FTSE 350 pharmaceuticals & biotechnology: Big pharma under a cloud

Most exposed to austerity this year are GlaxoSmithKline (GSK) and AstraZeneca (AZN) for broadly similar reasons. The European market, where pharma companies generate at least a quarter of their sales, has proved to be worst affected by the global slowdown and resulting austerity measures. From Germany drastically cutting the reference prices that insurance companies will reimburse for medicines by €2bn (£1.62bn) a year, to Spanish pharmacists unable to buy drugs as regional budgets are squeezed to breaking point, there is little sign that the pressure in Europe will ease, particularly for older medicines that form the bulk of revenues.

Problems in the European periphery need to be factored in for UK pharma companies as well. Spain, in particular, poses problems for drugs companies because the way medicines are paid for by the autonomous regions makes recovering money owed difficult. Lack of payment has meant supplies of some medicines are scarce in Spanish pharmacies and the central government may need to step in to clear the log jam. Whatever the short-term problems for GSK in Europe, the company can still look to its over-the-counter business, which isn't subject to reimbursement constraints for prescription medicines. It may need to expand the business in order to rebuild its appeal to investors, but at least the generous dividend is safe.

What will happen with AstraZeneca is much harder to forecast this year because the company is exposed to such a wide range of outcomes under its new chief executive Pascal Soriot, formerly of Roche (CH: RO). Mr Soriot has already suspended the share buyback programme in favour of preserving cash for buying in new products in 2013. This will not have much of an impact on results for the next few years and AstraZeneca's core revenue is forecast to contract by 2 per cent right up until 2016, while the rest of the sector clocks up 5 per cent revenue growth. After that date, AstraZeneca could start to benefit from several diabetes drugs it has in development, as well as an expanded indication for heart drug, Crestor. Mr Soriot's ability to turn Astra around will be further tested by the fact that the company cannot expect to find further cost-savings after several major rounds of redundancies over the past two years.

Managing a difficult handover will be a major theme at Shire Pharmaceuticals (SHP) in 2013. The smallest of the three big companies will probably undergo a round of strategic soul-searching of its own this year after the retirement of chief executive Angus Russell. His replacement, Danish-born Flemming Ornskov, was chief marketing officer and global head of strategic marketing for Bayer's pharmaceutical business. The appointment offers some clues over how Shire will develop its strategy. Mr Ornskov brings experience of selling into emerging markets, as well as operating within a diversified conglomerate structure. The task for Shire will be to win back investor confidence after a sustained fall in the share price last year – by the end of October, the company's share price was down a hefty 25 per cent compared with the start of 2012. Shire's basic reliance on attention deficit disorder medicines is seen as an increasing handicap as generic competition, particularly to Adderall XR, is increasing. Mr Ornskov's task will therefore be setting out a strategy to break this link. In the meantime, a plan to buy back $500m (£310m) of shares this year should settle nerves.