By Lewis Krauskopf
NEW YORK (Reuters) - New threats to drug makers' revenues are rising even as the industry maneuvers to plug huge holes from looming patent expirations.
A newly elected U.S. administration under President-elect Barack Obama brings concerns over pricing and further potential scrutiny, at a time when drug companies have already faced increased uncertainty from the regulators of their products.
And although investors traditionally see the drug industry as insulated from rocky economic times, there are signs the global turmoil is taking its toll and forcing consumers to cut back on their medicines.
These issues arise as drug companies near a brutal period when many of their blockbuster products will lose patents and see sales eroded by generic rivals. Meanwhile, the industry has spent billions on research with insufficient return.
To some, the industry's struggles demand drastic change.
"We would not be buyers of the sector at current levels until we see signs that managements are beginning to take bold action to control their destiny," Jami Rubin, a U.S. pharmaceuticals analyst for Goldman Sachs, said in a recent research report.
Leaders of many of the world's top pharmaceutical companies -- including Pfizer Inc (PFE.N: Quote, Profile, Research, Stock Buzz), Merck & Co (MRK.N: Quote, Profile, Research, Stock Buzz), AstraZeneca (AZN.L: Quote, Profile, Research, Stock Buzz), Bayer AG (BAYG.DE: Quote, Profile, Research, Stock Buzz) and Daiichi Sankyo (4568.T: Quote, Profile, Research, Stock Buzz) -- will address these challenges this week at the Reuters Health Summit in New York.
Others guests from the biotech and specialty pharmaceutical industries include Gilead Sciences Inc (GILD.O: Quote, Profile, Research, Stock Buzz), Amgen Inc (AMGN.O: Quote, Profile, Research, Stock Buzz), Shire Plc (SHP.L: Quote, Profile, Research, Stock Buzz), and Elan Corp (ELN.I: Quote, Profile, Research, Stock Buzz), as well as chief executive officers of top health insurers WellPoint Inc (WLP.N: Quote, Profile, Research, Stock Buzz) and Aetna Inc (AET.N: Quote, Profile, Research, Stock Buzz), which face their own set of challenges with a new U.S. political landscape.
To be sure, the pharmaceutical industry overall has proven to be a defensive investment in weak economic times. This year, the American Stock Exchange Pharmaceutical index .DRG of large U.S. and European drug makers has fallen 23 percent, compared with a 40 percent drop for the S&P 500 index .SPX.
With investors worried about balance sheets like never before because of the credit crisis, health-care products companies overall can boast better liquidity than any other sector except for information technology, according to a recent report from Credit Suisse.
The market turbulence created another silver lining for cash-rich drug makers: the chance to pick off biotech companies or other assets with dramatically depressed valuations.
Indeed, as Eli Lilly & Co's (LLY.N: Quote, Profile, Research, Stock Buzz) purchase of ImClone Systems Inc IMCL.O shows, pharmaceutical companies may seek to buy themselves out of their patent expiration and pipeline woes.
But just as the current climate yields opportunities, problems may be on the horizon.
The Obama administration's appointments in key areas that oversee the industry -- such as the commissioner of the U.S. Food and Drug Administration and secretary of Health and Human Services -- could lead to tighter regulation.
A Democratic-led Congress may seek to allow the U.S. Medicare health program for seniors to have direct negotiations with drug makers, which have long feared such a move would lead to price controls. The possibility of broader U.S. health-care reform is also a wildcard. Continued...
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