Pharmas Down Across the Board Amid Poor Earnings and Price Outlook

Big Pharma had a down day Thursday, as the health-care sector dropped 1.13% amid poor earnings reports, a lost legal battle over cheap medicines and the specter of increasing competition from generic drugmakers.

The market as a whole started the session down, but stocks mostly recovered and closed modestly higher after President Obama's speech on financial reform contained no special surprises.

While a few drugmakers managed to recover some of the earlier losses, many a pharmaceutical still ended the day deep in the red: Merck (MRK) closed down 2.8%, Bristol-Myers Squibb (BMY) declined 2.6%, Eli Lilly (LLY) dropped 1.8%. Even diversified Johnson & Johnson (JNJ) dipped 0.9%, after falling as much as 1.5% earlier in the day, despite increasing its dividend.

Drug companies have lost a legal battle in the U.K. over cheap medicines. They argued that plans promoted by Britain's state health service that encourage doctors to prescribe cheaper medicines were illegal. They lost.

Troubles at Big Pharma

While perhaps only somewhat material to drugmakers' sales today, this illustrates the many problems facing Big Pharma, especially in light of the increased pressure on health-care budgets worldwide. This is in addition to the expected increasing competition pharmas are about to face from generic drugmakers as they lose patent protection on many blockbuster drugs.

Meanwhile, earnings have been rolling in, not all of them strong or encouraging, and some downright weak. Roche (RHHBY) kicked off Big Pharma earnings last week with a mid-single-digit sales growth forecast for 2010, despite having one of the more promising pipelines. Roche shares fell 1.4% Thursday. Novartis (NVS), which Tuesday reported 25% sales growth in the quarter thanks to a boost from H1N1 (so-called swine flu) vaccine sales, also expects 2010 sales to grow at single-mid digits in 2010, which doesn't bode well for the rest of the year. Novartis shares also sank 1.4% Thursday.

These forecasts are also consistent with the IMS Health forecast, which calls for a global pharmaceutical sales growth of 4% to 6% this year.

Lower Forecasts for J&J, Abbott

Meanwhile, Johnson & Johnson and Abbott (ABT) both lowered earnings guidance for 2010. Then we have Genzyme (GENZ), which reported a decline in sales and a loss Wednesday; and Baxter (BAX), which on Thursday cut its full-year outlook because of health-care reform costs and a weaker plasma protein market. Baxter shares sank 13.3% Thursday.

Not all the news in the sector was disappointing. Delcath Systems (DCTH) shares soared 19.2% Thursday after the company's experimental anti-cancer technology met the endpoint of a phase 3 trial. Analysts believe the system, which can deliver high doses of cancer drugs to the liver without exposing the whole body to toxicity, could have blockbuster potential.