, which have spearheaded recent growth at divisional level. The company has invested heavily in the development of products such as Deramaxx and Atopica, and has strengthened its sales and marketing capabilities in key markets so as to extract maximum returns from these and other new brands. New products generated just over a quarter of divisional sales in 2004, and with patents on some of its older brands exhausted or approaching expiry, Novartis will hope to drive that figure up further in coming years. Early approval of Deramaxx in Europe, where Merial has already begun to roll-out a competitor product, will be a key factor in this respect.
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US patents on Interceptor expired in 2004, while Program will lose its exclusivity there in 2006. Of the two, Interceptor (milbemycin oxime) is believed to be the most likely target for generic manufacturers, but both brands will also be affected increasingly by the availability of generic heartworm/flea control combinations based on other active ingredients, including ivermectin and moxidectin. Novartis has proved adept at accessing active ingredients with potential for in-house development (milbemycin oxime, nitenpyram and deracoxib being the most prominent examples). It also appears increasingly willing to broaden its portfolio through distribution and marketing alliances. The companys US range has already been boosted by the addition of Luitpolds Adequan osteoarthritis treatment and Ethicores Ethicon veterinary suture line. More deals along these lines are likely to be pursued in future, though targets will be chosen carefully to tie in with major in-house brands.
16.7
Prospects
While Novartis has ceased publishing interim financial results for its animal health business, it is clear that the strong performance achieved in 2004 has been maintained, with double-digit sales growth noted in all major market regions during the first half of 2005. Importantly, the US was singled out as one of the strongest contributors to interim results. This means that, while exchange rate factors continue to inflate sales as reported in many international markets, underlying growth of the business in key markets is clearly quite strong. Sales at the half-year stage are believed to have reached just over $400 million up by around 14% on 2004 figures. Adequan and the Ethicon suture line were both added to the US portfolio at an early stage in 2004, so growth there this year is unlikely to wane on their account during the second half. Indeed, as Novartis lends its considerable marketing muscle to these brands, revenues are likely to continue rising. Assuming that the strong first half performance is carried through into the second half of the year, the company is forecast to post 2005 sales of approximately $860 million up by 14% on year-earlier figures. It is not clear exactly how close Deramaxx is to commercialisation in Europe, or when Econor is likely to make its debut in the US. A market entry for either product at an early stage in the second half of 2005 could help to drive up full-year sales by more than 14%, but both are certain to have a positive impact on divisional revenues in the next couple of years. This should help to offset the potential impact of generic competition on older brands such as Interceptor, Program and Sentinel during the second half of the decade. Other new products will also be brought to market by Novartis during the next five years. Most of these will target the companion animal sector, which is expected to generate close to two-thirds of divisional revenues by the end of the decade. The most likely barrier to such a development is the acquisition of additional business in the veterinary biologicals market, where the company appears to favour building a business in the food animal sector.
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The likelihood of Novartis launching an acquisition bid for a rival pharmaceutical company appears to have receded in the wake of the Hexal purchase. Nevertheless, a corporate-level merger or acquisition deal with implications for the structure of Novartis Animal Health should not be ruled out completely.
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Chapter 17: Pfizer
CHAPTER 17 PFIZER
Pfizer 235 East 42nd Street New York NY 10017-5755 US Tel: +1 212 573 2323 www.pfizer.com Key personnel Pedro Lichtinger Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events May 2005 Impax Labs granted FDA approval to market a generic version of Pfizers Rimadyl (carprofen) canine NSAID. Announces the closure of two animal health production sites as part of a global manufacturing restructure. Launches its livestock respiratory disease treatment, Draxxin (tulathromycin) in the US. $1,953 million 1st Vaccines, antiparasitics, anti-infectives North America, Europe, Asia, Latin America President, Pfizer Animal Health
June 2005
August 2005
17.1
Company background
Pfizer consolidated its position as the worlds biggest pharmaceutical company when it completed the acquisition of Pharmacia Corporation on 16 April 2003. The deal also pushed Pfizer up into a clear leadership position in the animal health sector. Full-year revenues from the Pharmacia business were included in Pfizers results for the first time in 2004. Pre-tax earnings and net income both rose sharply on 2003 figures, which included merger-related expenses totalling more than $6 billion. Operating income increased from $3.3 billion to $14 billion on sales that were 17% higher at $52.5 billion. Net income rose from $3.9 billion to $11.4 billion during the year. Pfizers human drugs portfolio now includes five products with annual revenues of more than $2 billion, including Lipitor (atorvastatin), which is the worlds best-selling pharmaceutical, with 2004 sales of almost $11 billion. Prescription pharmaceuticals dominate the companys business, accounting for 88% of net sales and generating an operating profit of $21.5 billion in 2004. Pfizer Animal Health, which is the smallest of the companys
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three business segments, posted sales of just under $2 billion in 2004 up by 22% on year-earlier figures and equivalent to 3.7% of corporate net revenues.
Table 17.1: Pfizers sales by business area, 2004
Sector Sales ($ million) 46,133 3,516 1,953 914 52,516 % of total 87.9 6.7 3.7 1.7 100.0
Pharmaceuticals Consumer healthcare Animal health Corporate/other Total

Source: Pfizer.
17.2

Pfizer posted animal health sales of more than $1.3 billion in 1999, but the sale of the divisions interests in the MFAs sector during the final quarter of that year pushed revenues down below $1.1 billion in 2000. Sales declined by a further 3% in 2001, but rebounded in the following year, when the weakness of the US dollar began to inflate international revenues as reported. Currency factors continued to inflate divisional sales during 2003 and 2004, but revenues were also boosted in both years by the acquisition of Pharmacia, which included a substantial animal health business. With inhouse growth also contributing to gains, Pfizer reported animal health sales increases of almost 43% in 2003 and 22% in 2004. Revenues in the latter year reached $1,953 million a figure that saw the company replace Merial as the worlds biggest animal health business.
Table 17.2: Pfizers animal health sales, 2000-2004 1
Year Sales ($ million) 1 1,053 1,022 1,119 1,598 1,953 % change -21.7 -2.9 +9.6 +42.8 +22.2
2
2000 2001 2002 2003 2004
Notes: 1 As reported (sales figures for 2000 subsequently restated); Pharmacia products from 16 April 2003. Source: Pfizer.
including sales of ex-
One-off charges borne by the division saw Pfizer Animal Health post an operating loss of $98 million in 2001, but pre-tax earnings reported by the business in 2002 were $132 million, equating to an operating margin of 11.8%. Earnings and margins have risen sharply since then, though mergerrelated charges booked by the division affected income reported by the business in 2003. Expenses relating to the integration of Pharmacia Animal Health into the Pfizer business totalled $146 million in 2003. Excluding those one-time items, divisional operating profit rose to $247 million, pushing T&F Informa UK Ltd, 2005
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operating margins up to 15.5%. That figure increased further in 2004, reaching more than 18%, as Pfizer posted pre-tax earnings of $353 million for its animal health business, on sales of $1,953 million.
Table 17.3: Pfizers animal health operating profit and margins, 2001-2004
Year Sales ($ million) 1,022 1,119 1,598 1,953 Operating profit (loss) ($ million) (98) 132 247 353 Operating margin (%)
2001 2002 2003 2004
N/m 11.8 15.5 18.1
Note: N/m, Not a meaningful percentage. Source: Pfizer.
17.2.1
2003 performance Boosted by the inclusion of ex-Pharmacia product revenues for just under nine months of the year, but also reflecting in-house growth and the positive impact of exchange rates, Pfizers animal health sales rose by almost 42% in 2003, reaching $1,598 million. Earnings as reported by the division were affected by merger-related costs, but rose sharply when one-time items were excluded, reaching $247 million. Underlying operating margins generated by the business rose from less than 12% to more than 15% as a result. Sales of livestock products increased by 63% to $970 million, thanks largely to the inclusion of major Pharmacia brands in results. Revenues were also driven by higher sales of swine vaccines, which increased by 9% following recent major product launches in both the US and Europe, and by full-year sales of the livestock respiratory disease treatment, Advocin 180 (danofloxacin), which had been launched in the US towards the end of 2002. Sales of the companys Dectomax (doramectin) livestock endectocide franchise were almost flat, reflecting increasing generic competition in that segment of the market. Pharmacias animal health business was dominated by products for use in food animal species, but did include a number of companion animal lines, revenues from which helped to drive Pfizers companion animal product sales up by 20% to $628 million. Strong performances were reported for several established Pfizer brands, including the endectocide, Revolution (selamectin), sales of which rose by 26%; the canine NSAID, Rimadyl (carprofen), which posted a 13% gain and the antibiotic, Clavamox/Synulox (amoxicillin and clavulanic acid), sales of which were 16% ahead of yearearlier figures. Pfizer continued to strengthen its portfolio through product and business acquisitions in the second half of 2003, purchasing European rights to part of Bayers cattle biologicals business and announcing in December that it had agreed to acquire the animal health division of the Australian company, CSL, in a $126.2 million cash deal. CSL reported animal health sales worth the equivalent of $46 million in 2002, and has had a significant impact on Pfizers position in the Australian animal health market. The company, which is focused on the research, development and sale of veterinary vaccines, has
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a number of promising products in its pipeline. It also possesses a US manufacturing arm, Biocor, which is capable of producing to international GMP standards. 17.2.2 2004 performance New product launches and strong performances by several more established brands helped to drive Pfizers sales in 2004. The residual impact of the Pharmacia acquisition, the addition of revenues from CSL and the continued weakness of the US dollar also had a positive impact on results, and divisional revenues rose by 22% to $1,953 million over the course of the year. Pre-tax earnings increased sharply, reaching $353 million (up by 43% on year-earlier figures when one-time charges booked in 2003 are excluded from calculations). The divisions operating margin reached 18% as a result. Sales of livestock products rose by 24%, driven primarily by new products and the impact of new indications secured for more established brands. European revenues were boosted by the launch of Pfizers new respiratory disease antibiotic, Draxxin (tulathromycin), which was rolled out in the region at the beginning of the year, while first sales of the new ceftiofurbased product, Excede, contributed to domestic revenues in the second half. US sales were also boosted by new claims authorised for the companys Bovishield bovine vaccine. Companion animal product sales increased by 20%, reaching more than $750 million (39% of the divisional total). Leading brands such as Rimadyl, Revolution and Clavamox continued to spearhead growth in this segment of the portfolio, with sales of all three products rising at double-digit rates. 17.2.3 Interim 2005 performance With Pharmacia sales included in results for the full year in 2004 and the CSL acquisition completed in February of that year, gains posted by Pfizer in 2005 will be attributable almost completely to underlying growth. Currency factors continued to inflate international revenues as reported in each of the first two quarters, but results were still impressive.
Table 17.4: Pfizers first half animal health sales, 2004 and 2005
Source: Pfizer.
% change
2005 496 578 1,073 +15.9 +19.4 +17.7
428 484 912
The division posted a gain of just under 16% in the first quarter, and followed up with an increase of more than 19% in the April-June period. This drove first-half revenues up to $1,073 million 17.7% higher than year-earlier figures. Pre-tax earnings generated by the division in the first half were more than 30% higher than 2003 figures, at $203 million, equating to a divisional operating margin of almost 19%. T&F Informa UK Ltd, 2005
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Major contributors to growth included Draxxin, which made further headway in European markets where it was launched in 2004, and the small animal brands, Rimadyl and Revolution. Demand for the companys vaccine products was also strong, while US sales of its livestock product range benefited from a combination of recent product launches and favourable economic conditions notably in the dairy sector. Draxxin was approved by US regulators in June 2005, and was launched there at the beginning of August. Available fully to US livestock producers in good time for the autumn respiratory disease season, it should contribute to a strong performance there in the second half of the year.
17.3

