Dark clouds loom on Big Pharma horizon

By Sam Cage

ZURICH (Reuters) - Big Pharma initially coped better than other sectors with recession but has begun to underperform, and bleak prospects of more competition, problems getting new drugs to market and cheaper medicines are looming on investors' radars.

There are few long-term reasons for the world's biggest pharmaceuticals makers to be optimistic as they approach second-quarter results, but analysts still expect solid earnings growth from many though volatile currencies make predictions tough.

"The sector is going to be in for a rough ride in the next decade," said Andrew Weiss, analyst at bank Vontobel in Zurich.

"Some of these major players are going to be smaller companies in the next decade," Weiss said. "They've failed now for nine years to develop exciting pipelines."

Healthcare is traditionally one of the last areas where consumers cut spending and the sector fared much better in the early part of the year than many downturn-hit industries.

But as economic optimism increases, the sector's long-term problems of multiple patent expiries and excess capacity are moving to the fore of investors' thinking. The process of President Barack Obama's reform of the U.S. health care system is also being closely watched.

"Political headwinds are still a risk for drug stocks as the reform process plays out in the second half '09, but the EPS risk for pharma should be manageable in our view," Deutsche Bank analyst Barbara Ryan said in a note.

That combination has pressured stocks, even as other sectors have staged something of a rebound, and the recession is hurting in some areas, especially where the consumer pays directly, rather than authorities or insurance.

The American Stock Exchange's pharmaceutical index .DRG, which includes top U.S. and European companies, has shed some 5 percent in 2009 versus a roughly 2 percent drop in the wider S&P 500 index .SPX.

CUTTING BACK

The first companies to report next week -- Johnson & Johnson (JNJ.N), Abbott Laboratories (ABT.N) and Switzerland's Novartis (NOVN.VX) -- should give a flavour of what to expect.

J&J investors are keen to know whether cost cuts can continue to offset weaker sales and will want details on its planned $1.5 billion (925.5 million pounds) investment in Elan (ELN.I) and its new drug pipeline, including high-profile experimental treatments for Alzheimer's disease.

Recession could also hurt Abbott Laboratories, which is prone to positive surprises but lost sales momentum in the first quarter, and its costly Humira arthritis drug. Novartis has said the downturn is hurting demand in areas like over-the-counter medicines.

The stronger dollar versus the year-ago quarter may hurt U.S. companies and others that report in the U.S. currency, like Novartis and AstraZeneca (AZN.L).

"We have witnessed unprecedented currency volatility over the past few quarters, creating an added layer of uncertainty for the 2009 EPS outlook for many of the names in our coverage universe," JP Morgan analysts said in a note on the U.S. sector.