Biotech Values

[DewDiligence]

Big Pharma’s Midterm Blues

[It’s helpful to have #msg-49486773 handy while reading this article.]

http://online.wsj.com/article/SB10001424052748703805704575594443638093542.html

›NOVEMBER 4, 2010, 2:07 P.M. ET
By HESTER PLUMRIDGE

President Obama's health-care overhaul may have been one of the hottest topics on the midterm campaign trail, but his party's election losses scarcely made an impact on global pharmaceutical-stock valuations. The market clearly doesn't anticipate the new Congress will be able to derail Democrat plans, which already are starting to weigh on drug-company earnings. Combined with strong government head winds from Europe, it points to difficult times ahead for the industry.

The market may be underestimating the impact of the U.S. overhaul. Changes to U.S. Medicaid and Medicare programs are forcing firms to offer bigger rebates on their drugs already. Johnson & Johnson last month lowered its full-year sales forecasts after third quarter U.S. revenue disappointed. It isn't yet clear whether wider health-insurance enrollment will boost volumes sufficiently to offset lower prices. Goldman Sachs estimates the changes could shave an annual 5% off pharma operating profit until 2015.

With the US still the single biggest profit pool for drugs groups, that is a problem for the whole industry. U.S. giants such as Bristol-Myers Squibb, Pfizer and Johnson & Johnson derive around 55% of revenues from the U.S, European drugs majors around 40%. Meanwhile, Europe's austerity measures are biting into profits, too: German, Greek and Spanish governments all have cut prices they pay for drugs this year. Others, including France and Ireland, use Germany as a pricing benchmark.

Drug companies hope that what they lose on developed-market sales they can more than make up in emerging-market growth. New drug approvals to replace losses from those coming off patent also are key to pharma fortunes. More-diversified firms such as Abbott Laboratories and GlaxoSmithKline with nutrition and consumer health-care divisions could be better insulated from regulatory head winds than those without alternative revenue streams. Those with relatively low emerging-market exposures such as AstraZeneca are more likely to struggle.

But with the industry trading at just 10.5 times forecast 2011 earnings, well below the midteen average multiples enjoyed over the past decade, the market is predicting a bleak future. It will take more than an election to change that prognosis.‹