Pfizer generated 55% of its animal health sales in markets outside the US prior to the acquisition of Pharmacia Animal Health. The Pharmacia business was led by US sales, and has contributed to a period of rapid growth reported by Pfizer in its home market over the past two years. International revenues have been inflated by exchange rate factors during that period, however, while the acquisition of CSL has also boosted international sales. As a result, the US/international sales split reported by Pfizer in 2004 was identical to figures posted two years earlier.
Table 17.5: Pfizers US/international sales split, 2004
Region Sales ($ million) 878 1,075 1,953 % of total 45.0 55.0 100.0
US International Total
Source: Pfizer.
The expanded Pfizer animal health division has been split into three operating regions comprising the US; a combined Asia/Latin America business that also covers Australasia; and a rest of the world region that is dominated by Europe, but that also includes Canada, Africa and the Middle East. This miscellaneous grouping is referred to in-house as Eucana. 17.3.1 US Pfizer confirmed prior to the closure of the Pharmacia acquisition that its expanded animal health business would continue to be run from the companys existing global headquarters in New York. The divisions R&D headquarters has been shifted to the former Pharmacia complex at Kalamazoo in Michigan, however. An expansion project currently underway at Kalamazoo will enable Pfizer to conduct a greater proportion of its clinical research work in-house. New animal facilities being built there will be inaugurated during 2005. Elsewhere, a site at Lincoln, Nebraska, which previously manufactured human and veterinary pharmaceuticals as well as biologicals, has been earmarked exclusively for veterinary vaccine production in future. The company has ploughed over $50 million into the construction of a vaccine manufacturing plant at the site over the past two years, and several T&F Informa UK Ltd, 2005
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products currently in late-stage development will eventually be produced there. Veterinary pharmaceutical manufacturing activities previously undertaken at the Lincoln facility will be transferred to other locations, including Kalamazoo. Pfizer Animal Health now enjoys a clear leadership position in its home market, generating US sales of $878 million in 2004. That total is more than $350 million higher than the figure reported by the division in 2002, prior to the acquisition of Pharmacia. US sales rose by 46% in 2003, when exPharmacia products were included in results for almost nine months. Underlying growth of the US business is clearly strong, however, as evidenced by the 19% increase reported in 2004, and by a further 16% gain posted during the first half of 2005. New distribution and marketing strategies implemented by Pfizer in its home market have had a significant impact on US sales, helping to drive a period of renewed growth for several products, including established brands such as Clavamox and Rimadyl. The latter was exposed to generic competition in the US for the first time in May 2005, but has continued to perform strongly. Demand for Pfizers livestock portfolio has also been strong over the past 18 months, and sales in that sector are also being boosted by new product launches. First revenues from Draxxin will be booked by the US business in the second half of 2005. 17.3.2 International markets Pfizer generated 55% of its 2004 animal health revenues equivalent to $1,075 million in markets outside the US. International sales as reported have been inflated by exchange rate factors since the beginning of the dollars recent slide in value in 2002, but revenues have also been boosted by the addition of ex-Pharmacia products and the CSL business. New product launches are also driving international sales, especially in Europe, where Draxxin was rolled out in the first half of 2004. Prior to its purchase by Pfizer, Pharmacias European animal health revenues had been boosted by a series of acquisitions, including Parke Daviss animal health interests in the region; the Swedish company, Pherrovet; and Paines & Byrne in the UK. The companys Excenel (ceftiofur) antibiotic had also been a major source of growth in European markets. Pfizers European business had likewise been outpacing generally sluggish market growth in the region, and has continued to do so thanks to strong performances by its vaccine range, leading companion animal brands and the launch of Draxxin. Pfizer is believed to have generated sales of close to $500 million in Europe during 2004. Pfizer generates more than 25% of its global animal health sales in markets outside the US and Europe. Major contributors to sales outside the companys two major market regions include Brazil, Canada, Japan and Australia. The business is also expanding in south-east Asias developing markets, though results there have been affected since the end of 2003 by outbreaks of avian influenza. Conditions in Mexico remain difficult, but the operating environment in other leading Latin American countries including Brazil, which is the regions dominant animal health market have improved considerably in the last two years. Animal health product sales in both Brazil and Argentina are currently T&F Informa UK Ltd, 2005
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rising at double-digit rates, and growth in both countries is expected to remain strong through 2005. In Asia, Japan has traditionally been the companys main source of revenues, but market conditions there have precluded significant growth for most competitors in the animal health sector for several years. Pfizers Japanese sales have been boosted recently by new product launches, however, with introductions for Rimadyl Injectable, the bovine respiratory disease vaccine, Rispoval, and the small animal antibiotic, Zenaquil (marbofloxacin), all handled during 2004. Elsewhere in the region, Pfizer took on responsibility for the distribution and marketing of Bayers animal health range in India during 2003, while the company is working to build up its own business in south-east Asias leading swine-producing markets. These are major targets for several established Pfizer brands, and for a range of antibiotics added to the portfolio as a result of the Pharmacia acquisition. China is the biggest potential growth market in Asia, and most leading animal health manufacturers have invested in the establishment of sales, marketing and, in some cases, manufacturing activities there. Pfizer announced in 2005 that production of animal health products previously undertaken at sites in Corby, UK, and Orangeville, Canada, would be transferred to a new plant in Suzhou, China, as part of a broad restructure of its worldwide manufacturing operations. In Australia, Pfizers previous mid-tier position in the animal health market has been strengthened considerably by the acquisition of CSL, which posted revenues of Aus$65 million in the year prior to its purchase. CSL has strengthened Pfizers position in the Australian livestock biologicals market, and has also brought the company significant manufacturing and distribution capabilities. Pfizer now markets CSLs vaccine range directly in New Zealand, having terminated a prior agreement between CSL and the local company, AgVax (acquired recently by Intervet) in the final quarter of 2004. It will also look to commercialise CSLs vaccines more widely in international markets.
17.4
Product portfolio
Pfizers revenues were split relatively evenly between livestock and companion animal products prior to the acquisition of Pharmacia, with the livestock portfolio responsible for 53% of divisional sales in 2002. Pharmacias animal health business was dominated by products for use in food animal species while the acquisition of CSL and Bayers European cattle biologicals business have also helped to tip the balance in favour of livestock products, which generated more than 61% of divisional sales in 2004.
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Animal Pharms Top 20, 2005 Edition Table 17.6: Pfizers animal health sales by species segment, 2002-2004
Segment Sales ($ million) 2002 Livestock Companion animals Total
Source: Pfizer.
2004 % share 2004 1,200 753 1,953 61.4 38.6 100.0
2003 970 628 1,598
595 524 1,119
Having divested its interests in the MFAs market at the end of the 1990s, Pfizers animal health business was led by vaccines, antiparasitics, antiinfectives and companion animal speciality products. Pharmacias animal health business was dominated by anti-infectives, with the ceftiofur antibiotic alone responsible for one-third of its sales. Pharmacia also brought Pfizer a range of reproductive products, while the acquisition of CSL and Bayers European cattle biologicals business have strengthened its position in that sector of the market. Anti-infectives are the leading contributors to the expanded Pfizer Animal Health business, generating global sales of more than $500 million in 2004. Vaccine sales are in excess of $400 million, while the companys antiparasitic range generates revenues of more than $300 million.
Table 17.7: Pfizers Animal Health sales by product segment, 2004
Segment Sales ($ million) > 500 445 310 < 700 1,953 % share > 26 23 16 < 35 100
Anti-infectives Vaccines Antiparasitics Others Total
17.4.1
Anti-infectives Pfizers anti-infective revenues received a substantial boost following the acquisition of Pharmacia, and have continued to increase rapidly since then as major new products are rolled out in key markets. Global revenues in the sector are estimated to be comfortably in excess of $500 million. First revenues from Pfizers new livestock respiratory antibiotic, Draxxin (tulathromycin), were generated in European markets during 2004, following its approval under the EUs centralised registration procedure in the final quarter of 2003. The active ingredient is a semi-synthetic macrolide from a new antibiotic subclass, presented as a single-dose injectable with indications covering the treatment and prevention of bovine respiratory disease and the treatment of respiratory disease in pigs. Its duration of action is the key to its potential success, with a single injection providing cover for up to 15 days.
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Sales of Draxxin in European markets were a major contributor to growth in the region during 2004, and the product will boost Pfizers domestic business in the second half of 2005 following its introduction in the US during August. It became the first antibiotic to be approved by the FDAs Center for Veterinary Medicine using new guidance procedures, which include a review of antimicrobial resistance transfer risks. Draxxins availability in time for the autumn respiratory disease season should help Pfizer to capture significant shares of that market. The companys US anti-infective revenues are already being driven by other recent additions to the portfolio, which include Simplicef (cefpodoxime), the first oral cephalosporin approved for use in dogs, and Excede, a new oneshot, ceftiofur-based livestock anti-infective. Both products received FDA approval early in the second half of 2004. Ceftiofur was the single biggest contributor to Pharmacias animal health sales, and is now believed to generate global revenues of approximately $200 million. Excede is a new formulation of the ceftiofur active ingredient featuring a patented delivery method that enables administration through the ear. This means that the product has been given a zero meat withdrawal period. Along with its ability to provide effective antibiotic action for seven days, this has made it a popular choice with livestock producers. It is due to be rolled out in Europe from September 2005 under the Naxcel brand name, with indications for the treatment of swine respiratory disease associated with Streptococcus suis, Actinobacillus pleuropneumoniae, Pasteurella multocida and Haemophilus parasuis. Ceftiofur was commercialised initially by Pharmacia as a bovine respiratory disease (BRD) treatment for use in beef and non-lactating dairy cattle. Approval has since been gained for use in lactating dairy cows, while the treatment of other bovine infections has been added to its list of indications. Shorter treatment programmes have also been licensed in the BRD sector, while approvals in other species have contributed to recent sales growth. Pigs and poultry are the main targets outside the cattle sector, but approvals for use in horses and dogs have been secured in some markets. The base formulation of ceftiofur is a sterile powder for reconstitution prior to use. Patents on the sterile powder formulation expired in the US during 2001 but a ready-to-use (RTU) suspension commercialised in the second half of the 1990s is now the main source of revenues from the franchise. The RTU product has been given a zero withdrawal period in dairy cows, and its strong performance in North America and Europe has been a major contributor to recent sales growth. Like Excede, Simplicef, which has been approved for use in the treatment of wound infections and abscesses in dogs, had already been submitted for regulatory approval by Pharmacia Animal Health prior to the acquisition of its parent company by Pfizer. The active ingredient, cefpodoxime, is well established in human medicine. Pharmacia also brings Pfizer a range of other antibiotics, including lincomycin, spectinomycin, clindamycin and pirlimycin. Lincomycin and spectinomycin are the most significant contributors to revenues. Pig and poultry markets are the main targets for lincomycin, which is sold as Lincomix, Lincocin and, in combination with spectinomycin, as Linco-Spectin. Sales of Linco-Spectin have risen sharply following its approval for the T&F Informa UK Ltd, 2005
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treatment of PPE (ileitis). European approvals for lincomycin are limited to therapeutic use, but the product is authorised as a livestock performance enhancer in the US and some other key markets. It is also marketed as a therapeutic antibiotic for use in small animals, under the Lincocin trade name. Tablet and aquadrop formulations are both available for use in cats and dogs. Pfizers established anti-infective range was previously led by the Terramycin line of oxytetracycline-based antibiotics. Feed additive formulations of this product were sold to Phibro Animal Health in 1999, but therapeutics were retained, and generate substantial revenues, especially in the US. Other leading Pfizer anti-infectives include amoxicillin and the fluoroquinolone antibiotics, danofloxacin and marbofloxacin. Pfizer commercialised danofloxacin in the early 1990s as Advocin. Its first launch, in Brazil, was as a treatment for respiratory pathogens such as E. coli and Mycoplasma spp in poultry, but most early introductions were for use as a bovine respiratory disease treatment. It has also been approved widely for use in pigs. Sales of the product were boosted in the second half of the 1990s following launches of the cattle respiratory formulation in Japan and major European markets during 1996 and 1997. The latest addition to the danofloxacin franchise is A180, indicated for the treatment of bovine respiratory disease and calf enteritis. Introduced initially in Latin America the A180 product was launched in the US and first European markets during 2002. It contains 180mg/ml danofloxacin and is administered via subcutaneous injection. A second dose can be administered 48 hours after initial treatment where symptoms persist. Marbofloxacin, which is sold under the Zeniquin brand, has been available in the US for the treatment of canine infections since 1999. US regulators approved its use in the treatment of feline skin and soft tissue infections during 2001 and Pfizer began promoting Zeniquins use in cats in 2002. The French company, Vtoquinol, holds marketing rights to marbofloxacin in Europe under an agreement struck with SmithKline Beecham Animal Health prior to Pfizers acquisition of the SmithKline Beecham Animal Health business. In 1999, Pfizer granted Vtoquinol additional rights to the product covering development and marketing for livestock use in all countries outside the US and Canada and companion animal use in markets outside the Americas, Japan, New Zealand, Australia and South Africa. A tablet formulation for use in dogs and cats was launched in Japan during 2004 as Zenaquil. Pfizers amoxicillin-based line of antibiotics was added to the portfolio in the 1990s following its acquisition of SmithKline Beecham Animal Health. The range includes products for use in both livestock and companion animals. The most significant contributors to revenues are amoxicillin/clavulanic acid combinations, sold variously as Clavamox and Synulox. Sales of Clavamox in the companion animal sector have increased significantly over the past 2-3 years as a result of stronger marketing for the brand. Both Pharmacia and Pfizer possessed interests in the mastitis treatment market, and US trade regulators demanded that Pfizers existing range in its home market was divested following the Pharmacia acquisition. Products that generated annual sales of around $5 million were sold to ScheringPlough Animal Health shortly after the Pharmacia transaction was closed in T&F Informa UK Ltd, 2005
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April 2003. Pfizer has still emerged as a stronger player in the mastitis treatment market, however, thanks to Pharmacias strong involvement in the sector. 17.4.2 Antiparasitics Pharmacias $500 million-plus animal health business did not include any significant interests in the parasite control products market. As a result, its integration has reduced the contribution made by antiparasitics to the expanded divisional sales total. Interests in the sector generated global sales of approximately $310 million in 2004 equivalent to approximately 16% of Pfizer Animal Health revenues. The bulk of Pfizers antiparasitic revenues are generated by two endectocide compounds: doramectin, which is sold exclusively for use in the livestock sector; and selamectin, which is indicated for use in small animals. Aggregate global sales of these two products are estimated at almost $250 million. More modest revenues are also generated by a range of older anthelmintics, while two ivermectin-based equine wormers have been added to the companys US and Canadian portfolios recently through a licensing deal with the French company, Virbac.
Table 17.8: Pfizers antiparasitic revenues by major brand
Brand Active ingredient(s) 2004 sales ($ million) 140 110 60 310
Dectomax Revolution/Stronghold Others Total
Doramectin Selamectin Pyrantel, morantel, albendazole, etc
. . . Doramectin
Doramectin is an avermectin endectocide brought to market by Pfizer in the mid-1990s. Sold as Dectomax, it was launched in Brazil and Argentina in 1993, was rolled out in Europe during 1994 and 1995, and reached the US market in 1996. Early introductions were of an injectable formulation for use in cattle, but registrations for use in pigs and sheep were also secured at an early stage, while a pour-on product for cattle reached its first markets in 1997. Along with Fort Dodges Cydectin (moxidectin) brand, Dectomax represented the first direct competition for Merials Ivomec (ivermectin) endectocide franchise. Dectomax and Cydectin reached several key markets at around the same time, prompting a period of fierce competition between the three companies. Dectomax fared well in that battle, and sales of the Pfizer brand had reached almost $100 million in 1995. Its US launch, and first introductions of the cattle pour-on formulation, drove sales up by 58% to $150 million in 1996, while a further gain of 11% saw global revenues reach almost $170 million in 1997. Deteriorating conditions in major livestock markets, coupled with the arrival of the first generic ivermectin-based livestock endectocides, saw Dectomax sales growth grind to a halt at the end of the 1990s. With volumes subdued T&F Informa UK Ltd, 2005
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and prices being eroded by generic competition, Dectomax revenues began to fall back from peak levels. They continued to decline in local currency terms through 2002 and 2003, but international sales were inflated by exchange rate factors in both years, allowing Pfizer to report flat sales of the brand in 2002 and a 1% gain in 2003.
. . . Selamectin
Selamectin is the newest active ingredient in Pfizers antiparasitic portfolio. Launched in its first markets during 1999, it is the first true, singleingredient endectocide for use in small animals, possessing indications for the prevention and control of flea infestation, heartworm and ear mite infestations in both dogs and cats. It is also approved for the treatment and control of sarcoptic mange in dogs, and for the treatment of intestinal hookworm and round worm infestation in cats, while claims for the control of ticks on dogs have also been registered since its initial authorisation. Selamectin was launched in the US, as Revolution, in the second half of 1999. Early demand for the product was extremely strong, and sales had already reached $100 million by the end of that year. Distribution channels were overstocked following that initial surge, however, and US sales of the product were much lower in the following two years. Launches in international markets (where it is sold most widely as Stronghold) and the establishment of stronger marketing and promotional support for the brand have driven strong global sales growth more recently, however. Pfizer reported a 35% increase in global sales of the Revolution/Stronghold brand in 2002, while revenues generated by the product rose by a further 26% in 2003. Double-digit gains were recorded again in 2004, and global sales of selamectin are now believed to be in excess of $100 million and rising. Pfizer continued to report double-digit sales growth for Revolution in the first half of 2005.
. . . Others
Neither doramectin nor selamectin have been developed for use in the equine market, which has provided an additional source of revenues for both Merials ivermectin and Fort Dodges moxidectin. Pfizer has moved to fill that gap in its portfolio, however, licensing US and Canadian rights to Virbacs Equell (ivermectin) and Equimax (ivermectin and praziquantel) branded generics. Significantly, the deal with Virbac came at a time when products in Pfizers own equine wormer range were themselves coming under pressure as a result of generic competition. Generic versions of Pfizers Banminth and Strongid brands both of which contain the pyrantel anthelmintic have been brought to market in the US during the past two years. Pfizer continues to market a range of equine anthelmintics containing either pyrantel pamoate or pyrantel tartrate, as well as both liquid and paste formulations of the benzimidazole anthelmintic, oxibendazole, which are sold under the Anthelcide brand. Pyrantel is also the active ingredient in the companys canine anthelmintic brand, Nemex, which like Banminth and Strongid is now exposed to generic competition. The most significant contributors to Pfizers pyrantel revenues are the equine brands, Strongid C, Strongid C2X and Strongid Paste. T&F Informa UK Ltd, 2005
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The SmithKline Beecham Animal Health portfolio acquired by Pfizer in the 1990s included a canine heartworm treatment, Filaribits (diethylcarbamazine). Sales of this product have dwindled following the success of avermectin/milbemycin-based heartworm preventatives, and the company said active marketing of Filaribits would cease in 2005. Companion animal ectoparasiticides also feature in the Pfizer range, though sales of these products are modest. They include Mita-Clear, a small animal ear mite control containing pyrethrins and the synergist, piperonyl butoxide, and Mitaban, which is based on amitraz. In the livestock sector, modest revenues are still generated by the benzimidazole anthelmintic, albendazole, which is sold as Valbazen. Albendazole possesses a broader spectrum of activity than many other benzimidazole compounds, boasting activity against fluke and tapeworm as well as nematodes. Livestock wormers based on morantel are also sold in a number of markets, while Pfizers US range includes Durasect, a pour-on formulation containing permethrin and pyrethrins with indications for the control of flies and lice. 17.4.3 Vaccines The Pharmacia acquisition had no significant impact on Pfizers veterinary biologicals portfolio, but the company already enjoyed a strong position in this sector of the market, and the addition of CSL Animal Health and Bayers European cattle vaccines to the business in 2004 helped to push Pfizers worldwide biologicals sales up to around $445 million. Revenues generated by the range are continuing to increase, with strong performances from both livestock and companion animal vaccines noted by the company in the first half of 2005. The vaccines business includes extensive lines of livestock and companion animal products, but Pfizer is not a major player in the poultry biologicals market. Livestock vaccines have spearheaded recent growth of the business, thanks to strong performances by new products launched in major cattle and swine markets. With revenues in these segments boosted further by the acquisition of CSL and some former Bayer cattle vaccines in Europe, livestock biologicals were responsible for almost 70% of Pfizers 2004 vaccine sales a figure equivalent to approximately $300 million. The companys companion animal vaccine lines generated global sales of close to $150 million.
. . . Livestock vaccines
The Pfizer swine biologicals range has been a particularly strong contributor to recent sales growth, with revenues in this segment of the business increasing by 18% in 2002 and a further 9% in 2003. The range includes the FarrowSure line of vaccines covering various combinations of parvovirus, erysipelas, Aujeszkys disease and leptospirosis; the Aujeszkys disease preventative, PR Vac and the Pleuroguard respiratory disease brand offering Actinobacillus pleuropneumoniae, Bordetella protection against bronchiseptica, erysipelas and Pasteurella multocida. Sales growth has been dominated in recent years by newer additions to the range, however. Pfizers flagship swine vaccine is the Mycoplasma hyopneumoniae product, sold variously as RespiSure or Stellamune. RespiSure reached its first T&F Informa UK Ltd, 2005
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markets in the early 1990s, and quickly emerged as a leading product in the M. hyopneumoniae market segment. By the end of the decade it had become the biggest single contributor to Pfizers veterinary vaccine sales, and revenues generated by the RespiSure/Stellamune product have risen considerably since then following the launch of a second-generation oneshot version. RespiSure One, which reached its first markets in 2001, is a single-dose product offering protection for a period of 23 weeks, meaning that one vaccination is sufficient to protect treated animals up to marketing age. RespiSure One/Stellamune One continues to drive Pfizers swine biologicals business, which has also been boosted recently by the launch of a new influenza vaccine. Sold as FluSure, it was launched in the US during 2002, and was noted as a strong contributor to revenues there in 2003. The cattle vaccine range is at its most extensive in the US, where protection against a broad range of respiratory and enteric pathogens is offered by the BoviShield, CattleMaster, Rispoval and ScourGuard lines. The range also includes clostridial vaccines marketed under the Fortress and Ultrabac labels and a line of campylobacter/leptospirosis vaccines sold as StayBred; a combination rotavirus/coronavirus product, CalfGuard, for the prevention of calf scours and the single-dose Mannheimia (Pasteurella) haemolytica vaccine, One Shot. In revenue terms, leading products in the bovine range include the BoviShield Gold and CattleMaster Gold lines. BoviShield Gold is a range of modified live virus vaccines against IBR, BVDV and PI-3, but protection against respiratory syncytial virus, leptospirosis and pasteurellosis is also offered by some multivalent products in the line. The CattleMaster Gold series is aimed at similar pathogen targets, but the BVDV element is based on killed type 1 and type 2 viral material. Revenues generated by the cattle vaccine range in the US were boosted in 2004 by the launch of new claims for the BoviShield line in pregnant cows and foetal/nursing calves, and by the launch of Spirovac, a reproductive vaccine offering protection against leptospirosis. Multivalent IBR, BVDV, PI-3 and BRSV vaccines are marketed under the Rispoval label in Europe, but brands such as CattleMaster, Fortress, ScourGuard and Staybred are all familiar to producers in a number of other international markets. Pfizer is also involved in the specialist FMD vaccine market, where it sells a multivalent product under the Pfizervac Oleosa brand in Brazil and several other south American countries. While Pharmacia had no significant presence in the biologicals market, its portfolio did include the Enviracor mastitis vaccine, which is now part of Pfizers dairy cattle vaccine range in a number of major markets around the world. The bovine range has also been strengthened by the acquisition of Bayers gene-deleted IBR marker vaccines, which have been added to Pfizers portfolio in Europe, and by the purchase of CSL.
. . . Companion animal vaccines

