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Pharmaceuticals face recession health check

Swiss pharma giants face testing time

The apparent resilience of the pharmaceutical industry to the economic downturn will be tested to full in the coming years, analysts warn.

Profits leapt 25 per cent last year at Swiss giant Novartis while rival Roche forged ahead with its hostile bid for biotech firm Genentech despite a dip in results. But balance sheets alone do not tell the whole story.

Pharmaceutical companies traditionally weather economic downturns better than other industries as health spending is considered a necessity rather than a luxury. However, the severity of the current recession coupled with internal problems within the sector may prove more of a drag this time around.

Roche disappointed the market on Wednesday by posting a five per cent fall in net profits thanks in large part to a strengthening Swiss franc and falling sales of pandemic drug Tamiflu.

There was no mention of job cuts at either Basel-based firm, but international competitors have been shedding posts by the thousand in recent months as sales flatten.

Price pressure

Birgit Kulhoff, an analyst at Rahn and Bodmer bank, believes it is only a matter of time before the global recession starts to take its toll on the sector.

“We will probably start to see more pressure on prices [of drugs] as governments spend their money on propping up economies,” she told swissinfo. “Hospital budgets might also come under pressure and they may try to save some money by negotiating discounts or using more generics.”

Roche chief executive Severin Schwan disagreed, maintaining that pharmaceutical firms are not affected in the same way as other sectors.

“There is no doubt that our industry is less exposed to the financial crisis. The reason is that we provide solutions that help patients to improve the quality of their lives and to prolong life,” he told swissinfo. “However volatile the financial markets are, this demand will remain.”

Other observers believe that pharmaceutical firms face greater risks from patent expiries on their best selling drugs than from the fallout of the financial crisis.

Takeover activity

Christophe Eggmann, an analyst with Julius Bär bank, is of the opinion that core drug sales would not be severely affected by the recession. He argues that the failure to produce enough blockbuster drugs to replace existing best sellers represents a greater threat.

“Pharmaceutical companies have problems of their own making. It is clear that they face huge challenges of patent expiry and product pipelines,” he told swissinfo.

Eggmann believes that, in this respect, Roche is standing on more solid foundations despite Novartis posting better results last year.

Wary of the patent threat, both Swiss companies – and many international competitors – have embarked on a recent round of takeover activity that flies in the face of the current credit crunch.

Roche launched a $42.1 billion (SFr47.9 billion) hostile bid to fully take over its biotech partner Genentech last month in an attempt to bring innovation in-house. Last year, Novartis invested some of its cash reserves on a series of deals.

“Pharma companies have generated big free cash flows and they need to invest it. Valuations [of takeover targets] have been lowered in the current economic climate,” Kulhoff said.

swissinfo, Matthew Allen in Basel

Novartis 2008 results:

Sales: $41.459 billion (SFr48.16 billion) – ($38.072 billion in 2007), up 8.9%
Operating profit: $8.964 billion (SFr10.41 billion) – ($6,781 billion in 2007), up 32.2%
Net profit: $8.163 billion (Sfr9.48 billion) – ($6.54 billion in 2007), up 24.8%
Proposed dividend: SFr2 (+25%)

Roche 2008 results:

Sales: SFr45.617 (SFr46,133 in 2007), down 1%
Operating profit: SFr13.924 billion (SFr14.468 billion), down 4%
Net profit: SFr10.844 billion (SFr11.437 billion), down 5%
Proposed dividend: SFr5 (+9%)

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SWI - a branch of Swiss Broadcasting Corporation SRG SSR