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After 2018 gains, top pharma companies issue cautious outlook for 2019

After reporting generally profitable earnings for 2018, the pharmaceutical sector is preparing for more conservative helpings to come, judging by weaker forecasts brought on by drug pricing pressure and crowded markets.

Of the top 20 pharmaceutical companies by market cap, those reporting the biggest beats in 2018 were mostly based in Europe, representing four of the top five. The U.K.'s GlaxoSmithKline PLC and AstraZeneca PLC beat earnings-per-share expectations by 3.4% and 2.7%, respectively. Germany's Bayer AG did 2.1% better than anticipated, and Switzerland's Roche Holding AG beat analysts' predictions by 1.9%.

New York-based Bristol-Myers Squibb Co. was the only American company to crack the top five, beating expectations by 2.6% despite regulatory stumbles for its cancer treatment Opdivo. Also positive for the company was an 18% revenue jump at Celgene Corp., which, pending the outcome of an April shareholder vote, Bristol-Myers is poised to acquire for an estimated $95 billion in the third quarter.

Notable misses for the year occurred at Gilead Sciences Inc., Novo Nordisk A/S and AbbVie Inc., each of which has a rather narrow therapeutic focus. At the J.P. Morgan Healthcare Conference in early January 2019, many executives emphasized a more balanced portfolio to offset slumping sales.

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The year ahead

While some of the large pharmaceutical companies predict earnings will rise over 2018 in the year ahead, the predictions are conservative — especially at the largest U.S. companies.

Johnson & Johnson and Merck & Co. Inc. raised outlooks for 2019 with EPS highs of $8.65 and $4.72, respectively, but the figures were lower than analysts expected.

"Given that Johnson & Johnson has been a relative underperformer year-to-date in 2019 and also in 2018, we do think shares could and should bounce on this positive fourth-quarter performance, assuming investors view this guidance as conservative vs. base-case scenario for 2019," Leerink analyst Danielle Antalffy said in a Jan. 22 note.

Credit Suisse analyst Vamil Divan called Merck's 2019 guidance "good enough" in a Feb. 4 note but said shares would rally for the year.

Pfizer Inc.'s prediction was particularly cautious, as the company set guidance on the high end at $2.92 in advance of expected currency effects and the loss of market exclusivity of its blockbuster pain drug Lyrica.

Pressure from the drug pricing debate has led these companies to depend more on sales volume over price hikes, and coupled with pending loss of exclusivity on major products, that erosion could weaken revenues significantly.

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Biogen Inc., which is looking to expand beyond its core neuroscience areas, has the most ambitious EPS estimate for 2019 at a high of $29. Executives said during the company's January earnings call that 2018 was one of the biotech's strongest in research and development, with 15% more spent during the year to prepare for new products early in the next decade.

In an October 2018 report from Wolfe Research, analysts expected that headwinds in 2019 would outweigh the positives. Among these detractors were the erosion of pricing power, issues of market access and upcoming loss of market exclusivity across the industry, especially as generics carve out larger portions of the brand-name space.

But with cash on hand from 2018's revenues and lowered valuations of smaller biotech companies, M&A is expected to ramp up — cancer and gene therapy are spaces that have already garnered interest, and pharmaceutical companies are looking to revamp depleting R&D pipelines.

Wolfe research cited R&D productivity as the "only meaningful tailwind" of 2019. The ability to introduce new products into the pipeline, the analysts reported, is the kind of upside pharmaceutical companies should look for as prices and market volume stagnate.