Revenues generated by Pfizers companion animal vaccine range have risen at more modest rates than the companys livestock biologicals portfolio in recent years, but the companion animal range still realises global sales of around $140 million. Products for use in small animals, which are sold under the Vanguard (canine) and Felocell (feline) brands, dominate in this segment T&F Informa UK Ltd, 2005
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of the market. Recent additions to the range include Vanguard CPV, a hightitre canine parvovirus vaccine capable of overriding maternal antibodies. Flagship feline vaccines include the Leukocell 2 second-generation feline leukaemia preventative and Primucell FIP, which offers protection against feline infectious peritonitis. Recent launches in the US include the singledose, single-antigen feline panleukopaenia vaccine, Felocell FPV; a feline rhinotracheitis preventative, Felocell Resp-2 and Felocell Resp-3, which offers protection against panleukopaenia, rhinotracheitis and Chlamydia psittaci. Equine vaccines are modest contributors to Pfizers vaccine revenues at global level, and are not a feature of the companys range in some international markets. Equine influenza preventatives (Flumune) and vaccines against equine rhinopneumonitis and Potomac fever are marketed in the US, however.
. . . CSL products
Most of CSLs vaccines are marketed primarily in Australia and New Zealand, where the purchase has strengthened Pfizers position appreciably. CSL operated a US manufacturing arm, Biocor, however, which was responsible for the production of the Spirovac leptospirosis vaccine to which Pfizer acquired marketing rights in a deal concluded some time before the corporate-level acquisition. Pfizer said the GMP-approved Biocor facility would be used to accelerate the introduction of line extensions in the US. It will also look to commercialise a number of other CSL vaccines more widely in future. CSLs range spans both livestock and companion animals, and includes an extensive line of sheep vaccines sold widely in Australia. The company has also gained plaudits for novel products, including its immunosterilisation vaccines such as Improvac, which offers an alternative to surgical castration of pigs as a means of preventing boar taint, and Equity, for the control of oestrus in non-breeding horses. Pfizer plans to commercialise these and other novel CSL products on a global basis. 17.4.4 Other pharmaceuticals Pfizers most successful pharmaceutical speciality product is the companion animal NSAID, carprofen. Sold as Rimadyl, it emerged as the leading product in the rapidly expanding canine osteoarthritis treatment market during the second half of the 1990s, and has maintained a leadership position in the sector despite growing competition from other established non-steroidal products and new entrants from the COX inhibitor subclass. Rimadyl generated sales of more than $80 million in the US alone during 2004, and worldwide revenues from the product are believed to be approaching $150 million following three consecutive years of double-digit growth. Pfizer now faces generic competition for shares of the carprofen market on both sides of the Atlantic, however, with Norbrook marketing a generic version of Rimadyl in Europe and Impax Laboratories having been granted US approval to market a generic version of the Rimadyl Caplets formulation in the first half of 2005. Rimadyl has maintained its position in the companion animal NSAID market in spite of publicity surrounding adverse reactions to the product in a small T&F Informa UK Ltd, 2005
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proportion of treated dogs. These triggered a class action suit against the company by US pet owners, which was settled out of court by Pfizer in 2004 without any admission of product liability. Regulators have also monitored Rimadyl closely, and the company was ordered by the FDA to amend labelling for the product. Pfizer maintains that the proportion of treated animals suffering adverse reactions is extremely low, but has issued additional advice to veterinary surgeons using the product (notably that dogs should always be tested for pre-existing liver conditions before commencing treatment). It has also begun distributing owner information sheets. Selegiline has been a less successful addition to Pfizers companion animal speciality range. Developed by the Canadian company, Anipryl, as a canine behavioural therapy, it was licensed to Pfizer during the 1990s and has been sold in the US as a treatment for canine Cushings disease and cognitive dysfunction syndrome. US sales failed to match pre-launch expectations, however, while the commercialisation of a selegeline-based product in Europe by the French company, Ceva, affected Anipryls commercial prospects in that region. Cevas product was not approved for either canine Cushings disease, but Draxis and Ceva were in dispute over rights to those uses until 2003, when the two companies agreed a settlement that saw Ceva purchase European rights to Anipryl. Pfizer markets a range of sedatives and pain management treatments, including Domosedan (detomidine), Domitor (medetomidine) and Antisedan (atipamezol) under an agreement with the Finnish company, Orion Pharma. The existing deal between the two companies covered the US and Europe, but terms of the agreement were expanded in 2005, as a result of which Pfizer will introduce the Orion products in major markets across Asia, Latin America and the Middle East. At the same time, a licensing deal under which Orion handles Pfizers products in Sweden, Norway and Denmark was also extended. The Pharmacia acquisition has given Pfizer an entry into the fertility/reproduction control market, with a range of products including the synthetic prostaglandin, Lutalyse/Dinolytic (dinoprost). Sold as a sterile injectable solution, Lutalyse is used primarily in the synchronisation of oestrus in cattle and horses. It can also be used to induce abortion, or to induce parturition in cattle and pigs. The reproductive range, which also includes the gonadotropin-releasing hormone, Ovalyse (fertirelin), has been expanded further through the acquisition of rights to the Eazi-Breed CIDR progesterone-releasing insert range developed by the New Zealand company, InterAg. The Eazi-Breed range is approved in more than 30 countries for use as a reproductive aid in beef and dairy cattle, sheep and a number of minor species. US regulators authorised use of the product in beef cows and beef and dairy heifers during 2002. In addition to its lincomycin and spectinomycin antibiotic feed additive range, Pharmacia also markets an in-feed hormone growth promoter, melengestrol acetate. Sold as MGA, it is a progestogenic hormone used to enhance the performance of growing beef heifers. MGA is approved for use in combination with several other products and boasts a zero withdrawal period. The bulk of its revenues are generated in the US, and it is not approved for use in EU markets.
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17.5
R&D
Pfizer invested almost $7.7 billion in R&D during 2004 equivalent to just under 15% of corporate net sales. The company does not publish information on R&D spending by its animal health unit, but the division is one of few businesses in the sector that can boast an R&D/sales ratio on a par with that of its human pharmaceutical parent. Prior to the Pharmacia acquisition, it was ploughing around $200 million a year into R&D, and while spending as a percentage of revenues is believed to have fallen back following recent major product launches Pfizer is undoubtedly the animal health industrys leading investor in R&D. Current spending certainly remains well above the sectors 10% average, and is estimated to be in excess of $250 million. In the wake of the Pharmacia acquisition, Pfizer announced that its animal health R&D headquarters would be transferred from Groton, Connecticut, to Pharmacias research farm and laboratory complex at Kalamazoo in Michigan. Animal facilities at Kalamazoo have been expanded so that Pfizer can conduct a greater proportion of its clinical development work in-house. At the time of the Pharmacia purchase, late-stage development pipelines at both Pfizer and Pharmacia included several products with the potential to generate substantial revenues in the animal health sector. Some of these have already reached their first markets, with launches handled for Draxxin (teluthromycin), Excede (ceftiofur) and Simplicef (cefpodoxime) in 2004. The vaccine portfolio has also been strengthened recently following first launches of CattleMaster Gold and Rispoval 3, and Pfizer says it expects to launch one or two major new products in both the pharmaceutical and biological market sectors every year until 2008. A new livestock antiparasitic is among the products in Pfizers pharmaceutical development pipeline. Its identity has not been acknowledged publicly, but it may be a product from the paraherquamide anthelmintic class, which was under development at Pharmacia Animal Health prior to Pfizers acquisition of Pharmacia Corp. A semi-synthetic member of the class, 2-desoxo-paraherquamide A (PNU-141962), has been chosen as a candidate for development based on high levels of nematocidal activity and a good safety profile. Further development of the selamectin molecule is also anticipated in the next five years. This will almost certainly lead to the registration of broader indications, but might also include the application of novel formulation or delivery technology that would allow extended activity claims. Still in the parasite control sector, Pfizer has obtained patents covering pyrazole insecticidal compounds believed to be effective against, arthropods, helminths and possibly protozoa. Pfizers veterinary pharmaceutical development pipeline also includes reproductive aids and a broad range of companion animal speciality products that the company says will target currently unmet needs. These include cardiovascular, cancer and behavioural therapies, while Pfizer is also engaged in a collaboration with Neurogen targeting the development of companion animal obesity treatments. Elsewhere, a third fluoroquinolone antibiotic is in development for veterinary use, while Pfizer continues to work with the US biopharmaceutical company, Essential Therapeutics (formerly Microcide Pharmaceuticals), on the development of novel veterinary antibiotics. The alliance, which was
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expanded recently, will utilise Essential Therapeuticss targeted genomics technology to develop new antibiotic drug classes. Formulation technology is also being harnessed in order to maximise the potential of both new and existing products. In 2002, Pfizer acquired rights to use an advanced oral formulation technology from the Kansas-based drug delivery specialist, CyDex. Pfizer had previously licensed rights to the use of CyDexs Captisol system for application to human pharmaceuticals. The technology, which improves the solubility, stability and bioavailability of active ingredients, is likely to be applied to both new and established antibiotics in the Pfizer animal health range. Pfizer boasts considerable in-house research capabilities in the biologicals sector, but is also involved in a number of collaborative R&D projects that have enabled the company to access novel products and technology platforms. One of its longest-standing partners is the UK company, Cantab Pharmaceuticals, with which it has worked for several years on vaccine candidates developed using Cantabs patented DISC-virus technology. Pfizer also has an exclusive option to a global licence covering Peptide Therapeutics veterinary allergy vaccine, being developed initially for the prevention of flea allergy dermatitis (FAD) in dogs, and struck an agreement with Galenica Pharmaceuticals (US) in 2001 covering the use of Galenicas proprietary immune enhancer, GPI-0100, in the development of preventative and therapeutic vaccines for use in both companion animals and livestock. Elsewhere in the biologicals sector, Pfizer has invested heavily in the development of food safety vaccines, and underlined its continued commitment to this area recently. The company has invested more than $5 million in equity and up-front payments in a deal with Avant ImmunoTherapeutics under which it was granted exclusive rights to animal health and food safety applications of Avants patented gene modification technology. Pfizer has also acquired exclusive rights to an equine WNV vaccine developed by Crucell (the Netherlands); has options to naked DNA gene delivery technology in development at Vical (US); and has secured exclusive veterinary rights to immunodrugs being developed by the Swiss company, Cytos Biosciences, for the treatment of a range of chronic disease conditions. Immunological R&D capabilities have been boosted further by the acquisition of CSL Animal Health. The purchase has given it access to some significant product and technology platforms, with CSLs R&D portfolio described by Pfizer as a key driver of the deal.
17.6
Strategy
Although the acquisition of Pharmacia Corp was a deal driven by human pharmaceutical considerations, the fit between the two companies animal health businesses was also a good one, in terms of both established product ranges and development pipelines. As a result, while the merger brought together what were then the worlds second- and ninth-biggest veterinary drug companies, trade regulators demanded the disposal of products with annual sales of only $5 million in order to satisfy competition legislation. While initial integration of the two businesses is now complete, Pfizer continues to restructure its manufacturing capabilities. This has seen it
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Chapter 17: Pfizer
announce the closure of two small plants in the UK and Canada, with activities at both locations being transferred to a site in China. Pharmaceutical production is also being terminated at the companys Lincoln, Nebraska plant, which will become a major focus of veterinary vaccine manufacturing following a $50 million investment programme. Developments at the Lincoln facility are part of a broader initiative designed to expand Pfizers already high-profile position in the vaccines market. This has seen it acquire the Australian vaccine specialist, CSL, and Bayers European cattle biologicals business in the past two years. As a result of the CSL purchase and in-house programmes, the company has several major new vaccines in late-stage development, most of which will eventually be produced at the Lincoln site. Pfizer has also turned its attention to more established products in recent years, devoting increased promotional resources to key brands in both the livestock and companion animal sectors. The results have been impressive, with double-digit sales gains reported for a number of established products in each of the past three years. More recently, restructuring of marketing functions has seen a clearer distinction made between responsibility for new and established products. This has enabled marketing teams to focus on products being readied for market, maximising returns generated in the initial period following commercialisation. While revenues from new products will continue to grow, some of Pfizers more established brands will be harder to handle in coming years, largely as a result of growing generic competition. Doramectin has already been affected by the penetration of the livestock endectocides market by generic ivermectin, while generic versions of Pfizers pyrantel-based anthelmintic brands have also reached the market in the past couple of years. Rimadyl is the latest major Pfizer brand to experience generic competition, while certain of the companys US patents on ceftiofur and marbofloxacin are also set to expire in the next two years. The impact of patent expiries and branded competition for older products will almost certainly be outweighed by growth from recent launches through the remainder of the decade. Senior management will be keen to drive up earnings as well as sales, however. Pfizer had already begun to pursue measures designed to drive down costs and improve levels of efficiency before the Pharmacia acquisition, and divisional margins have improved considerably since the beginning of the decade. They have continue to rise in the wake of the Pharmacia integration, and now stand at around 19%. Driving that figure up further, and maintaining margins at levels in excess of 20% will be high on the agenda in the next five years.
17.7
Prospects
Exchange rates, the residual impact of the Pharmacia acquisition and the first-time inclusion of revenues from CSL all contributed to the 22% gain posted by Pfizer Animal Health in 2004. Underlying growth of the business appears to have increased since then, however, and while acquisitions will have a negligible impact on sales in 2005, the company appears set to deliver another high double-digit gain. Results in each of the first two quarters were affected favourably by exchange rates, but the extent to which international revenues are being
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Chapter 17: Pfizer
inflated on conversion to dollars is believed to have declined. And while revenues from the CSL business were included for the first time in the first quarter, gains reported by the company were actually higher in the second quarter, when an increase of 19% cemented a first-half hike of 18%, driving sales up to $1,073 million in the first six months of the year. Draxxin and Excede were both noted as strong contributors to growth, but significant increases were also reported for the vaccines range, and for established companion animal brands such as Rimadyl, Revolution and Clavamox. Second-half launches for Draxxin in the US, and for Excede in Europe (where it will be sold as Naxcel) should ensure a strong finish to the year, and growth in the final six months may well outstrip first-half gains. Pfizer is forecast to better its 2004 performance by a little over 20% in the second half of the year. Coming on top of gains booked for the first half, this will see the company report a full-year increase of 19%, taking 2005 sales to $2,325 million. The disposal of Pharmacias MFA products, which would knock around $200 million off Pfizers animal health sales, remains a distinct possibility at some point in the next five years. Pfizer divested its own interests in that sector of the market in 1999, and is unlikely to retain Pharmacias brands for long. Patent expiries also threaten to limit revenues from some established Pfizer brands during the second half of the decade, but the impact of generic competition will be outweighed by revenues from new products brought to market in both the pharmaceutical and biological sectors. The company appears set to post underlying growth at levels towards the high end of the animal health industry range throughout the period to 2010.
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Chapter 18: Phibro Animal Health
CHAPTER 18 PHIBRO ANIMAL HEALTH

Phibro Animal Health 65 Challenger Road Third Floor Ridgefield Park NJ 07660 USA Tel: +1 201 329 7300 Fax: +1 201 329 7070 www.pahc.com www.phibroah.com Key personnel Keith Collins Marvin S Sussman Yehuda Markovitze Animal health business 2004 sales 2004 ranking Main product areas Main business areas
1
President, Phibro Animal Health Division President, Prince Agri General manager, Koffolk
$265 million 18th
Medicated and nutritional feed additives Americas, Asia/Pacific
Year to 30 June 2004
Key events December 2004 December 2004 January 2005 Raises $23 million to restructure debts. Agrees the sale of its Belgian virginiamycin manufacturing plant to GlaxoSmithKline. Appoints Keith Collins as president of the Phibro Animal Health division.
18.1
Company background
Phibro Animal Health Corp (PAHC) is a privately held US business focused on the manufacture and marketing of agricultural and industrial chemicals. The company previously traded as Philipp Brothers Chemicals, but changed its corporate name in 2003 to reflect the dominant contribution now made by animal health and nutrition products to its business. Its existing interests in that sector were expanded significantly in 2000 by the acquisition of Pfizers MFAs business. Since the Pfizer deal, PAHC has closed or divested several businesses in the industrial chemicals field, and animal health and nutrition products are now responsible for almost three-quarters of the companys corporate net sales. Activities in the sector are also its dominant source of income.
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A new subsidiary, Phibro Animal Health, was established to run the former Pfizer business following its acquisition. The companys existing interests in the animal health (Koffolk) and nutrition (Prince Agri) sector continue to trade as separate divisions, but are grouped with Phibro Animal Health for reporting purposes. PAHC posted a corporate operating income of $19 million in the year to 30 June 2004, on sales of $358 million. Revenues were almost 5% higher than year-earlier figures, but pre-tax earnings fell by 25%. The company reported a net income of $12.9 million, reversing recent heavy losses resulting from closures and the sale of loss-making businesses in the industrial chemicals sector. Industrial chemical sales will decline further in fiscal 2005 as a result of recent disposals.
Table 18.1: PAHCs sales by operating segment, fiscal 2004 1
Segment Sales ($ million) 265 42 31 20 358 % of total 74.0 11.7 8.7 5.6 100.0
Animal health and nutrition Industrial chemicals Distribution All other Total
Note: 1 Year to 30 June 2004. Source: PAHC.
The net income of $12.9 million posted by PAHC in fiscal 2004 marked a welcome return to profitability, following net losses totalling almost $70 million in the previous two years, which depleted PAHCs cash reserves. In October 2003 the company raised $105 million in a refinancing initiative, the proceeds of which were used to reschedule existing debt, repay its senior credit facility and make payments due to Pfizer in connection with the MFAs acquisition. Further debt restructuring initiatives have been pursued since then through a private placement completed in December 2004. Early in 2005 the company announced the creation of a holding company for its capital stock, formed by major shareholders. The holding company pursued a further private share offering, the proceeds of which were used to fund a stock redemption initiative that was completed in March 2005. PAHC remains short of cash to fund its operations, and has continued pursue cost-cutting initiatives and the sale of non-strategic assets in a bid boost levels of liquidity. As part of that strategy the company agreed December 2004 to sell its Belgian virginiamycin manufacturing facility GlaxoSmithKline, and will eventually transfer production of the product Brazil. to to in to to
18.2
Animal health and nutrition sales and operating profit

Phibros interests in the animal health and nutrition sector were combined for reporting purposes following the acquisition of Pfizers feed additives business in November 2000. Underlying growth in the segment has been limited since the beginning of the decade, but revenues increased by 46% in
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fiscal 2001 and a further 21% in fiscal 2002 following the inclusion of exPfizer products in results. Gains of 5% and 6% in the two following years took sales to just over $265 million in fiscal 2004 almost double the figure being reported prior to the Pfizer MFA acquisition.
Table 18.2: PAHCs animal health and nutrition sales, fiscal 2000-2004 1
Year Sales ($ million) 2 135.1 197.8 239.6 250.7 265.4 % change +1.7 +46.4 +21.1 +4.6 +5.9
2000 2001 2002 2003 2004
Notes: 1 Years to 30 June; 2 figures reported in fiscal 2001 and 2002 subsequently restated. Source: PAHC.
Operating income generated by businesses in the animal health and nutrition segment has also risen substantially as a result of the acquisition. Pre-tax earnings from existing interests totalled less than $18 million in fiscal 2001, but rose to $28 million in fiscal 2002 and exceeded $38 million in fiscal 2003. Operating margins in that year reached a healthy 15.4%, but fell back to 12.5% in fiscal 2004, when earnings totalled $33.3 million. 18.2.1 Fiscal 2003 performance Having been boosted in both of the two previous years by the impact of the Pfizer MFAs acquisition, animal health and nutrition sales rose by a more modest 4.6% in the year to 30 June 2003, reaching just under $251 million. Gains were attributed by the company to volume increases. Revenues generated by MFA products rose by $6.7 million, with gains in the antibacterial, antibiotic and anticoccidial segments offset in part by lower sales of other products, including anthelmintics. The impact of higher volume sales was offset partly by lower average selling prices, including the impact of currency devaluations in Latin America. Nutritional feed additive sales rose by $4.4 million, driven primarily by higher volume sales of inorganic minerals, trace mineral premixes and other nutritional ingredients. Operating income in the animal health and nutrition segment rose by 36% to $38.5 million, pushing operating margins for the business up past 15%. The improvement in pre-tax earnings was attributed to increased volume sales of higher margin products and reductions in operating expenses. 18.2.2 Fiscal 2004 performance PAHC reported an animal health and nutrition sales total of just over $265 million in the year to 30 June 2004 up by almost 6% on year-earlier figures. The two segments of the business experienced contrasting fortunes, with lower sales of MFA products offset by a sharp rise in revenues generated by nutritional feed additives. Sales of most MFAs were broadly similar to fiscal 2003 levels, but revenues from the companys anticoccidials fell by more than $7 million, primarily as a T&F Informa UK Ltd, 2005
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result of negotiations with a major customer that were not completed until the fourth quarter of the year. Lower average selling prices also affected MFA revenues, but the impact of falling prices was offset in part by the weakness of the dollar, which inflated international sales as reported. By contrast, sales of nutritional feed additives increased by around 20% on year-earlier figures. Gains in this segment of the business were attributed largely to higher volume sales of inorganic minerals, trace mineral pre-mixes and other feed ingredients. Operating income generated by businesses in the animal health and nutrition segment fell by 13% to $33.3 million. Lower average selling prices and changes in the segments product mix both had a negative impact on earnings, while currency factors pushed up manufacturing costs at the companys plant in Rixensart, Belgium, and also inflated expenses generated by international sales and administration activities. 18.2.3 Interim fiscal 2005 performance The strong final quarter enjoyed by PAHC in fiscal 2004 was followed by a similarly positive start to the 2005 fiscal year, with sales rising by almost 11% in the first quarter. Gains since then have been more modest, however, and animal health and nutrition revenues were just over 6% higher at $205.5 million after nine months.
Table 18.3: PAHCs animal health and nutrition sales, 2004 and 2005
Period 2004 ($ million) 59.8 68.7 64.9 193.4 2005 ($ million) 65.8 70.7 69.0 205.5 % change +10.9 +2.9 +6.3 +6.3
First quarter Second quarter Third quarter Nine months
Note: 9 months to 31 March. Source: PAHC.
Pricing pressures continued to affect revenues generated by the companys MFA lines, with lower average selling prices reported in each of the three quarters to 31 March 2005. Exchange rate factors inflated international revenues as reported, however, while volumes also rose, led by solid demand for the companys antibiotic lines. Revenues generated by the nutritional feed additives business continued to rise, with higher volumes driving growth in the first half of the year and higher average selling prices leading gains reported in the third quarter. Underlying earnings generated by businesses in the animal health and nutrition segment were up on year-earlier figures at the nine-month stage, but operating income as reported fell back sharply as a result of costs associated with the companys agreement to sell its Belgian manufacturing facility. The deal attracted one-time charges of $9.5 million in the second quarter (resulting in a segment operating loss of $1.5 million for the threemonths to 31 December 2004), and a further $1.5 million in the third quarter.
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18.3

