By LINDA A. JOHNSON AP Business Writer TRENTON, N.J. (AP) — Stricter regulation, a dearth of new blockbuster drugs, increased pressure to lower prices and more intense generic competition hammered the pharmaceutical industry in 2008, but its stocks still weathered the market collapse better than many other sectors. The industry’s ills predate the financial crisis but are being exacerbated as the recession pushes poor patients to delay refills, trade down to generics and split pills. With challenges likely to drag on, drugmakers almost unanimously took the surest steps in 2008 to improve their bottom lines — slashing thousands of jobs, halting R&D projects and selling real estate. Job cuts even hit salespeople and scientists. Drugmakers also re-engineered their sales machines, with fewer sales reps calling on harried doctors. There was a huge push to boost sales in big-population emerging markets like India. Drug stocks are often considered defensive against market mayhem, since consumers have to take their medicine no matter what the stock market is doing. But the sector didn’t quite play out that way this year. Investors “got an absolutely wretched year in returns” from drugmakers, said WBB Securities analyst Steve Brozak. “They’ve been hoarding their cash worse than Scrooge,” amid the global credit crunch, but need to invest more in science, he added. “It seems like it’s much more difficult to be an investor in a pure-play pharma company now,” says Eric Schoenstein, a portfolio manager at Jensen Investment Management. He now favors companies such as Johnson & Johnson and Abbott Laboratories because they generate cash flow from lots of products besides prescription drugs. The worst performer among major drugmakers was Merck & Co. Having just clawed its way back to $58-a-share after settling tens of thousands of lawsuits over withdrawn painkiller Vioxx, the stock lost half its value due to efficacy and safety concerns over cholesterol drugs it sells with partner Schering-Plough Corp. Merck’s shares ended 2008 down 48 percent. The sector’s top two performers saw shares decline less than 5 percent in value: Abbott Laboratories and Britain’s AstraZeneca PLC, one of four foreign companies among the top five drugmakers. Still, the 21 percent drop in the Dow Jones U.S. Pharmaceuticals Index beat the broader market in 2008, outperforming both the Dow Jones Total Market Index’s 40 percent decline and the 39 percent fall in the Standard & Poor’s 500 Index. Looking ahead, drugmakers’ biggest problem remains a limited supply of hot, late-stage drugs to replace the 1990s’ blockbusters which are facing a “patent cliff” — a period between 2010 and 2013 when patent protection on many top-selling drugs will expire, and lower-cost generic drugs may reach the market.Big pharma is estimated to lose a combined $30 billion in revenue during that period, as competition heats up for Pfizer Inc.’s cholesterol drug Lipitor, Bristol-Myers Squibb Co.’s blood thinner Plavix, and Eli Lilly & Co.’s anti-psychotic Zyprexa. To fill the gaps in their pipelines quickly, some companies are buying up biotechs and smaller partners. But not all of those bids have succeeded: Bristol-Myers lost out to Lilly after it tried to buy partner and cancer drug maker ImClone Systems Inc., and Genentech Inc. spurned Roche Group’s $44 billion offer, still open, as too low. Schoenstein said he expects small, “fill-in” acquisitions to continue in 2009, but thinks major mergers are unlikely because financing on that scale will be scarce.Industry executives and analysts also expect more pressure on drug prices in 2009, from employers and insurers, new generic drugs and the Obama administration possibly requiring discounts on drugs in the Medicare program. Washington also is considered likely to open the door to development of generic biologic drugs; Merck recently announced plans to jump into that area. Pharmaceutical companies also face a tougher road to drug approval from the Food and Drug Administration. In the wake of health scandals like Vioxx, the agency has been delaying drug decisions and sometimes requiring new patient studies, often to check for safety issues like heart problems. This has added to drugmakers’ costs and delayed revenue growth.