Poor pharma performance shows no sign of let-up

By Lewis Krauskopf and Ben Hirschler - Analysis

NEW YORK/LONDON (Reuters) - Investors can expect more gloom from pharmaceutical companies this week after initial lackluster earnings from some of the largest in the industry underscored a range of ills.

The results further soured investors on drug makers' shares, which had already fallen across the board over the past year. The declines have largely stemmed from concerns over growing generic competition, major research problems for particular drugs, and fears of a tougher U.S. regulatory and political climate.

All this has underlined how much "big pharma" has lost its traditional image as a defensive investment play during rocky economic times.

"It's the start of what looks like a pretty bloody pharma results season," said Nomura Code Securities analyst Paul Diggle.

The American Stock Exchange Pharmaceutical index .DRG, which consists mainly of large U.S. and European drug makers, has fallen some 12 percent this year, underperforming broader indexes.

Some companies -- such as Pfizer (PFE.N) and Eli Lilly (LLY.N) -- are wrestling with or preparing for generic competition to their top products. GlaxoSmithKline (GSK.L) and Amgen (AMGN.O) are among those contending with safety worries over their big sellers. AstraZeneca (AZN.L) and Wyeth (WYE.N) exemplify companies hit by major research disappointments.

"It's a combination of company-specific and macro issues that have been impacting the sector for a number of years," said Ruairi O'Neill, senior equity research analyst with PNC Capital Advisors.

Investors dumped pharmaceutical shares last week after disappointing sales or outlooks from Pfizer, the world's largest drug maker, as well as Roche (ROG.VX) and Forest Laboratories (FRX.N). A weak dollar boosted Johnson & Johnson's (JNJ.N) otherwise anemic sales, while Abbott Laboratories' (ABT.N) solid results failed to excite the market.

THE WEEK AHEAD

Most of the other large drug companies will report this week, starting with Merck & Co (MRK.N), Novartis (NOVN.VX) and Eli Lilly on Monday; Wyeth on Tuesday; and Glaxo and Schering-Plough (SGP.N) on Wednesday.

The picture is unlikely to improve.

Analysts expect earnings to tumble at Glaxo, the world's No. 2 drug maker, as demand for its Avandia diabetes pill has fallen off a cliff since a safety scare last May.

Profits at Merck, Novartis and Wyeth will suffer because of competition from cheap generics.

Unlike some big pharma rivals, Novartis is taking decisive action to diversify away from slow-growing prescription drugs into more resilient health-care areas.

Earlier this month, it announced plans to buy up to 77 percent of U.S. company Alcon (ACL.N) from Nestle (NESN.VX) for $39 billion to boost its eye care business.