The geographical scope of PAHCs three animal health and nutrition units varies markedly, from the US-focused business of Prince Agri Products, through Koffolk, to Phibro Animal Health, which is the most international of the three divisions. PAH runs substantial manufacturing operations in Brazil, and operates pre-mix manufacturing plants at several other locations. Its 15 regional offices span six continents, and its five most important markets are located variously in North America, South America and Asia. Both the US and Mexico feature among Phibros five most important markets, and North America is by far the biggest regional contributor to the companys global sales total. It also holds strong positions in Brazil and Australia, however, and at regional level its Asia/Pacific business is a significant source of revenues. The divisions European business is more limited, largely as a result of the EUs restrictive approach to the use of antibiotics as livestock growth promoters. Approvals for Phibros virginiamycin product were withdrawn in the EU during 1999, knocking almost $30 million off sales of a business that was still run by Pfizer at the time. Carbadox has also been banned in the EU, where all remaining antibiotic growth promoters will be phased out by the end of 2005. Sales of some other anti-infectives in the Phibro range are also lower in Europe than on the other side of the Atlantic, since approvals are for disease treatment and control only, and do not cover performance enhancing indications. Despite the restrictive approach pursued by regulators in the EU, Phibro has taken steps to strengthen its presence in Europe since it acquired the former Pfizer business. Alliances have been established with distributors in a number of European markets, and new indications for some key products are being pursued in the region. Production costs at its virginiamycin manufacturing plant, located at Rixensart in Belgium, have risen sharply in the past three years, however, and in December 2004 the company agreed to sell the facility to GlaxoSmithKline. Production of virginiamycin will eventually be transferred to its manufacturing site in Brazil.
18.4
Product portfolio
Phibros portfolio includes major interests in both the medicated and nutritional feed additive markets. MFAs became the companys biggest source of revenues in the sector following the acquisition of Pfizers MFA business in 2000. Nutritional feed additives have spearheaded recent sales growth, however, and revenues generated by the two segments were virtually identical in fiscal 2004. Phibro Animal Health Inc (PAHI) manufactures and markets a broad range of MFAs, while Koffolks revenues are generated primarily by anticoccidials. The Prince Agri Products business is PAHCs main source of nutritional feed additive sales.
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Table 18.4: PAHCs animal health and nutrition sales by product category, 2004
Category Sales ($ million) 79 44 9 133 265 % of total 29.8 16.6 3.4 50.2 100.0
Antibiotics and antibacterials Anticoccidials Other MFAs Nutritional feed additives Total
Source: PAHC (percentage figures based on values rounded to the nearest $1 million).
Nutritional feed additive sales rose by almost 20% in fiscal 2004, offsetting lower sales of MFAs. Revenues generated by antibiotics and antibacterials fell back marginally during the year, but sales of anticoccidial products declined sharply, from $53 million to $44 million. Sales of other MFAs (primarily anthelmintics) rose from $7 million to $9 million. 18.4.1 Phibro Animal Health PAHI was established to manage the manufacture, distribution and sale of the MFAs business acquired by its parent from Pfizer in 2000. It also markets a number of products manufactured by sister company Koffolk, including the anticoccidials, Nicarb (nicarbazin) and Amprol (amprolium), in certain countries. The PAHI business comprises livestock performance enhancers, antiparasitics and poultry anticoccidials. It employs around 400 staff and operates four main production sites. Bulk active ingredients are manufactured at Guarhulos (salinomycin and semduramicin) and Braganca Paulista (nicarbazin) in Brazil; at Rixensart (virginiamycin and semduramicin) in Belgium; and at Ramat Hovav (nicarbazin and amprolium) in Israel. Active ingredients are processed at these facilities, and at contract pre-mix facilities around the world. Virginiamycin, carbadox, oxytetracycline, morantel and pyrantel are the five most significant active ingredients in the range acquired from Pfizer. Virginiamycin and carbadox are both banned in EU and some other countries, but both generate significant revenues in the US and certain international markets. Oxytetracycline, morantel and pyrantel are distributed more widely. Sold most widely as Stafac, virginiamycin possesses performance-enhancing and disease prevention indications in poultry, pigs and cattle. The product generated global revenues of more than $80 million in the late 1990s, but more than a quarter of that total was realised in EU markets where approvals for the product were withdrawn in 1999. Global sales of Stafac are now thought to total around $50 million. Production costs at Phibros Rixensart site have increased significantly in recent years, and the company announced in December 2004 that it had agreed to sell the facility to GlaxoSmithKline. The deal is not scheduled for completion until November 2005, and could be closed in 2006. In the meantime, Phibro has begun stockpiling virginiamycin in a bid to ensure its T&F Informa UK Ltd, 2005
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continued availability when production is eventually transferred to its Brazilian manufacturing centre. Virginiamycin was the subject of a risk assessment study undertaken recently by US regulators to gauge whether its use leads to the development of antibiotic-resistant bacteria that could compromise the efficacy of products from the streptogramin class used in human medicine. The study noted that some strains of the Enterococcus faecium bacteria found in food products derived from animals display resistance to the class, and that resistance appears to be related to virginiamycin use. Researchers were unable to assess levels of resistance transfer from E. faecium in food to E. faecium in humans, however, and while the study noted that transfer of resistance was biologically plausible, it said available information was insufficient to reach a conclusion. Approvals for carbadox (sold as Mecadox) are limited to the pig production sector. Like virginiamycin, carbadox has been banned in the EU, and regulators in several other countries are looking closely at user safety issues where carbadox is concerned. Long-term prospects for the product received a further blow in 2003 when the FAO/WHO Joint Expert Committee on Food Additives (JECFA) voted to withdraw established maximum residue limits for the product. Oxytetracycline is the active ingredient in Phibros Terramycin range of livestock performance enhancers and disease control products. Products in the range are approved for use in most major food animal species, including poultry, pigs, sheep and cattle, while oxytetracycline is also registered for use in a number of minor species including bees and fish. The PAHI range is completed by a line of parasiticides, including the livestock anthelmintics, Rumatel (morantel) and Banminth (pyrantel), and the poultry anticoccidials, Coxistac/Posistac (salinomycin) and Aviax (semduramicin). Semduramycin is the most recent addition to the portfolio, having been commercialised by Pfizer in the second half of the 1990s. 18.4.2 Koffolk Phibros Koffolk subsidiary is an Israeli-based company focused on the manufacture and distribution of pre-mix products and vitamins. It also produces fine chemicals and other intermediates used in the manufacture of pharmaceuticals and cosmetics. Koffolks plant at Ramat Hovav in Israel manufactures the poultry anticoccidials, amprolium and nicarbazin (the latter is also produced in Brazil by Koffolks subsidiary, Planalquimica Industrial). The company claims to be the worlds only manufacturer of amprolium and the largest volume producer of nicarbazin. Phibro Animal Health distributes nicarbazin (as Nicarb) and amprolium (Amprol) in the US, but both active ingredients are also sold to other animal health companies. Koffolk acquired US marketing rights to nicarbazin from Merial in 1996, and purchased European rights to the product in 1999. In fiscal 2004 it acquired rights to sell amprolium in most international markets, relinquishing claims against the seller for outstanding purchase order commitments as part of the deal.
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While the Koffolk business is led by anticoccidials, the company also manufactures and distributes a range of vitamins, pre-mixes and concentrates for use in livestock and poultry. These include vitamins A, D3 and a stabilised vitamin K3 derivative; vitamin pre-mixes for use in poultry, ruminants and pigs; water-soluble vitamin preparations and specialist feed ingredients such as antioxidants. 18.4.3 Prince Agri Products While Koffolk generates sales on an international scale, the Prince Agri Products business, which manufactures and markets a broad range of minerals and other specialist feed ingredients for use in livestock and poultry feed and by the pet food industry, is focused predominantly on the US market. Trace minerals and mineral/selenium pre-mixes are produced at Princes blending facilities in Marion, Iowa, Bremen, Indiana and Bowmanstown, Pennsylvania. It holds a strong position in the supply of trace minerals such as iron, manganese, copper, zinc, iodine, cobalt, selenium and molybdenum to US feed companies, blenders, integrated poultry producers and pet food manufacturers. In addition to its proprietary mineral products range, Prince also markets a number of other feed ingredients. These include buffers, yeast and palatants, as well as vitamin K and amino acids such as lysine, threonine and tryptophan. Prince has been the strongest contributor to recent growth of the PAHC animal health and nutrition business, posting a 20% increase in sales during fiscal 2004. That gain took the divisions revenues to $133 million, and with additional increases reported in each of the first three quarters of fiscal 2005, full-year sales are on course to exceed $140 million.
18.5
R&D
PAHCs spending on R&D has doubled since the company acquired the former Pfizer MFAs business. Its R&D budget remains extremely low, however, with spending at corporate level equivalent to less than 2% of group net sales. MFAs research is currently undertaken at PAHIs Rixensart facility in Belgium (though the sale of this site to GlaxoSmithKline has been agreed), and by Koffolk at its centre in Ramat Hovav, Israel. Most work is focused on fermentation development through microbiological strain improvement and process scale-up. Projects aimed at the development and registration of new indications and formulations of existing products are also being pursued. PAHI has an active programme designed to identify and licence new products and technologies that may eventually result in additions to its existing portfolio. Defensive research designed to support the continued use of antibiotic and antibacterial products in livestock agriculture is also being pursued. PAHI is continuing research begun by Pfizer that aims to develop a better understanding of microbial resistance mechanisms and corresponding risks.
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Koffolk runs an experimental poultry farm in the south of Israel where trials on a range of feed additive products are conducted. Potential replacements for antibiotic-based performance enhancers are among the products that have been trialled at the facility recently.
18.6
Strategy
PAHC has been forced to juggle its finances constantly since the beginning of this decade, having run up substantial debts and incurred sizeable losses as a result of the poor performance of businesses in its industrial chemicals portfolio. Loss-making subsidiaries in that field have been closed down in Norway and France, while several other businesses have been divested. Charges associated with those closures and disposals saw the company post net losses totalling $70 million in a two-year period, prompting a series of refinancing initiatives designed to restructure its debts. The group raised over $100 million in October 2003, and issued additional offerings in 2004 and early in 2005. It continues to carry significant amounts of debt, however, and is subject to restrictive limits on spending as a result. The sale of Phibro Animal Healths Rixensart manufacturing facility has seen additional one-time costs included on the companys balance sheet for fiscal 2005, but is part of a longer-term cost-containment strategy that should eventually enable it to manufacture its virginiamycin MFA more cheaply in Brazil. Other recent disposals in the industrial chemicals field will see animal health and nutrition products account for around 80% of the companys global revenues, and profits generated in the animal health and nutrition sector should enable it to reduce current levels of indebtedness over the medium term. Income generated by the animal health and nutrition portfolio will be affected in the near-term by costs associated with the sale of the Rixensart facility, but underlying earnings from interests in the AH&N sector are returning double-digit margins. Maintaining current levels of profitability against a background of declining prices will be among the major challenges faced by senior management of the companys MFA divisions through the remainder of this decade. Phibros MFA revenues could also be at risk in the long term as a result of the current debate surrounding the use of antibiotics in animal production. The recent, inconclusive review of virginiamycin by regulators in the US was good news in this respect, but pressure on the MFAs industry is continuing to build. PAHC may pursue a move into the non-antibiotic livestock performance enhancers market in a bid to reduce its exposure to the antibiotic resistance debate, but funds available to support such an initiative are currently limited.
18.7
Prospects
Revenues generated by Phibros MFA products fell back in fiscal 2004, but a strong performance by the Prince Agri nutritional feed additives business enabled it to post a 6% increase in sales across its animal health and nutrition portfolio. Sales in both the medicated and nutritional feed additive segments were up on year-earlier figures at the nine-month stage in fiscal 2005, but gains posted by Prince Agri continued to outstrip those reported for Koffolk and PAHI. As a result, revenues generated by nutritional inputs
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are expected to exceed MFA sales for the first time since the Pfizer acquisition in November 2000. Gains across the animal health and nutrition sector as a whole totalled 6.3% at the nine-month stage. That figure owed much to a double-digit increase reported in the first quarter, however, and the business will struggle to match its performance in the final quarter of fiscal 2004, during which sales rose by around 20%. Assuming a somewhat weaker final quarter this time around, PAHC is forecast to report a fiscal 2005 animal health and nutrition sales total of approximately $273 million up by 3% on year-earlier figures. Operating income generated in the sector will be down sharply on fiscal 2004 figures as a result of one-time charges relating to the sale of the Rixensart manufacturing facility. Underlying earnings were slightly ahead of year-earlier figures at the nine-month stage, however, and the segment continues to generate double-digit operating margins. Excluding one-off items, pre-tax earnings from PAHCs three animal health and nutrition businesses are forecast at just over $31 million in fiscal 2005, equating to an operating margin of 11.5%. Beyond fiscal 2005, pricing pressures in the MFAs market and a return to more stable currency values are both expected to limit gains in that sector of the business. Prince Agri will also find it difficult to maintain sales increases at recent levels, and total animal health and nutrition revenues are expected to slow, with growth averaging 3% or less through the remainder of the decade. Lower prices will also affect the margins of the MFA business, but cost-containment efforts being pursued by the company are expected to see it maintain double-digit returns on its interests in the animal health and nutrition sector.
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Chapter 19: Schering-Plough
CHAPTER 19 SCHERING-PLOUGH
Schering-Plough One Giralda Farms Madison New Jersey 07940-1010 USA Tel: +1 201 822 7000 www.schering-plough.com www.spah.com Key personnel Raul E Kohan Animal health business 2004 sales 2003 ranking Main product areas Main business areas Key events May 2005 June 2005 Announces a series of senior management changes as part of a shake-up of the division. Acquires Takedas 40% stake in a Japanese joint venture, establishing a wholly owned SPAH subsidiary there. $770 million 9th Antiparasitics, anti-infectives, vaccines North America, Europe, Latin America President, Schering-Plough Animal Health (SPAH)
19.1 Company background Schering-Plough is a US pharmaceutical major with subsidiary interests in the consumer healthcare and animal health fields. Corporate sales and earnings have been affected since 2001 by a series of problems, including the expiry of patents on two leading pharmaceutical brands, GMP compliance problems at major production plants, and regulatory investigations into sales and marketing practices in the US. The company has made substantial payments to the US FDA in respect of GMP compliance issues. In addition, while the two sites under investigation have remained open, production is subject to third-party review and certification procedures that have increased costs and reduced output, limiting the availability of some key brands sold by both the companys human pharmaceutical and animal health businesses. Schering has also been forced to increase its litigation reserves as a result of the investigation into sales and marketing practices, while revenues have been affected by patent expiries.
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In 2003, the company announced the appointment of Fred Hassan, previously head of Pharmacia Corp, as its new CEO. Several other changes in senior management have since been announced, and plans to stabilise the business have been put in place. These include staff cuts and the implementation of strict cost-containment policies. Restructuring programmes have added to costs in the short-term, but are expected to improve future levels of profitability. Litigation, employee termination and asset impairment charges booked by Schering in 2003 totalled almost $600 million. That figure declined to $153 million in 2004, but the company booked tax expenses of more than $400 million related to the intended repatriation of unremitted foreign earnings as required by the American Jobs Creation Act of 2004. As a result, net loss rose from $92 million in 2003 to $947 million. Corporate net sales were down on year-earlier figures by just under 1%, at $8,272 million.
Table 19.1: Schering-Ploughs sales by business sector, 2004
Sector Sales ($ million) 6,417 1,085 770 8,272 % of total 77.6 13.1 9.3 100.0
Prescription pharmaceuticals Consumer healthcare Animal health Total

Source: Schering-Plough.
Revenues generated by Scherings prescription pharmaceutical business have fallen by more than $2 billion over the past two years, but this is still the companys core business, accounting for 78% of corporate net sales in 2004. Consumer healthcare products generated 13% of revenues during the year, with the animal health business responsible for just over 9%.
19.2

Schering-Plough has been a top-10 player in the animal health and nutrition products industry since 1997, when it acquired Mallinckrodts interests in the sector. SPAH posted sales of less than $200 million in the year prior to the Mallinckrodt acquisition, but the deal saw that figure rise to well over $600 million, and divisional revenues had reached $720 million by 2000. Sales growth since the beginning of this decade has been limited, however, with manufacturing and product availability issues affecting US sales and revenues in some other countries depressed as a result of difficult market conditions. Global sales as reported fell back in both 2001 and 2002, while the 3% gain posted in 2003 was largely the result of exchange rate factors, which inflated international sales as reported. The 10.5% increase posted in 2004 represented the first real growth for the business since 2000.
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Chapter 19: Schering-Plough Table 19.2: SPAHs sales, 2000-2004

Year Sales ($ million) 720 694 677 697 770 % change +7.1 -3.6 -2.5 +3.0 +10.5
2000 2001 2002 2003 2004
Divisional earnings also remain well below levels being reported at the beginning of the decade. As recently as 2001, SPAH reported a pre-tax profit of $141 million. Generated on sales of $694 million, that equated to an operating margin of just over 20%. Earnings fell sharply in 2002, however, and declined further in 2003, by which time divisional margins had fallen to little more than 12%. Operating profit rose modestly in 2004, but with sales increasing by over 10%, pre-tax margins fell further, to 11.4%.
Table 19.3: SPAHs earnings and divisional margins, 2001-2004
Year Sales ($ million) Pre-tax profit ($ million) Operating margin (%)
2001 2002 2003 2004
694 677 697 770
141 93 86 88
20.3 13.7 12.3 11.4
19.2.1
2003 performance Sales expressed in local currencies fell back for the third consecutive year in 2003, but currency factors boosted revenues as reported by around 7%, enabling SPAH to post a 3% gain that took divisional sales to $697 million. Manufacturing and supply issues continue to affect the performance of the business, however, and US sales fell back by 4% in a year when most of the companys competitors enjoyed a stronger performance in the worlds biggest animal health products market. Earnings also continued to fall, with pre-tax profit down by 7.5% to $86 million and divisional margins slipping below 13%. Nuflor (florfenicol) continued to head the companys livestock business, and a stronger performance by the brand in the second half of the year was a major factor behind the improvement in divisional sales which had been down on 2002 levels by more than 2% at the end of June during the final six months. Second-half sales were also boosted by the acquisition of Pfizers US mastitis treatment range, while additional launches of the swine mycoplasma vaccine, M+PAC, had a positive impact on livestock revenues. In the companion animal sector, SPAH reported significant growth in sales of the microchip pet identification system, HomeAgain. The companion animal
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NSAID, Zubrin (tepoxalin), was also a source of growth following launches in new markets. 19.2.2 2004 performance New product roll-outs, improved economic conditions in a number of international markets and the continued positive impact of exchange rates on results all contributed to a stronger performance by SPAH in 2004. Firstquarter sales were up on year-earlier figures by almost 20%, and while subsequent gains were more modest, full-year revenues still rose by over 10%, reaching $770 million. The company reported solid growth across its range of core brands, highlighting the performance of the cattle NSAID, Banamine (flunixin meglumine), which recorded particularly strong gains. The increase in sales at global level masked continued problems in the US, where sales continued to decline. A fall of 11% in domestic sales was comfortably offset by a 20% rise in international revenues, however. While the recent slide in divisional earnings was halted, pre-tax profit rose by only $2 million, to $88 million, and operating margins continued to decline. Charges relating to a patent infringement case that was resolved in June 2004 are believed to have been a major factor behind the limited increase in earnings. A US court ruled in 2000 that SPAHs porcine reproductive and respiratory disease vaccine, Prime Pac PRRS, infringed a patent owned by BIV. Schering appealed the ruling, which was affirmed by the appellate court in 2003, and damages were determined by the 2004 decision, in which a District Court jury ordered the company to pay Boehringer $6.9 million plus interest charges. 19.2.3 Interim 2005 performance Results posted by SPAH in the first half of 2005 point to a year of strong growth, with signs that some of the problems that have plagued the business in recent years may finally be behind it. Sales in the first quarter of 2004 had been up on year-earlier figures by around 20%, but that figure was bettered to the tune of more than $20 million in the first quarter of 2005, with sales reaching $193 million (+13.5%). A 22% gain in the second quarter drove first-half sales up to $420 million up on 2004 figures by 18%.
Table 19.4: Schering-Ploughs animal health sales, first half 2004-2005
% change
2005 193 227 420 +13.5 +22.0 +18.0
170 186 356
Exchange rates have continued to inflate sales as reported, accounting for around 4% of gains booked in each of the first two quarters. But significant volume growth is now being reported by the division and, crucially, the US business finally appears to be growing again after a period of protracted T&F Informa UK Ltd, 2005
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decline caused by manufacturing and product supply problems. The extent of gains reported in the second quarter was attributable in no small measure to higher sales of products for use in the US cattle sector, and total domestic sales were up on year-earlier figures by almost 30% at the half-year stage.
19.3

