Price hikes and swine flu windfalls boost Big Pharma

It is turning out to be a better year for Big Pharma than initially feared, thanks to hefty drug price increases and windfall sales from swine flu.

What's more, the industry dodged a bullet over the summer on US healthcare reform, leaving company executives relatively upbeat going into the third-quarter reporting season, which kicks off next week.

The long-term problems have not gone away, with companies facing record losses to generics over the next four years, threatening a yawning gap in future sales and driving sector valuations to a steep discount to the wider market.

But pharmaceuticals have shown their defensive colours in the downturn, with no sign yet of a late-cycle hit to revenues.

"Our initial view was that we would see something by the third quarter, but it is starting to feel like that is not going to happen," said UBS analyst Gbola Amusa.

Drug sales, in fact, are now expected to grow by 4.5 to 5.5 per cent this year in the all-important US market, according to IMS Health, the leading tracker of prescription drug data.

Only six months ago, IMS was predicting a one to two per cent fall.

Resilient demand for medicines means pharmacies have been forced to rebuild inventories that were slashed late last year and drugmakers have pushed through steep price increases, despite the struggling economy.

Credit Suisse analyst Catherine Arnold said the average price increase for major US drug companies in the third quarter was 8.7 per cent.

Investors seeking reassurance about the sector's performance will need to look through some sizeable currency distortions.

US firms will benefit from a recent weakening in the dollar, given their large international exposure, though currency is still negative on a year-on-year basis.

Conversely, European companies - barring those reporting in dollars - will start to feel the pinch as their currencies strengthen.

Diversified healthcare group Johnson & Johnson opens the reporting season tomorrow with the market wanting to see that its broad-based business model, which means its stock trades at a premium to pure pharmas, is continuing to deliver.

Abbott Laboratories, which reports on Wednesday, should show that at least some blockbusters still have a good future, with arthritis drug Humira proving a key driver.

Switzerland's Roche reports sales figures only on Thursday and Helvea analyst Karl-Heinz Koch expects growth in the pharmaceuticals division to be driven increasingly by new use of cancer drugs including Avastin and Herceptin, underscoring the logic of this year's buyout of Genentech.

Flu drug Tamiflu, which is being stockpiled by governments to deal with the H1N1 pandemic, will also boost Roche, while demand for swine flu vaccines promises to boost GlaxoSmithKline, Sanofi-Aventis and Novartis.

Most swine flu vaccine revenues will only be booked from the fourth quarter, but companies may clarify the profit implications this month, according to analysts.

Pfizer, the world's biggest drugmaker, will report on October 20 and may offer little cheer. Across-the-board losses in its key products are likely to highlight just why it needs Wyeth, the smaller company with a promising pipeline that it agreed to buy for $68 billion in January.

The challenges at Pfizer - facing loss of patent exclusivity on the world's biggest selling drug, Lipitor, in 2011 - mirror those in the wider industry and explain Big Pharma's fall from favour.