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Drugmakers Singing Same Song: 2012 Will Be Tough

For drugmakers, the golden era of the 1990s, when they seemed to effortlessly churn out new multibillion-dollar pills, is not even in the rearview mirror any more.

For drugmakers, the golden era of the 1990s and early part of the last decade, when they seemed to effortlessly churn out new multibillion-dollar pills for the masses along with double-digit quarterly profit increases, is not even in the rearview mirror any more.

Buzzwords such as "blockbuster" and "cash cow" have all but disappeared. The new vocabulary stresses "headwinds," ''austerity" and "efficiency." The "Do More with Less" mantra of many industries is basically on steroids in the pharmaceutical business, where most companies have shed 10 percent to 20 percent of their workforce and closed numerous factories and offices or sold them — if they could find a buyer.

Amid these challenges, the major drugmakers have been reading from the same script in reporting mediocre year-end results and trying to brace investors for a difficult 2012.

Almost unanimously, company executives say revenue will be flat or down this year due to a mix of generic competition, pricing pressures in the European Union and now some key emerging markets, unfavorable currency exchange rates and research setbacks or manufacturing problems.

And they're all trying to soothe investors with promises of more share buybacks and dividend hikes, plans to heavily market their newest drugs and hopes for new approvals or encouraging data on medicines now in testing.

"If you didn't know what company you were listening to, they were all sounding the same" on the fourth-quarter conference calls, said Edward Jones analyst Linda Bannister. "They have good balance sheets, good cash flow (but) these companies are all struggling with the same issues."

Some of the pressures on the industry are beyond its control, such as the lingering global recession, penny-pinching by millions of unemployed people and belt-tightening by government health programs in the many countries overwhelmed with debt.

Other wounds are self-inflicted, particularly the many drug and medical device recalls that have cut into sales and raised scrutiny by regulators and quality concerns among patients.

Numerous factory production lines have been shut down under pressure from regulators because of contamination by bacteria and shards of glass or metal, improper levels of active ingredients and other safety issues. Fixing the problems and resuming production takes many months, and rival manufacturers rarely have the capacity to quickly pick up the slack, leading to drug shortages that have reached a crisis in U.S. hospitals.

Doctors are being forced to delay treatments or give patients alternatives that don't work as well, cost far more or have more dangerous side effects. Patients are dying because of this, although many of the scarce drugs are made by generic companies.

In an effort to retain investor confidence, executives are touting experimental drugs in development, which may or may not pan out. And they all stress how "shareholder friendly" they are, offering large dividends and more share buybacks, which are aimed at raising both share prices and earnings per share.

U.S.-based drugmakers, nudged by Wall Street portfolio managers, are now paying out dividends at ratios two or three times those of other big corporations, noted analyst Steve Brozak of WBB Securities. Recall-plagued Johnson & Johnson's dividend yield — the annual dividend payment divided by share price — is about 3.5 percent, while Eli Lilly and Co., the drugmaker taking the biggest hit from generic competition, is paying almost 5 percent.

"The three things that are saving the industry right now are dividends, dividends and dividends," which are propping up stock prices, Brozak said.

All the easy drugs have pretty much all been discovered and there are good, if not excellent, treatments for most common diseases, so medicine makers have shifted their strategy.

They are primarily pursuing drugs for "unmet medical needs," generally fairly rare diseases affecting thousands, or ones targeted to small subsets of patients with a particular genetic variation. While that "personalized medicine" holds great promise for much-needed treatments for cancer, Alzheimer's disease and other killers, when these new drugs hit the market, they often come with eye-popping price tags.

Recent cancer drugs are priced at or near $100,000 for a year or course of treatment. Just Wednesday, the first drug to treat the root cause of the deadly lung disorder cystic fibrosis, Vertex Pharmaceuticals Inc.'s Kalydeco, was approved by the Food and Drug Administration. Its cost for a year's supply: $294,000. Even with patient-assistance programs, a small percentage of patients with good insurance won't be able to afford the copayments.

Already, government health programs in Europe as well as some insurers are rebelling, questioning whether these new drugs have enough efficacy and safety advantages over older ones, particularly those available as inexpensive generics, to justify the cost. When those health plans have refused to cover a new drug, somedrugmakers have haggled, offering steep discounts, rebates or even deals that amount to a money-back guarantee.

Despite spending an estimated $1.4 billion to develop a typical new drug and get it to market, drug and biotech companies are generally seeing smaller returns on their investment. Some have taken billion-dollar charges for drugs that failed in the final stage of patient testing. And companies are having to trim their research budgets because of less money coming in the door now or in the near future.

Companies are all pursuing the same basic strategy: Cut costs, try to license new drugs from smaller companies, market the heck out of everything already approved, push their off-patent drugs in emerging markets and then repeat. But drugmakers have already cut staffing close to the bone, China and other emerging markets can't pay anything near U.S. drug prices, and there's a dwindling number of experimental compounds available, with more companies fighting for them.

The industry's situation has gone from problematic to "suicidal," Brozak said. "All these companies are behaving like lemmings, jumping off the cliff."

Despite all the gloom and doom hanging over the industry, most brokerage analysts have "Buy" ratings for the major pharmaceutical stocks, partly on hopes key experimental drugs will turn into big revenue generators in a few years.

For now, the positive ratings are mainly because of drugmakers' generous dividends, share repurchases and the other key number going up: people being diagnosed with expensive chronic diseases, particularly diabetes, heart disease, hepatitis C and some cancers.

That's why one of the few bright spots this quarter was Denmark's Novo Nordisk, the world's biggest maker of insulin. It reported a fourth-quarter profit increase of 19 percent and sales growth of 12 percent due to brisk sales of insulin and diabetes drugs.