SPAH was a largely US-focused business prior to its acquisition of Mallinckrodt Veterinary in 1997. The integration of Mallinckrodt transformed it into a truly global organisation, with around 60% of global revenues generated outside the US. That figure has risen significantly during the past five years as a result of both exchange rate trends and problems encountered by SPAH in the US market. With US sales declining by a further 11% in 2004, and with international revenues surging by 20%, markets outside the US accounted for a record 75% of the divisional sales total.
Table 19.5: SPAHs US/international sales split, 2003-2004
Region 2003 Sales ($ million) US International Total
2004 % of total 31.3 68.7 100.0 Sales ($ million) 194 575 770 % of total 25.2 74.8 100.0
218 479 697
19.3.1
US SPAHs domestic business has borne the brunt of the problems caused by GMP compliance issues, and the divisions US sales have fallen sharply since the beginning of the decade. In 2001, the company posted domestic revenues of $250 million, but by 2004 that figure had fallen to just $194 million down by a total of more than 22%. Domestic sales in the second quarter of 2004 totalled just $36 million, accounting for less than 20% of total revenues in the three-month period. Schering is traditionally a strong competitor in the US livestock market, but with leading brands such as the Nuflor (florfenicol) antibiotic and the NSAID, Banamine (flunixin meglumine), among those affected by manufacturing issues it has lost significant ground in its home market since 2001. Banamine already faces generic competition, and first requests for approval to market generic versions of Nuflor were submitted to US regulators in 2004. Sales of both brands have begun to pick up, however, and look set to play a part in the recovery of the US business over the next couple of years. Banamine in particular has been a strong contributor to US revenues in the past 12 months, partly as a result of broader indications registered in the final quarter of 2004, when the product was approved for use in lactating dairy cattle. Signs that the US business was finally beginning to turn the corner were evident in the second half of 2004. This was confirmed in the first half of 2005, when US sales rose by 28% on year-earlier figures. The April-June total of $54 million was 50% higher than the corresponding figure of $36 million reported in the second quarter of 2004.
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SPAHs antibiotics line in the US was strengthened in 2003 when the company purchased a line of bovine mastitis treatments from Pfizer, which added around $5 million to the divisions domestic sales. It is also involved in the livestock growth implant market, where it markets the zeranol-based anabolic growth promoter, Ralgro, and handles a substantial range of vaccines in the US. Biological lines have been strengthened recently by a number of introductions, which have included a new calf scours vaccine, Guardian, and Centurian, a toxoid indicated as an aid in the reduction of liver abscesses in fed cattle. 19.3.2 International markets While domestic sales have been in decline since the beginning of the decade, Scherings international animal health sales have risen appreciably, driven up by a combination of exchange rate factors, higher volume sales of some key brands and the impact of new product launches. Sales as reported in international markets rose by 20% in 2004, reaching $575 million (around three-quarters of the global total). And while the weakness of the dollar continued to inflate international sales as reported, underlying growth was well into double digits. Europe and South America are the main contributors to SPAHs international sales. Management of both of these regions is in new hands following recent organisational changes announced by the division, with Ralph Cabezas appointed vice president of Latin American operations and Mauricio Vicente directing business in Europe, Canada, Australasia, Africa and the Middle East. With the dollar value of sales generated in Europe continuing to rise as a result of exchange rate factors, markets in the region now contribute an estimated $250 million-plus to Scherings global revenues. France is the main contributor to the companys European revenue total, but it is also a significant player in markets such as Germany, Spain and the UK. The division also operates a number of research and manufacturing facilities in Europe, including significant sites in both France and the UK. Its portfolio in the region has been strengthened considerably in recent years, with products previously distributed by third parties in France now handled directly, and major new products such as Orbax (orbifloxacin), Zubrin (tepoxalin) and the swine pneumonia vaccine, M+Pac, rolled out in Europe. In Latin America, sales and profits are improving as a result of growing livestock production and recovering economic conditions in key markets such as Brazil and Argentina. The company posted 2004 sales of $75 million in Brazil, where it claims third position in national industry rankings, and is on course to report high double-digit growth in 2005. The Brazilian subsidiary scaled down its local manufacturing operations at the beginning of this decade, handing responsibility for the production of FMD vaccines and certain antiparasitics to Bayer. Its position in the Brazilian market was strengthened in 2002, however, by the acquisition of the local company, Indstria Qumica Farmacutica, in which Schering-Plough previously held a 30% share. The company recently combined its headquarters and manufacturing activity in Brazil at Cotia (So Paulo), where it has invested over $1 million in upgrading and expanding facilities. It has also announced that the Coopers T&F Informa UK Ltd, 2005
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name, used by Mallinckrodt in Brazil and retained by Schering in a bid to maintain widespread brand recognition, will be dropped in 2005 as part of a move to make better use of global marketing synergies. Like most of its competitors, Scherings business in Asia has been affected over the past 18 months by the impact of avian influenza outbreaks on markets in several countries there. The region continues to present major long-term growth opportunities, however, and is expected to be a key target for investment. SPAH has already spent heavily on building up its position in Japan, which is the regions most developed market. It purchased Fujisawas animal health business in 2001, having taken a majority 60% stake in a joint venture with Takeda established in the previous year. Schering announced in June 2005 that it had agreed to buy out Takedas share of the joint venture, which will become a wholly owned subsidiary of SPAH as a result. Schering will take over all operations transferred from its erstwhile partner, including sales channels, and the company has announced plans to increase levels of investment in Japan. Product launch activity there is likely to be stepped up as a result.
19.4
Product portfolio
SPAH markets one of the animal health industrys most extensive portfolios, which includes major interests in the anti-infective, antiparasitic and vaccine segments as well as a broad range of pharmaceutical specialities and livestock growth implants. Vaccines are believed to account for around 30% of divisional sales (equivalent to more than $200 million), while antiinfectives and antiparasitics both generate over 20% of global revenues. Products for use in food animals are the main focus of the business, accounting for around three-quarters of sales.
19.4.1
Antiparasitics SPAH has established interests in the parasite control market, but has increased its presence in the sector recently through distribution and marketing deals that have seen it take on new products in both the livestock and companion animal fields. The companys established endoparasiticide portfolio is dominated by livestock wormers, including the Hapadex (netobimin) anthelmintic and an extensive range of products based on active ingredients such as levamisole and oxfendazole. The Nilverm and Nilzan ruminant anthelmintic ranges are based on levamisole, and include Nilzan Gold, a levamisole/oxyclozanide combination offering additional activity against fluke. Zanil, a singleingredient flukicide containing oxyclozanide, is also sold in a number of major markets, and was introduced in Spain during 2002. The Synanthic and Systamex ranges are based on the benzimidazole anthelmintic, oxfendazole, and also include an oxyclozanide combination, Systamex Plus Fluke. Longacting bolus products containing oxfendazole are marketed under the Autoworm label, and are a well established part of the range. Generic avermectins were in late-stage development at Mallinckrodt Veterinary when Schering acquired the Mallinckrodt business, and SPAHs Australian subsidiary launched an ivermectin-based cattle pour-on product under the Paramax label in 1999. A pour-on for sheep has since been introduced, and avermectin-based products for use in horses have also been
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commercialised in a number of southern hemisphere markets. Recent developments have seen SPAH combine ivermectin with the flukicide, triclabendazole, in products for cattle (Sovereign Pour-On) and sheep (Paramax F), while a triclabendazole-only flukicide is sold as Triclazole. The company has also marketed Eco Animal Healths ivermectin-based pouron product, CooperMED, since 2002. Another marketing deal saw SPAH enter the companion animal endoparasite control market for the first time in 2003, when it acquired exclusive US distribution and marketing rights to a generic canine heartworm preventative, Tri-Heart Plus (ivermectin and pyrantel), developed by Heska. In the ectoparasiticide market, sheep dips are a significant source of revenues for SPAH. Its range includes products based on diazinon and chlorfenvinphos, while deltamethrin-based pour-on products are also marketed for the control of flies and lice on livestock under the Coopers label. Companion animal ectoparasiticides include the Exspot and Defend small animal flea and tick control range and the equine fly control, Coopers Fly Repellent. All three are based on the permethrin insecticide. In the US, diazinon-based small animal flea and tick collars are marketed under the Escort trade name. Schering also markets an emamectin-based product, presented as a medicated pre-mix, for the treatment and prevention of sea lice infestation in farmed fish. In the poultry sector, SPAHs ionophore anticoccidial product, Clinacox (diclazuril), has been marketed in a number of major poultry producing markets for some time, but is still relatively new to the US market where sales since its approval in 1999 have contributed to increased revenues in the poultry sector. The company held back a US launch until combination approvals were received from regulators there, and the product is now approved for use in combination with BMD (bacitracin) and Stafac (virginiamycin), two of the leading performance enhancers used in the US broiler production sector. 19.4.2 Anti-infectives The livestock respiratory treatment, florfenicol, is SPAHs best-selling animal health product, and generates well over half of the companys anti-infective sales. Global revenues generated by florfenicol, which is sold under the Nuflor brand, are believed to be in excess of $100 million, despite recent availability issues that have stemmed from the companys manufacturing compliance problems. A synthetic analogue of chloramphenicol, florfenicol reached its first markets in 1995, with initial approvals for use as an injectable treatment of bovine respiratory disease. The products broad spectrum of activity and a favourable dosing regime saw it capture significant shares of the BRD market in the second half of the 1990s, while revenues have been boosted more recently by the approval of a one-shot treatment regime, the addition of new claims (including activity against foot rot), and commercialisation of the product in additional species markets. A pre-mix for use in pigs has been commercialised in Latin America, while an injectable swine formulation has been rolled out in Europe and major Asian markets. An aquaculture pre-mix also features in Scherings Japanese range, and a liquid formulation for use in poultry is in late-stage development. T&F Informa UK Ltd, 2005
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Nuflor already faces generic competition in southern hemisphere markets, and will be targeted by generic manufacturers in North America and Europe during the second half of this decade. The launch of new formulations and the construction of a new low-cost manufacturing facility for the product in China should help Schering to maintain substantial shares of the market for florfenicol, however. The company has invested more than $20 million in the construction of a manufacturing plant in Shanghai, which will eventually be capable of producing 150 tonnes of the product a year. The fluoroquinolone antibiotic, orbifloxacin, is a more recent addition to the SPAH anti-infectives range. Rights to the product outside Asia were licensed from the Japanese company, Dainippon, and Schering launched a small animal formulation in the US during 1997 under the Orbax brand. Orbax has since been introduced in most major markets outside Asia. SPAH also markets a broad range of more established anti-infective products for use in both companion animals and livestock. Gentamicin and cyclosporine are both part of the original (pre-Mallinckrodt) SPAH range. The former is sold variously as Gentocin, Garasol and Septigen, and is also included in combination products with the flunixin meglumine NSAID, and with betamethasone and clotrimazole in Otomax, a three-way product for the treatment of ear infections in dogs. Otomax is well established in the Americas, but has been rolled out in international markets during the past five years and has been a significant contributor to recent sales growth in Europe. Cyclosporine, which is sold in ointment form as Optimmune for the treatment of keratoconjunctivitis sicca (dry eye) in dogs, is also well established in the US, but like Otomax is now being introduced more broadly. US patents on both products are now expired, and Otomax already faces generic competition there. The Mallinckrodt portfolio added a number of well-established multi-species antibiotics, including the potentiated sulphonamides, Tribrissen (trimethoprim and sulphadiazine) and Zaquilan (baquiloprim and sulphadimidine) and the cephalosporin antibiotic, Ceporex (cephalexin), while bovine mastitis treatments such as Cepravin (cephalonium), and the Oxytetrin (oxytetracycline) line of livestock antibiotics also boosted revenues in the sector. Scherings position in the US mastitis treatment market was strengthened further in 2003 when it acquired distribution and marketing rights to a range of products divested by Pfizer in order to meet conditions attached by US trade regulators to clearance of Pfizers acquisition of Pharmacia. The deal included the lactating cow treatments, Dariclox (cloxacillin) and Amoxi-Mast (amoxicillin), and the dry cow product, Orbenin-DC (cloxacillin). Combined annual revenues generated by these products in the US are approximately $5 million. More recently, SPAHs livestock antibiotic range has been broadened through the addition of the tylosin-based swine anti-infective, Aivlosin. The company gained global distribution rights to the product in an agreement with the UK company, Eco Animal Health, which was concluded in the second half of 2004.
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19.4.3
Vaccines SPAH is a leading player in the veterinary vaccines market, generating annual sales of more than $200 million in the sector. The company previously marketed a relatively modest range of biologicals, primarily in the US, but its acquisition of Mallinckrodt Veterinary included a global vaccines business that realised sales of more than $100 million at the time of its purchase. SPAH also acquired Solvays US companion animal vaccine business towards the end of the 1990s, adding a further $20 million to its global biologicals revenues. Schering manufactures and markets a broad range of poultry vaccines, including products for use against all of the major target pathogens, but its flagship products in this species segment are its coccidiosis vaccines, sales of which took off sharply in the second half of the 1990s, and which were boosted further at the end of that decade when the company began rolling out Paracox 5, a version of its live, attenuated vaccine for use in broiler chicks. Multi-million dollar expansion programmes were pursued at SPAHs manufacturing plants in the US and the UK as the company prepared to meet the huge increase in demand for the products. SPAHs coccidiosis vaccines were developed in a collaboration with the UK Institute for Animal Health, the first fruits of which were commercialised at the beginning of the 1990s. Sold as Paracox in Europe and Coccivac in the Americas and Asia, they were taken up widely in the breeder and layer segments of the poultry industry. Sales in the US surged in the second half of the 1990s after spray cabinet application technology was made available, but it was the registration of a product for use in broiler chicks which represented the real commercial breakthrough for the company. Branded as Paracox 5, the vaccine is sprayed on to feed given to day-old broiler chicks. It contains live, attenuated sporulated oocysts derived from five strains of the Eimeria parasite. The product was approved in the UK during 1999, received EU-wide approval in 2000, and was soon available in all of the worlds major poultry markets. A version of the vaccine was sold as Coccivac B in the Americas and Asia, but the Paracox 5 product is now also available to producers in the US and many other international markets. While coccidiosis vaccines lead the SPAH poultry biologicals range, significant revenues are also generated by other products, which include single-target and multivalent vaccines against a broad range of diseases. Products against infectious bursal disease (Bursa Vac), infectious bronchitis and Newcastle disease (both sold widely under the Broiler Bron, Ava Bron and Polybron brands) are among the most significant in revenue terms. A new vaccine for the prevention of necrotic enteritis in poultry was granted a conditional US approval in 2005, and will be the subject of large-scale efficacy trials over the next 18 months. Pigs and cattle are the main targets for SPAHs livestock vaccine range, though the company also markets products for use in sheep in some countries. The swine biologicals range includes products against pneumonia, erysipelas, Glssers disease, Aujeszkys disease and influenza, but Schering was forced to cease marketing a PRRS vaccine, Prime Pac PRRS, after a US court ruled in 2004 that the product infringed patents held by Boehringer Ingelheim. The ruling cost the company more than $7 million in damages.
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Leading products in the swine biologicals range include the gene-deleted Aujeszkys disease vaccine, PRV/Marker Gold; the killed virus swine influenza preventative, MaxiVac Flu; the Mycoplasma hyopneumoniae vaccine, M+Pac; and Pneu Pac (Actinobacillus pleuropneumoniae) and Parapac (Glssers disease). M+Pac has been marketed in the US since the middle of the 1990s, but has been launched more recently in other regions, including Latin America, Asia and Europe, where it has been a strong contributor to sales growth. A one-shot administration regime has been approved in a number of markets. The PRV/Marker and MaxiVac Flu products have been made available in a combination vaccine in the US and a number of other countries, while MaxiVac Excell 3, which was the first three-strain swine influenza vaccine to be made available in the US, was launched there in 2003. MaxiVac Platinum, a combination product offering protection against mycoplasmal pneumonia and influenza, is another relatively recent addition to the US range. Scherings US cattle vaccine business is led by clostridial products, which are sold under the Covexin, Siteguard and Electroid labels. A rabies vaccine (Rabdomun), a one-shot Moraxella bovis preventative, Piliguard Pinkeye, and an intranasal IBR/PI-3 vaccine also feature in the US range, while in Europe cattle biological offerings include the Rotavec K99 and Rotavec Corona calf scours vaccines. A vaccine for the prevention of calf scours caused by rotavirus, coronavirus, E. coli and Clostridium perfringens types B, C and D was launched in the US under the Guardian brand at the beginning of 2005. Centurian, a combination toxoid targeting the two main bacteria implicated in the development of bovine liver abscesses was also added to the US range in the first quarter of 2005, while in Europe the company has begun rolling out its Covexin 10 clostridial vaccine for use in sheep. Companion animal vaccines are sold in most major international markets under the Equip (equine) and Quantum (canine and feline) brands. Equine products offer protection against influenza and tetanus, while small animal vaccines are available in various combinations that protect against a range of common pathogens. Scherings position in the North American small animal vaccines market was strengthened in 1997 when it acquired the Galaxy (canine) and Eclipse (feline) ranges previously manufactured and marketed by Solvay Animal Health. Again, the line includes a number of multivalent combination products, but vaccines against canine Lyme disease (Galaxy Lyme) and feline leukaemia (Eclipse FeLV) are also substantial contributors to revenues. The feline leukaemia product is also available in several combination vaccines. Scherings original US range, which predates the Solvay purchase, includes canine vaccines sold under the Intra-Trac label. SPAH acquired an interest in the aquaculture vaccines market in 2000, when it purchased the UK company, Aquaculture Vaccines Ltd. The business markets a range of products sold internationally under the Aquavac brand, including vaccines against enteric redmouth disease (ERM), furunculosis and vibriosis. Oral versions of several key products are available in the form of vaccine-coated feed pellets, while the range also includes an immunomodulating product, AquaVac Ergosan. AquaVac Vibromax, the first orally administered vaccine for use in farmed shrimp, was added to the range in 2004.
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19.4.4
Other products Pharmaceutical speciality products and livestock performance enhancers generate around a quarter of SPAHs global revenues. Major contributors include the companys veterinary anaesthetic range, anti-inflammatory products and the livestock growth implant, Ralgro (zeranol). The Banamine and Finadyne brands, both based on flunixin meglumine, are among the most established of SPAHs anti-inflammatory drugs. Banamine has been noted as a strong contributor to divisional sales over the past 12 months, reflecting improved availability of the product in the US as well as the registration of a new indication there. The product received FDA approval for use in lactating dairy cattle during the final quarter of 2004, and is the only NSAID authorised for use in lactating cows there. Banamine was already approved in the US as an adjunctive treatment for bovine respiratory disease in beef and non-lactating cattle, while at global level Schering generates substantial revenues from flunixin-based products for use in dogs and horses. Banamine and Finadyne are now exposed to competition from generic flunixin meglumine products, but SPAHs anti-inflammatory product revenues have been boosted since the late 1990s by the introduction of two new NSAIDs. Telzenac (eltenac) reached its first markets in 1998, while Zubrin (tepoxalin) gained its first approvals in 2001 and has since been launched in Europe and a number of international markets. Zubrin has had the most significant impact on revenues, and sales of the product continued to rise during 2003 as a result of introductions in new markets, which included the US. It was launched in Japan during 2004. The key to Zubrins success is tepoxalins mode of action, which involves the inhibition of both COX and lipo-oxygenase (LOX) pathways of arachidonic acid metabolism, which is responsible for pain and inflammation associated with conditions such as osteoarthritis. Competition for shares of the veterinary NSAID market has increased significantly in the past five years, but Zubrin is expected to withstand competition from recent novel introductions better than most established products. In the livestock growth implant market, SPAHs Ralgro (zeranol) line generates significant revenues in the US feedlot market. Hormone growth implants are banned in the EU, but Ralgro is marketed in a number of international beef producing markets outside Europe. A new long-acting implant for use in pasture cattle was granted FDA approval in 2002. Ralgro LA (zeranol) is indicated for increased rate of weight gain in pasture-fed cattle for up to 210 days. Schering is also involved in market for the milkyield booster, bovine somatotropin, where it markets LG Chemicals Boostin product in a number of Latin American and Asian countries. Back in the companion animal sector, SPAH has a long-standing agreement with the pet identification specialist, Digital Angel, under which it markets the HomeAgain microchip product in the US. The two companies extended their collaboration in the second half of 2004, signing a 10-year product supply and distribution agreement.
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19.5
R&D
Schering-Plough does not publish data on R&D spending by division, but SPAH is believed to invest between $70 million and $80 million a year on R&D. The division has no direct access to agrochemical R&D, which is a source of ectoparasite control candidates for some of its competitors, but does benefit from R&D synergies with its human pharmaceutical parent, through which active ingredients such as eltenac and tepoxalin have been sourced. Several other crossovers from the Schering human pharmaceutical portfolio are being developed for companion animal use, including treatments for CNS problems, age-related disorders, separation anxiety, obesity, heart failure and renal failure. SPAH has also used collaborations and product licensing agreements to broaden its portfolio. Examples include the orbifloxacin antibiotic, ivermectin-based products for use in both livestock and companion animals, and the bovine somatotropin formulation that Schering markets under an agreement with LG Chemical in parts of Asia and Latin America. Development-stage collaborations include an agreement with Aphton Corp under which Schering is working on the application of Aphtons antigastrin 17 immunogen as an equine ulcer treatment. Elsewhere, SPAH is working with the Commonwealth Scientific and Industrial Research Organisation in Australia to identify and develop new classes of antiparasitic compounds, and with the US company, Essential Therapeutics (formerly Microcide Pharmaceuticals), on the discovery and development of novel antimicrobials. Schering has global rights to ET development candidates that may overcome problems of microbial resistance by utilising technology that inhibits resistance mechanisms. The technology involves the application of efflux pump inhibitors, which disrupt resistance mechanisms in target bacteria and may also increase the susceptibility of some bacteria to certain antibiotics, extending their potential applications and reducing required therapeutic dose levels. In the biologicals sector, Schering is working on the development of new and improved vaccines as well as broader approaches to the use of immunebased technology. It is involved in programmes aimed variously at the use of viral vectors, gene deletion techniques and controlled release delivery methods. New generation vaccines against feline leukaemia and canine Lyme disease are among products believed to be in late-stage development. Longer-term projects include the development of antiparasitic vaccines, while an existing deal with the Danish biotech company, Pharmexa, covering veterinary applications of the latters vaccination technology, was extended recently.
19.6
Strategy
Several of the problems that have afflicted Schering-Plough at corporate level in recent years have also affected its animal health business. Most notably, manufacturing problems have affected the availability of some of the divisions major brands, including Nuflor and Banamine. Results in the first half of 2005 indicated that supply issues may finally be easing, but the division will have to work hard in order to reclaim market shares lost during the past four years.
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New indications for Banamine will help to drive demand for that product back up, but the company faces increasingly stiff competition from generic flunixin meglumine, while florfenicol will also be targeted by generic manufacturers in the US and major European markets. Preparations for the defence of the Nuflor brand have already been made, however, including the development of new formulations and indications, and the construction of a low-cost manufacturing plant in China. Also like its parent, the animal health division has implemented some major changes at senior management level in a bid to improve the way the business is run. A raft of new appointments was announced in the second quarter of 2005, including that of Peter McCarthy to the newly created position of senior director, global business operations. He will be charged, among other things, with leveraging business development opportunities. New heads of regional business in Latin America and Europe were also announced, while a number of new appointments were also made in sales, marketing and technical functions. Improving levels of efficiency and driving divisional margins back up will be among the main goals of SPAH management in the next five years. The company also appears keen to build up its business in new areas, as witnessed by recent agreements that have seen it secure marketing rights to products in both the livestock and companion animal sectors. More deals along similar lines are anticipated. At corporate level, Schering-Plough has been seen as a vulnerable takeover target for some time. The company has certainly been set back by recent problems, but there were signs towards the end of 2004 that it may be about to turn the corner in terms of halting recent declines in both revenues and earnings. Having come this far without attracting a hostile bid, Schering is unlikely to be targeted in the near future. A potential merger should not be ruled out, however, if a suitable partner emerges. Such a deal could have implications for the SPAH division, which could find itself merged with a new sister business, but might also be reappraised by the management of a new, larger parent company.
19.7
Prospects
Having seen its sales stagnate and earnings dip sharply since the beginning of the decade, SPAH appears set to enjoy a much-improved year in 2005. Signs of a turnaround were evident in 2004, when revenues increased modestly and earnings fell by just $2 million. Operating income should increase appreciably in 2005, however, thanks to improved product availability and significant increases in volume sales. Revenues in the first quarter were up on year-earlier figures by more than 13%, and while exchange rate factors played a part, underlying growth was approximately 9%. That was a particularly encouraging performance in view of the strong first quarter reported by the business in the corresponding period during 2004. Gains in the second quarter reached 22%, taking sales for the first half to $420 million up by 18% on 2004 figures. If SPAH can maintain that level of performance through the second half of the year it will post a 2005 sales total of more than $900 million. Some signs of recovery were already apparent in the second half of 2004, however, and it would be reasonable to
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assume that gains in the second half of 2005 will be slightly lower as a result. A second half gain of 14-15% would nevertheless enable SPAH to report full-year sales of approximately $895 million up by 16% on 2004 figures. Further solid gains can be expected in 2006 as the company continues to benefit from the recovery of its US business and increases in international sales that will be driven by a combination of established products and new introductions. Assuming that manufacturing problems are largely behind it by the end of 2006, prospects for the SPAH business during the remainder of this decade will depend primarily on how successful the company is in defending patent-expired brands such as Nuflor and Banamine, and on the nature and quality of new products brought to market. SPAH may not have a blockbuster in its near-term pipeline, but growth of the business is likely to be boosted by more licensing deals, under which it will gain rights to additional new products.
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Chapter 20: Vetoquinol
CHAPTER 20 VETOQUINOL
Headquarters Magny-Vernois, BP 189 70204 Lure Cedex, France Tel: +33 3 8462 5664 Fax: +33 3 8462 5690 www.vetoquinol.com
Key personnel
Etienne Frechin Chair and CEO, Vtoquinol.
Animal health business

