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Stock Strategist Industry Reports

Improved Outlook for Big Pharma Stocks in 2009

While challenges remain, we expect Big Pharma to perform well in 2009.

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Following an approximate 25% haircut in their share prices in 2008, we expect pharmaceutical stocks to perform well in 2009. Relatively few major patents expire in 2009, and we believe the industry's major patent expirations beginning in 2011 have largely been factored into drug stocks' valuations. Also, we project several new drugs will gain traction in 2009, as well as a few key blockbuster approvals. Additionally, we expect a large amount of data flow, setting up strong pipelines for patent-weary pharmaceutical companies to take into the patent cliff in 2011. Further, we believe continued cost cutting will buoy earnings growth and acquisitions will augment internal growth.

On the negative side, we expect the new U.S. government will begin to draft unfriendly industry legislation in 2009, creating head winds for the group. Also, while notoriously difficult to predict, foreign exchange rates could work against U.S. drug companies. Additionally, while the recessionary environment will likely weigh down growth, we believe drug sales will show a large degree of resistance to a deteriorating economy.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.