2004 sales: 2004 ranking: Main product areas: Main business areas: Euro 183 million ($227 million) 20th Anti-infectives, nutraceuticals pharma specialities,
Europe, North America
20.1
Company background
Vtoquinol is a privately owned French animal health business founded in the 1930s by pharmacist Dr Joseph Frechin. The company has remained in the hands of the Frechin family, with the founders son, Etienne, currently holding the position of chair and CEO. The business was originally built on the manufacture and sale of human drugs, and its focus shifted to the veterinary medicines sector as recently as the 1960s. It is now involved solely in the development, manufacture and sale of products for use in animals, however. Vtoquinol has expanded rapidly since the late 1990s, acquiring new business in Germany, Switzerland, Canada and the US. The company initiated its first offering of shares to external investors in 2003, partly to finance the integration of recently acquired interests and capital spending programmes, but also to support further expansion of the business in future.
20.2
Animal health sales

As recently as 1995, Vtoquinol was still essentially a national company, with annual sales of little more than Euro 60 million and the bulk of its turnover achieved in France. Acquisitions, distribution agreements and in-house growth have all driven sales up rapidly since then, however. Double-digit gains were posted every year from 1999 to 2002, largely as a result of acquisition activity. The purchase of Merials former Canadian subsidiary, J Webster Laboratories, drove revenues up in 1999, while the integration of the Swiss-based Chassot Group, which was acquired in April 2001, boosted sales reported in both 2001 and 2002.
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Vtoquinol posted global sales of Euro 185 million in 2002. No major acquisitions have been completed since then, however, and with almost 30% of revenues now generated in markets outside Europe, exchange rates have begun to affect the companys results. The weakness of the US dollar and related currencies against the euro knocked around five points off local currency gains in 2003, cutting growth from 7% to little more than 2% following the conversion of foreign revenues into euros for reporting purposes. Exchange rates continued to limit growth as reported in 2004. Expressed in local currencies, sales were similar to year-earlier figures, but revenues as reported fell back by just over 3% to Euro 183 million.
Table 20.1: Vtoquinols sales, 2000-2004
Year Sales (Euro million) 111 139 185 189 183 % change +14.4 +25.2 +33.1 +2.2 -3.2
2000 2001 2002 2003 2004
Source: Vtoquinol.
20.2.1
2003 performance Having risen consistently at double-digit rates since the late 1990s, Vtoquinols sales finally began to slow in 2003, which was the first year for some time in which results were not affected by significant acquisition activity. Expressed in local currencies, sales were still more than 7% ahead of year-earlier figures, but exchange rate factors limited revenues as reported to Euro 189 million up by just 2.2% on the total posted in 2002. Vtoquinol offered shares in the company to external investors for the first time during the year, raising Euro 40 million through a share issue designed partly to finance the integration of recent acquisitions notably the Swiss company, Chassot, which was purchased in 2001, and IGIs former US companion animal businesses, Evsco and Tomlyn, which were acquired in 2002. Funds managed by Banexi Capital Partners and 3I each took up half of the offering.
20.2.2
2004 performance Vtoquinol reported broadly flat sales in local currency terms during 2004, but with exchange rates continuing to limit reported returns in international markets, the company posted revenues of Euro 183 million down on yearearlier figures by just over 3%. Expressed in US dollars at respective annual average rates of conversion, sales were approximately 6% higher than in 2003. Sales in the companys home market were flat, but growth was reported elsewhere in Western Europe, largely as a result of recent product launches. The business also held its own in eastern Europe, but revenues reported for operations in North America were more than 10% lower than 2003 figures. Part of that decline was the result of exchange rate influences, but sales are
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believed to have fallen slightly in local currency terms. Revenues reported in other international markets were up on 2003 levels. Sales of anti-infectives and antiparasitics both declined during 2004, but reduced revenues in those sectors were offset largely by gains recorded by other parts of the portfolio. Sales of nutraceuticals and topical products in particular were higher than year-earlier figures. 20.2.3 Interim 2005 performance Vtoquinol does not publish interim sales figures, but with the impact of exchange rate factors on companies reporting in euros beginning to moderate, the business is believed to have posted modest gains during the first half of 2005. That trend is expected to continue in the second half of the year, though sales growth is anticipated at rates below those being reported by many other leading animal health companies.
20.3

Vtoquinol began to expand its European business in the 1980s and 1990s, and established relationships with distributors further afield. The 1999 acquisition of J Webster Laboratories in Canada marked the companys first serious foray into the international animal health market, however. A foothold has been gained in the US more recently, and with the Chassot business broadening its presence in Europe, Vtoquinol now generates only a quarter of its revenues in France. It possesses subsidiaries in 15 other markets, and sells its products through distributors in more than 80 countries around the world.
Table 20.2: Vtoquinols sales by region, 2004
Region Sales (Euro million) 1 46 70 15 42 10 183 % of total 25 38 8 23 6 100
France Other Western Europe Eastern Europe North America Rest of the world Total
Note: 1 Values based on rounded percentage figures. Source: Vtoquinol.
The four acquisitions listed in Table 20.3 have added approximately Euro 80 million to Vtoquinols annual sales total since 1998. Revenues have also been boosted by product acquisitions and marketing agreements announced recently in North America, which is clearly a target for further expansion.
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Chapter 20: Vetoquinol Table 20.3: Vtoquinols key acquisitions

Year 1998 Company Meca Labs (Germany) Details
1999 2001
J Webster Labs (Canada) Chassot (Switzerland)
2002
Evsco (US) Tomlyn (US)
Acquired from Grampian Pharmaceuticals in the first quarter; subsequently re-branded as Vtoquinol GmbH. Mecas sales at the time of the acquisition were equivalent to around Euro 8 million. Top-five player in the Canadian market, acquired from Merial. Sales at the time of its acquisition thought to be worth more than Euro 25 million. Purchased from Asklia Holdings following Asklias decision to exit the animal health sector. Sales equivalent to approximately Euro 35 million, including significant business in several east and central European markets. Both acquired from IGI as the latter disposed of remaining animal health assets. Combined 2001 sales equivalent to more than Euro 10 million.
20.3.1
Europe Vtoquinol is a leading player in the French veterinary products market, generating a domestic sales total approaching Euro 50 million. Its global headquarters site at Lure is also a major centre for manufacturing and research activity, while products in the companys growing nutraceuticals range are manufactured at a second site in Tarare. Activities in Europe have been stepped up considerably since the late 1990s following the acquisition of Meca Laboratories in Germany and the Swiss company, Chassot. Chassot represented Vtoquinols biggest acquisition to date in sales terms, with a turnover of approximately Euro 35 million at the time of its purchase, and established subsidiaries in several European markets. The company now boasts subsidiaries in 11 European countries outside France, including Germany, Spain and the UK. It also operates directly in Austria, Belgium, Ireland, Switzerland and the Netherlands, as well as central/east European countries such as Poland, Czech Republic and the Ukraine. Including its domestic business, Vtoquinol generated more than 70% of its revenues in Europe during 2004. Sales in western European markets outside France contributed 38%, or Euro 70 million, while business in central and eastern Europe was responsible for a further 8%, or Euro 15 million. Aside from its home market, Germany is the biggest contributor to the companys European revenues, with sales there worth around Euro 20 million following a series of recent product launches that have built on the position achieved through the acquisition of Meca. Activities in central and eastern Europe are dominated by the former Chassot business, which included an established presence in Poland, the Czech Republic and the Ukraine. Chassots manufacturing facility at Gorzw in Poland will be used as a base from which to expand into other central and east European markets, with key targets including Hungary and the Baltic states. Vtoquinol products are currently handled by distributors in European markets where the company does not possess a direct presence. In-house capabilities will probably be established in some of these countries as the
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business continues to grow. Moves to build a direct presence in Italy, which is the biggest European country in which the company does not already operate a wholly owned subsidiary, are likely at some point in the next five years. 20.3.2 North America North America has been the focus of Vtoquinols efforts to expand its business beyond the European region in recent years. The companys first attempt to gain a foothold there ended in failure, when a US subsidiary established earlier in the decade was sold in 1998. A year later, however, it turned its attentions to the neighbouring Canadian market, purchasing J Webster Laboratories from Merial. Webster was a major force in Canada, where Vtoquinol enjoys a strong presence, having used the Webster infrastructure to lever parts of its established European range into the Canadian market. It has also invested close to Can$5 million in the expansion of the former Webster manufacturing facility at Princeville, where a new penicillin production plant has been constructed to FDA standards. The Canadian business has also been expanded through product acquisitions and marketing agreements, which have broadened its portfolio. A range of insecticidal ear tags was acquired from Novartis in 2002, while in 2003 Vtoquinol and Bimeda announced an alliance that has seen key Bimeda products marketed under Vtoquinol labelling in Canada. The company has also established a subsidiary in Mexico, and returned to the US market in 2002, acquiring the former IGI companion animal businesses, Evsco and Tomlyn. Revenues generated by the two units totalled approximately $12 million in the year prior to their acquisition, and their inclusion in results from February 2002 has given Vtoquinols North American business a considerable boost. Sales reported in the region have been affected since then by exchange rate factors, but the company still posted North American revenues equivalent to more than Euro 40 million in 2004, accounting for almost a quarter of its global total. 20.3.3 Other markets Markets outside Europe and North America are responsible for only 6% of Vtoquinols global sales equivalent to approximately Euro 10 million in 2004. With no subsidiaries outside of its two main operating regions, activities in other markets are conducted through local sales offices or agreements with third-party distributors. Most of the companys major brands are sold widely through partners in Africa, South America and the Asia/Pacific region. Levels of in-house activity have been increased in North Africa, however and it is pursuing a stronger presence in Asia. To that end, a local sales office was opened in China recently.
20.4
Product portfolio
The shape of Vtoquinols product portfolio has changed significantly in the wake of its recent acquisitions. Anti-infectives remain the biggest contributors to global revenues, but the range also spans anti-
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inflammatories, antiparasitics and pharmaceutical specialities, as well as vaccines and a substantial range of nutraceuticals.
Table 20.4: Vtoquinols sales by product category, 2004
Category Sales (Euro million) 56.2 13.0 7.0 24.2 37.3 23.2 22.1 183.0 % of total 30.7 7.1 3.8 13.2 20.4 12.7 12.1 100.0
Antimicrobials Anti-inflammatories Antiparasitics Other pharmaceuticals Nutraceuticals and related Topical products Others (including vaccines) Total
Source: Vtoquinol.
Interests in the companion animal sector were boosted by the acquisition of Chassot, and around 45% of Vtoquinols revenues are now generated by products for use in small animals and horses. Products for use in food animal species still lead the business, however, with a share of around 55%. 20.4.1 Anti-infectives Vtoquinols flagship anti-infective is the fluoroquinolone antibiotic, marbofloxacin, which generates around two-thirds of the companys revenues in this segment of the market. Sold as Marbocyl, it claims significant shares of quinolone antibiotic markets in Europe and also generates revenues under distributor deals in a number of international markets. Rights to marbofloxacin were acquired under an agreement with HoffmannLa Roche, which also sold rights to the molecule in certain markets to SBAH. SBAH was subsequently acquired by Pfizer, which has developed and commercialised a marbofloxacin-based product as Zeniquin. Vtoquinol acquired certain of Pfizers rights to the molecule in 1999, clearing the way for it to register and launch livestock formulations of Marbocyl in all markets outside the US and Canada, and companion animal formulations in markets outside the Americas, Japan, New Zealand, Australia and South Africa. Injectable and tablet formulations of Marbocyl (the latter for use in small animals) are well established in most major European markets, but Vtoquinol continues to register new indications and launch novel formulations of the product, which have contributed to recent sales growth for the brand. A bolus formulation for use in calves, with indications for the treatment of neonatal gastroenteritis caused by E. coli, was launched in major European markets towards the end of the 1990s, while a palatable version of the tablet formulation for use in small animals was launched as Marbocyl P in France during 2003. Marbocyl P was introduced more widely in Europe during 2004. Other recent additions to the marbofloxacin range include Marbocyl 2% Injection, for the treatment of respiratory infections in calves and pigs, and Marbocyl FD, an injectable formulation for use in small animals with indications for the treatment of wound infections or abscesses and the T&F Informa UK Ltd, 2005
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prevention of postsurgical infections. A combination product containing marbofloxacin, the clotrimazole antifungal and the anti-inflammatory, dexamethasone, was launched in its first markets under the Aurizon trade name in 2001. Early targets included France, Germany, the UK and Ireland, while the product has since been rolled out across Europe. Aside from marbofloxacin, the rifaximin-based dry cow intramammary treatment, Fatrox, is among the best-selling anti-infectives in the Vtoquinol range. Most other anti-infectives in what is an extensive line are based on well-established active ingredients. They include therapeutic formulations containing amoxicillin, oxytetracycline and chlortetracycline, and MFAs containing trimethoprim/sulpha combinations and griseofulvin. Vtoquinol has applied its formulation expertise to some of these products, resulting in the development of patented brands such as the long-acting livestock injectable, Longamox (amoxicillin). Vtoquinol continues to broaden its anti-infectives range through the application of its formulation expertise to long-established active ingredients. An amoxicillin/clavulanic acid combination for use in dogs and cats, which is being sold as Clavaseptin Palatable Tablets, was added to the companys UK range at the beginning of 2005. 20.4.2 Other products Vtoquinols portfolio spans a broad range of therapeutic fields, with antiinflammatories, antiparasitics, hormones, biologicals, nutraceuticals and dermatological preparations all contributing to revenues. The companys involvement in several of these areas has either been initiated or strengthened as a result of acquisitions completed in the past five years. Inhouse development work has also broadened the range, with products such as the NSAID, tolfenamic acid, and the ACE inhibitor, imidapril, featuring prominently in this regard. Tolfenamic acid has been commercialised for use in both small animals and livestock. Companion animal products, presented in both tablet and injectable formulations, are sold as Tolfedine, while the livestock formulation, which is indicated as an adjunct in the treatment of acute bovine mastitis, and of metritis mastitis agalactia (MMA) syndrome in pigs, is sold as Tolfine. Tolfenamic acid is the main source of Vtoquinols antiinflammatory product sales, which were worth Euro 13 million in 2004. The canine ACE inhibitor, imidapril, is among the most recent in-house additions to the Vtoquinol range. Sold as Prilium, it was launched in France during the second half of 2002, and has since been introduced widely in Europe. Prilium is vying for shares of a market led by Novartiss Fortekor (benazepril) and Merials Enacard (enalapril), while fellow French company Ceva recently began to roll-out its own enalapril-based product. Imidapril boasts a longer half-life than either benazepril or enalapril, however, and has also been commercialised in a novel liquid formulation. These characteristics have contributed to a strong early performance from the Vtoquinol brand. The companys antiparasitic range has been expanded recently as a result of both in-house developments and product acquisitions, but is dominated by long-established active ingredients. Vtoquinol has developed and commercialised suspension and pre-mix formulations of the benzimidazole T&F Informa UK Ltd, 2005
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anthelmintic, fenbendazole, following the expiry of patents on the molecule, and sells them widely under the Flexadin trade name. Levamisole-based products, including injectables and drenches, are sold under the Levadin brand, and also feature prominently in the companys European parasite control range, while its Canadian portfolio was expanded in 2002 through the acquisition from Novartis of a livestock insecticides business comprising brands such as Bovaid (fenvalerate), Protector (diazinon) and Eliminator (cypermethrin and diazinon). Elsewhere in the range, Propalin (phenylpropanolamine), a symptomatic treatment for urinary incontinence in bitches, is among Vtoquinols bestselling products. A sympathomimetic agent, phenylpropanolamine does not cause the side effects often associated with hormonal treatments of the condition. It is presented as an oral solution that can be mixed with an animals food if necessary. The US launch of Propalin, which was handled in 2003, has boosted its global sales considerably. Still in the US, the purchase of IGIs companion animal business has brought Vtoquinol a range of companion animal specialities, diagnostics, skin care products and nutritionals sold through veterinary channels by Evsco, and therapeutic skin/coat care products plus an OTC nutritional range sold by Tomlyn in the trade sector of the market. In Europe, the acquisition of Chassot boosted Vtoquinols position in the nutraceuticals sector, where its Equistro range of equine feed supplements is a major contributor to revenues. The Equistro line includes vitamins, minerals and electrolytes, as well as the Chondril joint treatment brand, which is sold in both powder and oral paste formulations. In the small animal sector, Vtoquinol launched Zentonil (Sadenosylmethionine), indicated as an aid in the restoration and support of hepatic function, on the US market in 2003 and has introduced it in European markets more recently. A UK launch was handled in the second half of 2004. Other recent additions to this sector of the portfolio include Enisyl-F, a lysine-based paste indicated as an aid in the treatment of feline herpesvirus, which was launched in the US and Canada during the first half of 2005, and Ipakitine, which is indicated for use in dogs and cats affected by chronic renal failure. Biologicals contribute modestly to Vtoquinols global sales, but like other segments of the portfolio, revenues have been boosted recently by a combination of product launches and acquisitions. In-house developments have included Tecvax Chlamydia, an attenuated ovine chlamydiosis vaccine and Tecvax Pasteurella 1.6, which is indicated for the protection of calves against the A6 serotype of Pasteurella haemolytica.
20.5
R&D
Vtoquinol invests approximately 8% of its turnover in R&D programmes a figure that currently equates to around Euro 15 million a year. As an independent, the company lacks the sort of access to human pharmaceutical or insecticide research enjoyed by many of its competitors, which are part of healthcare, life science or chemical groupings. It has accessed a number of molecules through licensing deals, however, and continues to work on the development and registration of new chemical entities for use in the
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veterinary field, as well as the application of formulation technology to existing products. The company is currently working on 15 development projects, most of which are aimed at the eventual commercialisation of new products for use in companion animals. The bulk of its in-house R&D activity is conducted at its Lure headquarters complex, where a Euro 5 million investment programme completed recently has trebled the amount of space devoted to R&D functions. The Lure R&D centre now includes four separate laboratories focused on pharmaceutical formulation, analytical development, microbiology and vaccine analysis. Vtoquinol also maintains close links with a range of collaborators, most notably at public sector research organisations in France. Regular additions to the companys marbofloxacin franchise and the development and commercialisation of the canine ACE inhibitor, imidapril, are among the most significant recent fruits of Vtoquinols work in R&D. Inserts, patches and injectable products featuring the application of in-house formulation expertise have also been added to the range. Anti-infectives, anti-inflammatories, cardiovascular drugs and vaccines are the main focus of current R&D programmes. A significant proportion of the 15 major projects being pursued by the company are aimed at the further development of active ingredients that already feature in its range either through the registration of new indications, or the commercialisation of new formulations. Vtoquinol gained access to IGIs patented Novasome microencapsulation technology through its acquisition of the Evsco and Tomlyn businesses in the US, and is expected to develop novel formulations of existing products in its US range during the next five years. Elsewhere, the nutraceutical range acquired through Chassot has already been expanded since completion of the purchase in 2001, and more new products will be brought to market in this segment of the portfolio. In the pharmaceutical sector, a CNS treatment is among the new drugs included in the Vtoquinol development pipeline, while new vaccines for use in cattle and pigs are also expected to reach the market before the end of the decade.
20.6
Strategy
Vtoquinol is the smallest of the three French animal health companies that feature towards the top end of the industry rankings. And while the company has invested considerable sums in the development of its business over the past 10 years, it is unlikely to overhaul Ceva or Virbac in the foreseeable future, largely because both of those companies have access to more significant financial resources. Nevertheless, having already doubled its revenues and broadened its geographical scope through the series of acquisitions completed since the late 1990s, Vtoquinol appears ready to pursue further expansion. The groups general manager, Dominique Henryon, is on record as saying that the company remains determined to grow, and has identified the US and Asia as areas in which it is most likely to pursue additional business. Vtoquinol offered shares to external investors for the first time in 2003, raising Euro 40 million in an offering that was taken up by big-name funds
275
including 3I. The financing initiative was designed partly to fund the integration and subsequent restructuring of recently acquired businesses, but senior management made it clear that a proportion of the proceeds would be set aside to finance future growth. Vtoquinol has opened offices in China since completing the share offer, and may be contemplating the establishment of a joint venture there or elsewhere in Asia. Nor would it come as a surprise to see the company make a further acquisition in the US in a bid to build on its initial foothold in the market there. Existing financial resources are likely to limit the scope of acquisition or joint venture activity in the near future, but Vtoquinol may return to the market at some point, offering further shares in the company to external investors in return for capital that is clearly needed if it is to become a truly global company.
20.7
Prospects
Currency factors have limited revenues generated by Vtoquinol outside the euro-zone since 2002, but underlying growth of the business has also slowed. Thus, while a 7% gain in local currency terms was enough to offset exchange rate influences in 2003, a broadly flat performance in 2004 saw the company post a 3% decline in sales as reported. New products brought to market recently in both North America and Europe will help to bolster revenues, while the impact of currency factors on results being posted by European companies also appears to be moderating in 2005. Nevertheless, underlying growth of the Vtoquinol business is believed to have remained relatively limited in the first half of the year, and full-year gains are expected to remain firmly in single-digit territory. An increase of 4% would see the company report a 2005 sales total of Euro 190 million, just surpassing the figure of Euro 189 million posted two years earlier. Beyond 2005, prospects for growth from the existing Vtoquinol business will remain relatively moderate. New product launches and entries into new markets will help to drive sales, but revenues generated by existing core products will be relatively flat. The most likely source of more rapid growth is the addition of new business through one or more acquisition deals. These are also expected to be modest in scale, however, unless Vtoquinol raises additional funds to finance a bigger deal through a second share offering.
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Chapter 21: Virbac
CHAPTER 21 VIRBAC
Virbac 13me Rue LID BP 27 F-06511 Carros France Tel: +33 4 9208 7100 Fax: +33 4 9208 7165 www.virbac.com Key personnel Eric Mare Pierre Pags Animal health business 2004 sales 2004 ranking Main product areas Main business areas Key events January 2005 US subsidiary, Virbac Corp, receives notification of possible legal action by the Securities and Exchange Commission (SEC) relating to accounting irregularities. Postpones annual shareholders meeting pending completion of an audit of its US business. Belatedly closes 2004 accounts after Virbac Corp files audited financial statements for the year. Euro 359 million ($446 million) 14th Antiparasitics, vaccines antibiotics, dermatologicals, Chair Chief operating officer
Europe, North America, Asia/Pacific
June 2005
August 2005
21.1
Company background
Virbac is an independent French animal health business founded in the late 1960s. It expanded rapidly through a combination of acquisition activity and in-house growth during the 1970s and 1980s, and was ranked among the worlds 20 biggest animal health and nutrition businesses by the early 1990s. The company has been listed on the Paris stock exchange since 1985, but the family of its founder, French veterinary surgeon Pierre Richard Dick, has retained control of the business, holding approximately 47% of its capital and 63% of voting rights. Late in 2003 the company initiated an internal investigation of accounting irregularities at its US subsidiary, Virbac Corp. Thomas Bell and Joseph Rougraff, formerly chief executive and chief financial officer, respectively, at
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Chapter 21: Virbac
Virbac Corp, resigned from the company in January 2004, and an official investigation into the affair was begun by the US SEC shortly afterwards. Virbac Corp finally filed restated results for 2003 and prior years in April 2005, but financial statements outlining the performance of the US subsidiary in 2004 were not released until the end of August 2005. As a result, parent company Virbac SA was forced to postpone its annual shareholders meeting, and has yet to issue detailed corporate results for 2004. The US subsidiary has negotiated a proposed settlement with the SEC, including payment of financial penalties, and is unlikely to face further regulatory action. Legal proceedings initiated by shareholders in the company have still to be resolved, however, and could result in further charges against its balance sheet.
21.2

Acquisitions had a significant impact on Virbacs revenues in 1999 and 2000, driving global sales up by 27% and 18%, respectively. The business has grown at single-digit rates since then, however, and sales as reported fell back in 2003. Virbac has published restated results for 2003 and 2004 following the completion of an audit of its US subsidiary. US revenues for years prior to 2003 may also be corrected, but changes are not expected to have a material impact on global sales figures originally reported by the company. Global net sales for 2004 were just under Euro 359 million up by 1% on year-earlier figures and only 10% higher than the total reported in 2000. Exchange rates have had a negative impact on sales as reported since 2002, but underlying growth of the business has been limited since the beginning of the decade.
Table 21.1: Virbacs animal health sales, 2000-2004
Year
2 2 2 3 3
Sales (Euro million) 1 325 350 368 355 359
% change +17.9 +7.7 +5.1 -3.5 +1.1
2000 2001 2002 2003 2004
Notes: 1 Totals rounded to the nearest million (percentage change figures based on rounded totals may not tally exactly with those reported by the company); 2 as reported, prior to the investigation into accounting practices at Virbac Corp; 3 un-audited figures released by Virbac SA after Virbac Corp filed audited financial statements for 2004. Source: Virbac.
Virbac reported pre-tax earnings of Euro 34.3 million in 2004 up by almost 28% on year-earlier figures and sufficient to drive the companys operating margin back up to almost 10%. Operating income rose at rates slightly in excess of revenue gains early in the decade, and margins reached 10% in 2002. Earnings fell sharply in 2003, however, limiting the return on sales to just 7.5%. The decline was attributed largely to exchange rate influences T&F Informa UK Ltd, 2005
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Chapter 21: Virbac
and costs associated with the resolution of US accounting problems, and earnings outside the US rose by almost 9% during the year.
Table 21.2: Virbacs operating profit and operating margin, 2000-2004
Year Sales 1 (Euro million) Operating Profit (Euro million) Operating Margin (%)
2000 2001 2002 2003 2004
2 2 2 3 3
325 350 368 355 359
30.9 33.4 36.7 26.8 34.3
9.5 9.6 10.0 7.5 9.6
Notes: 1 Totals rounded to the nearest million; 2 as reported, prior to the investigation into accounting practices at Virbac Corp; 3 un-audited figures released by Virbac SA after Virbac Corp filed audited financial statements for 2004. Source: Virbac.
21.2.1
2003 performance Restated figures for 2003 show a sharp decline in Virbacs operating profit, which fell by 27% to Euro 26.8 million on revenues that were 3.5% lower at Euro 355 million. The company had posted a strong set of results at the half-year stage, but encountered a series of setbacks in the second half. Despite the completion of acquisitions in both Europe and the US, revenues dipped following the termination of distribution agreements in the pet food sector, while earnings were affected by rising production costs. To cap a difficult year, the company announced in November that accounting irregularities had been discovered at its US subsidiary, and that an investigation into the matter had been initiated. Sales in Europe were almost 3% ahead of year-earlier figures, with an increase of more than 4% reported in France and strong local-currency growth posted in the UK. Results in Germany and Spain were weaker, however, while sales fell back sharply in the Netherlands following the termination of a distribution agreement covering the Waltham range of pet food products. Outside Europe, exchange rates had a major impact on results as reported, with currency factors responsible almost entirely for double-digit declines in both the North and Latin American regions, and for a more modest reduction in sales posted across Asia. Sales generated by Virbacs swine and poultry lines were down on yearearlier figures, but those declines were offset by strong sales of ruminant products. Companion animal product sales were limited by weak demand in some European markets, while the termination of distribution agreements under which Virbac had previously handled the Waltham range of pet nutrition products in the Netherlands and Purinas pet food line in New Zealand offset strong gains reported for other companion animal products. Virbac completed three acquisitions during the course of 2003, purchasing the French companion animal diagnostics business, BioVeto Tests, in the first half of the year and integrating Delmarva Labs and the King Pharmaceuticals veterinary business into its US subsidiary in the second half.
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Chapter 21: Virbac
21.2.2
2004 performance Final (though un-audited) figures for 2004 show a recovery in Virbacs pretax earnings, which climbed by 28% to Euro 26.8 million on sales that were just 1% higher at Euro 359 million. Expressed in US dollars at annual average rates of exchange, global revenues totalled $446 million up by 11% on equivalent figures for 2003. US sales increased by 15% in local currency terms, with around half of gains reported there attributable to the full-year inclusion of revenues from the Delmarva and King veterinary businesses that were acquired in the third quarter of 2003. Sales in Asia were held back by the disruptive impact of avian influenza outbreaks, however, while European revenues were affected by difficult conditions in some of the regions major swine markets. The termination of pet food distribution agreements in 2003 (see Section 21.2.1 above) had a residual negative impact on companion animal product sales, but revenues generated by Virbacs core companion animal lines rose significantly, driving sales in this segment of the market up by more than 7%. Revenues generated by the companys food animal product lines declined by 6.5%. In March 2004, Virbac acquired all rights to its feline leukaemia vaccine, Leucogen, from the US company, Antigenics Inc, in a deal worth a little over $14 million. The agreement will give it improved control over the supply of what is one of its leading products.
21.2.3
Interim 2005 performance After a slow start to the year, Virbac enjoyed a much stronger performance in the second quarter, and appears on track to report improved results for the full year. Sales in the first quarter, which have been restated to reflect new French accounting standards, were down on year-earlier figures by 1.7% at Euro 79.6 million, with revenues generated in Europe falling by 3.7% and gains in other regions offset by reduced returns from third-party manufacturing operations in Australia and lower sales of cattle antiparasitics in the US.
Table 21.3: Virbacs first-half sales, 2004 and 2005
Period 2004 (Euro million) 81.9 89.2 171.1 2005 (Euro million) 79.6 96.0 175.6 % change
First quarter Second quarter First half

Source: Virbac.
-1.7 +7.6 +3.4
Business picked up in the second quarter, when sales rose by almost 8% on year-earlier figures, pushing first-half revenues up to almost Euro 176 million 3.4% above 2004 levels. Growth was reported in all of the companys main operating regions, with sharpest gains recorded in North America, Asia and Latin America. Food animal product sales continued to decline, falling by a little over 3%, primarily as a result of a downturn in swine and poultry markets across southern Europe. The reverse in that segment of the T&F Informa UK Ltd, 2005
280
Chapter 21: Virbac
portfolio was outweighed by strong growth in sales of companion animal products, which were 8% higher than 2004 levels on a pro-forma basis.
21.3

France in particular and Europe in general are still major contributors to Virbacs global revenues, but the business has been expanded constantly since its formation in the late 1960s, and the company now has a significant presence in all of the worlds major animal health markets. Growth has been achieved through a combination of in-house expansion and targeted acquisitions, with the result that Virbac now boasts a commercial presence in more than 100 countries and operates over 20 subsidiaries. The companys recent financial tribulations have delayed the publication of detailed results for 2004, and sales by region contained in Table 21.4 are Animal Pharm Reports. These are based on historical data and an interpretation of comments on the business published by Virbac.
Table 21.4: Virbacs sales by region, 2004
Region Sales (Euro million) 208 65 23 45 18 359 % of total 58 18 6 13 5 100
Europe North America South America Asia/Pacific Africa/Middle East Total

21.3.1
Europe Virbacs European sales are believed to have totalled almost Euro 210 million in 2004 equivalent to approximately 58% of global revenues. Sales in France, where the company is a leading player, are responsible for well over 40% of that figure, totalling around Euro 90 million. The business has been strengthened across the region, however, and almost one-third of Virbacs global revenues are generated in European markets other than France. Facilities in France remain central to Virbacs global research, development and manufacturing capabilities. The company operates major production plants at its Carros headquarters, and at Magny-en-Vexin, both of which continue to benefit from capital investment programmes designed to expand and upgrade output. The Carros complex also includes major R&D laboratories for both pharmaceuticals and biologicals. Outside France, Virbac has established subsidiaries in seven other European countries, including all four of the regions five other leading markets Germany, the UK, Spain and Italy. A regional marketing department has also been established to co-ordinate operational activities in Europe, with the aim of driving up levels of efficiency and profitability in the region. While the company does not operate subsidiaries in central and eastern Europe, it moved to strengthen its business there prior to the recent expansion of the EU, which saw countries such as Hungary, Poland and the
281
Chapter 21: Virbac
Czech Republic become fully fledged member states in 2004. A representative office has been opened in Hungary, and Virbac has assumed direct control of marketing and sales activities in all three countries. Companion animal products have been the main driver of recent sales growth in Europe, with strong performances reported for Virbacs Equimax equine wormer, anaesthetics, electronic identification products and the companys Leucogen feline leukaemia vaccine. Food animal product sales have been affected by sluggish market conditions in the region, and revenues in this segment of the European portfolio are believed to have fallen back in 2004 as a result of further downturns in the pig and poultry production sector notably in Spain. 21.3.2 North America Virbac bolstered its position in the US market by merging its local subsidiary with Agri-Nutrition Groups diversified companion animal business in 1999. The French company emerged with a 60% stake in the enterprise, which trades as Virbac Corp. In addition to a substantially broader US portfolio, Virbac also accessed manufacturing and research capabilities, as well as Agri-Nutrition Groups established distribution networks, which have since been used to lever established Virbac products into the worlds biggest animal health market. While Virbac runs a subsidiary in Mexico and distributes products in Canada, its US business was already the dominant source of its North American revenues, but interests there were increased further in 2003 by the acquisition of Delmarva Laboratories and the veterinary business of King Pharmaceuticals. Both transactions were completed in the third quarter of that year, and boosted Virbacs US revenues in both 2003 and 2004. Definitive financial results for both years were not filed until well into 2005, however, following a lengthy investigation into accounting irregularities at Virbac Corp, which first emerged towards the end of 2003. While the company has still to resolve legal action taken against it by shareholders in the wake of the accounting affair, the retrospective audit of the business is now complete, and with new senior management in place Virbac Corp appears capable of putting recent problems behind it. When financial results for the company were finally released, they revealed a pretax income of $3.6 million (compared with a pre-tax loss of $4.3 million in 2003), generated on sales that were 15% higher at $77.1 million. The US business is split into three segments, with prescription veterinary products contributing just over $39 million (51%) to the 2004 sales total, consumer brands $21 million (27%) and contract manufacturing activity for the remaining $16.5 million (22%). The residual impact of the King and Delmarva acquisitions was the main driver of prescription product sales in 2004, but sales of the companys canine heartworm, dermatology and dental product ranges all rose at double-digit rates. Revenues generated by the Iverhart Plus heartworm product were up by more than 40% following the withdrawal of Fort Dodges competitor product, ProHeart 6, in September 2004. Gains in those parts of the portfolio were offset by lower sales of companion animal insecticides, while revenues generated by the companys OTC product lines were also down on year-earlier figures. Contract manufacturing T&F Informa UK Ltd, 2005
282
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business increased, reflecting stronger customer demand and increased sales of the generic equine wormers that are sold by Pfizer in the US under an agreement with Virbac Corp. 21.3.3 Other markets Virbac generates approximately a quarter of its global revenues in markets outside Europe and North America. The Asia/Pacific region is the biggest contributor to that figure, but the company is also active in Latin America and across Africa and the Middle East. The Asia/Pacific region has been a major target for expansion of the Virbac business, which now boasts subsidiaries in several of the regions emerging markets as well as in Japan, Australia and New Zealand. Revenues in the latter market have declined following the termination of a distribution agreement under which Virbac previously handled the Purina pet food range, while further north, operating conditions in Asia have been made difficult by the disruptive impact of avian influenza outbreaks on veterinary markets. A return to positive growth in the region has been reported recently. Similar comments apply to the business in south America, where operating conditions were complicated earlier in the decade by severe economic problems in Brazil and Argentina. Both countries are now posting strong economic growth, however, and that recovery is being reflected in the animal health sector, were demand is strong, especially in Brazil. Virbacs food animal product lines are now handled by Pfizer and Elanco in Brazil, following its decision to focus resources on its companion animal business at the beginning of the decade.
21.4
Product portfolio
The Virbac business is led by companion animal products, which are responsible for almost two-thirds of the companys global revenues. That figure has risen in recent years as a result of acquisitions and new product launches in the companion animal sector and the difficult conditions faced by the food animal business in some major markets. Key product segments include antiparasitics and anti-infectives, both of which are believed to generate more than 20% of global revenues. Vaccines are responsible for a further 12% share, while Virbac also markets extensive lines of pharmaceutical specialities and dermatologicals, and is involved in the nutraceutical and pet food market segments.
21.4.1
Antiparasitics Virbacs range of parasite control products, which is dominated by products for use in small animals, horses and cattle, generates global revenues of more than Euro 80 million. This segment of the portfolio has been broadened considerably in recent years by the commercialisation of generic ivermectin formulations, which have been developed for use in all major species sectors. Virbac was the first company to commercialise a generic copy of Merials Heartgard Plus (ivermectin and pyrantel pamoate) canine heartworm control in the US, and sales of the product, which is sold as Iverhart Plus, rose by
283
Chapter 21: Virbac
more than 40% in 2004 following the withdrawal of Fort Dodges ProHeart 6 brand from the US market in September. The company has also commercialised heartworm products containing abamectin in combination with praziquantel and oxibendazole in Australia and a number of other international markets under the Friskies and Canimax brands. In the equine worming market, Virbac has commercialised products under the Equell and Equimax brands, with the latter containing both ivermectin and praziquantel for additional cover against tapeworm. Pfizer markets these products in the US, but Virbac handles them directly in most other markets, and rolled out the Equimax combination product across Europe during 2002 and 2003. In the livestock sector, generic ivermectins are sold as Virbamec and Virbamax, with pour-on and injectable formulations now well established in most major markets. Virbamec F, an ivermectin/clorsulon combination, has been launched in several countries, while Flukamec, a combination of abamectin and triclabendazole for use in sheep, has been added to the range in Australia and is now being rolled out in other major sheep markets. A novel, patented product containing ivermectin and the anabolic growth hormone, zeranol, has been developed and commercialised in Latin America, and was launched in Mexico during 2002. Sold as Zeramec, the product has been noted as a strong contributor to Latin American sales. Virbac has also been active in the market for generic benzimidazole products following the expiry of original patents on key molecules in that anthelmintic class in the 1990s. A range of oxfendazole-based wormers has been commercialised in Europe under the Oxfenil brand, while the company has also combined oxfendazole with avermectin molecules in broad-spectrum heartworm preventatives. Virbacs ectoparasiticide range includes well-established lines such as the Prevender (diazinon) and Preventic (amitraz) insecticidal collar ranges. A more recent addition to the portfolio is the insect growth regulator, pyriproxyfen, rights to which were obtained under an agreement with the Japanese company, Sumitomo. Several formulations have been brought to market, including spray and line-on products marketed as Duowin and a combination product containing pyriproxyfen and the knock-down insecticide, permethrin. A spot-on formulation of the IGR has also been brought to market under the Cyclio trade name, while a canine collar containing pyriproxyfen and dimpylate has been commercialised in Japan. 21.4.2 Anti-infectives Virbacs anti-infectives range has been affected over the past couple of years by a downturn in sales of products for use in pigs. Sales of the companys flagship anti-infective, Suramox (amoxicillin), have remained relatively strong in most markets, but sales across the range have fallen in some key target countries following a marked deterioration in operating conditions. Suramox features a patented formulation process that improves the solubility of antibiotic active ingredients in pre-mix products. This enables more accurate dosing and prevents degradation of active ingredient in feed. The product was launched in France during the second half of the 1990s, but is a more recent addition to the Virbac range in some other European countries and international markets. Initial indications were for use in T&F Informa UK Ltd, 2005
284
Chapter 21: Virbac
poultry, but approvals have also been granted for use in pigs, where Suramox now generates a substantial proportion of its revenues. Virbac markets a broad range of other anti-infectives for use in both companion animal and livestock species. The US companion animal range has been boosted by the acquisition of Delmarva Laboratories, which generates the majority of its revenues from sales of products containing amoxicillin and clindamycin. The livestock anti-infectives range is likely to be expanded in the second half of the decade as Virbac takes advantage of recent and upcoming patent expiries. The company has already launched generics containing florfenicol and ceftiofur in Latin America, and will roll them out in northern hemisphere markets when originator patents are exhausted there. 21.4.3 Biologicals Revenues generated by Virbacs biologicals range have been relatively strong in the past two years, thanks largely to the continued popularity of the companys Leucogen feline leukaemia vaccine in European markets and contributions from the interferon product, Virbagen Omega. Licensed from Toray Industries in Japan, Virbagen Omega became the first interferon to be approved for veterinary use in Europe when it was granted authorisation under the EUs centralised registration procedure in 2001. Initial EU approval is for the treatment of canine parvovirus, but regulators in Australia have also approved the product for use against calicivirus infection in cats and it has potential applications in a number of therapeutic areas, including the treatment of certain tumours in small animals. Trials with the product are also being conducted in cats infected with FeLV and FIV. Virbacs established biologicals range is dominated by small animal vaccines. Combination products offering protection against the most common viral challenges to dogs and cats are sold under the Canigen (canine) and Feligen (feline) trade names, but the companys flagship vaccine is the feline leukaemia preventative, Leucogen, sales of which are close to Euro 15 million. Virbac has marketed Leucogen since the 1980s under an agreement with codeveloper Aquila Pharmaceuticals. Aquila was bought by Antigenics Inc in 2000, and in 2004 Virbac acquired outstanding rights to Leucogen from Antigenics. The deal includes intellectual property, regulatory filings and inventories associated with manufacture of the vaccine. Virbac also markets an oral rabies vaccine, which has been used as part of rabies eradication programmes in mainland Europe. Developed in collaboration with the French national scientific research centre (CNRS), the vaccine is contained in bait for foxes, which are the main vector of the disease in Europe. It has been used successfully for a decade now, with notable success in countries such as France and Switzerland. The acquisition in 2003 of the French veterinary diagnostics specialist, BioVeto Tests has strengthened Virbacs interests in the biologicals market. Revenues from BioVeto Testss existing range are modest, at around Euro 2 million, but the company was also active in the companion animal vaccine T&F Informa UK Ltd, 2005
285
Chapter 21: Virbac
development field, and Virbac is expected eventually to launch new products as a result of those programmes. 21.4.4 Other products Virbacs portfolio has been broadened over the years by acquisitions and inhouse moves into new product areas. Significant areas of interest include the companion animal dermatology, dental hygiene and diet markets, while recent purchases have seen the company gain a position in the US endocrinology treatment sector. Dermatological interests are strongest in the US, where Virbac acquired the Allerderm business in the first half of the 1990s. Products from the range have since been launched internationally, and the company has applied novel formulation technology (spherulites) to a number of shampoos in order to enhance residual activity. A new allergic dermatitis treatment, Genesis (triamcinolone), was added to the range in 2002 following the acquisition of rights to the product from RMS Laboratories. Companion animal speciality products include anaesthetics, antiinflammatories and dental hygiene treatments. The canine osteoarthritis treatment, Fortiflex (chondroitin sulphate/chitosan), is among recent additions to the range, and has performed strongly in European markets. A NSAID, Sulidene (nimesulide), has been rolled out in Europe since the beginning of the decade, and has been a significant contributor to revenues there. Sales generated by anaesthetics have also risen recently following launches of Romidys (romifidine), a new product for use in small animals in respect of which Virbac acquired global rights from Boehringer Ingelheim in 2003.
21.5
R&D
Virbac currently invests 6.5% of its turnover equivalent in 2004 to Euro 23 million in research, development and licensing activity. It operates five research centres, and employs around 10% of its staff in research, development and licensing functions. The companys R&D efforts are dominated by work undertaken at its Carros (France) headquarters facility, where approximately 70% of research spending is invested. A further 17% of R&D funds are devoted to programmes being pursued in the US, while the remaining 13% is spent at facilities in Australia, Mexico and Vietnam. Pharmaceutical R&D accounts for 80% of spending, with work in the biologicals sector responsible for 20%. As a stand-alone animal health company, Virbac lacks access to in-house human pharmaceutical or insecticide research programmes available to many of its competitors. It has used product and technology licensing agreements successfully to broaden its portfolio, however, sourcing a number of recently launched products in this way. Global rights to the companion animal anaesthetic, romifidine, were acquired from Boehringer Ingelheim for Euro 6 million in 2003, for example, while other recent additions such as the Virbagen interferon product and the insect growth regulator, pyriproxyfen, were also accessed through licensing deals. Virbagen Omega is the target of significant development programmes that aim to achieve broader commercialisation as well as the registration of
286
Chapter 21: Virbac
expanded indications. Use of the product in cats is expected to be approved by European regulators in the near future. Several more conventional biologicals are also in late-stage development, including new vaccines against canine parvovirus and feline chlamydiosis. Products at an earlier stage are thought to include vaccines against FIV and Lyme disease, while the acquisition of BioVeto Tests included a number of development-stage companion animal vaccines. Chief among these is a canine leishmaniasis vaccine. In the pharmaceutical sector, Virbac has brought a stream of new antiparasitics and anti-infectives to market over the past five years. These have included products such as pyriproxyfen, rights to which were acquired under a licensing agreement, and a broad range of generics, among which the companys ivermectin-based products are the most significant. Virbac is a major force in the conventional generics market, but is also capable of applying in-house expertise to develop value-added products such as the ivermectin/zeranol combination launched recently in Mexico. Generics containing florfenicol and ceftiofur have been rolled out by the company in initial markets, and will be the focus of broad development projects in coming years as Virbac targets a position in key northern hemisphere markets for these products.
21.6
Strategy
While the accounting irregularities uncovered at Virbacs US subsidiary in 2003 have generated unforeseen costs for the company, it maintains that operational activity there has been largely unaffected, and revenues generated by the US business increased sharply in 2004 partly due to the residual impact of recent acquisitions, but also as a result of in-house growth. While sales may be rising, Virbac Corp sustained net losses totalling more than $8 million between 2000 and 2003, and the net income of $1.5 million reported recently in its belatedly filed results for 2004 will have been welcomed by its parent. Margins generated by the US business remain significantly below corporate levels, however, and increasing Virbac Corps contribution to global earnings will be a priority for new management there. Further strategic acquisitions are expected in the US during the second half of the decade as part of Virbacs long-term efforts to build a more substantial position in the worlds largest animal health products market. A stronger presence is also being sought in other regions, with potential growth markets in Asia identified as a key target in this respect. The company has already established subsidiaries in several of south-east Asias developing economies, including Thailand and Vietnam. Acquisition or jointventure deals are anticipated elsewhere in the region as it looks to drive its pig and poultry products business there. A tie-up of some sort in China is among the announcements anticipated before the end of the decade. Closer to home, the companion animal business is likely to be the main driver of sales growth for the company in Europe during the next five years. Several new products have been brought to market in this sector recently, and more introductions are expected in both the pharmaceutical and vaccine segments.
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Chapter 21: Virbac
Virbac has enjoyed considerable success in the market for generic avermectins since patents on Merials ivermectin and abamectin molecules expired in the second half of the 1990s. It will hope to repeat that success during the remainder of the decade as patents on a stream of major antiparasitic and antibiotic brands expire. Competition for shares of the generics market is increasingly fierce, but Virbacs experience in the sector will stand it in good stead. Margins on generics are slim, however, and more product licensing deals will also be pursued in a bid to drive earnings.
21.7
Prospects
Having posted a decline in sales during 2003 and limited growth in 2004, Virbac appears likely to report stronger results in 2005. Such a scenario looked unlikely when the company tabled a near-2% fall in revenues for the first quarter, but a 7.6% gain in the second quarter drove first-half sales up to almost Euro 176 million 3.4% ahead of year-earlier figures. Importantly, Virbac was able to report sustained growth in all of its major operating regions during the second quarter, with sharpest gains returned in North America, Asia and Latin America three areas in which, for various reasons, the business has struggled in recent years. And while revenues generated by the food animal portfolio were down at global level, strong growth was reported for companion animal lines, which are benefiting from the impact of recent launches and improved economic conditions in some markets. While gains in the final six months of the year may not quite match those reported in the second quarter, sales are expected to surpass year-earlier figures by 5-6%. Increases at that level would see Virbac post a 2005 sales figure of around Euro 373 million up on 2004 levels by 4%. Earnings may be affected by further one-time charges associated with the accounting affair in the US, however, and it may take longer to begin driving up global pre-tax margins. Beyond 2005, sales growth generated by the existing business should continue at levels closer to those reported at the beginning of this decade than the marginal gains posted in 2004. Conditions look set to remain difficult for the companys food animal portfolio in Europe, but sales generated by that sector of the business should continue to grow elsewhere notably in Asia and South America. The companion animal business will remain the most powerful driver of sales growth in the next five years, however.
288
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Animal Pharms Top 20, 2005 Edition

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2.5 2.6 2.7 CHAPTER 3

3.5 3.6 3.7

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4.5 4.6 4.7 CHAPTER 5 BAYER 5.1 5.2

5.5 5.6 5.7 CHAPTER 6

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6.5 6.6 6.7 CHAPTER 7 CEVA 7.1 7.2

6.4.1 Pharmaceuticals 6.4.2 Biologicals 6.4.3 Others R&D Strategy Prospects

7.5 7.6 7.7 CHAPTER 8

8.3 8.4 8.5 8.6 8.7 CHAPTER 9

9.3 9.4 9.5 9.6 9.7

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10.5 10.6 10.7

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12.5 12.6 12.7 CHAPTER 13 IDEXX 13.1 13.2

R&D Strategy Prospects

151 152 153 155

13.5 13.6 13.7 CHAPER 14

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15.3.2 15.3.3 15.3.4 Product 15.4.1

15.5 15.6 15.7

16.5 16.6 16.7

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17.5 17.6 17.7

17.4.4 R&D Strategy Prospects

. . . Companion animal vaccines . . . CSL products Other pharmaceuticals

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19.5 19.6 19.7

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20.6 20.7 CHAPTER

21.5 21.6 21.7

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Table 12.1 Table 12.2

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