If there is one industry that should benefit from the "demographic time-bomb", it is healthcare. Consumption of medicines begins in earnest when people reach their 50s, so ageing populations should mean expanding revenues.

Yet, despite the benefit of such a strong trailing wind, many of the large pharmaceuticals companies that dominate the healthcare sector are facing their toughest outlook in a decade.

The large pharmaceuticals groups have become accustomed to notching up double-digit increases in sales and earnings as a basic minimum.

Yet, this year, a string of the industry's best-known names are facing stagnant or even declining profits. Once a staple of many investment portfolios, the sector has lost much of the premium it used to enjoy to the rest of the stock market.

The mood of soul-searching in the industry has even prompted some observers to question whether pharmaceuticals can maintain its reputation as a high-growth sector, or whether the "big pharma" model has run into a brick wall.

"The business formula on which major companies have relied for their recent successes, inventing and selling blockbuster drugs, will probably not sustain double-digit growth rates," says Franz Humer, chairman of Roche, the Swiss pharmaceuticals group.

Many of the industry's woes have been a long-time coming. There is no surprise, for instance, that a slew of best-selling drugs have lost or are about to lose patent protection. But that does not reduce the impact on the companies concerned.

During the last year, Merck, Eli Lilly, Bristol-Myers Squibb and Schering-Plough - all in the top 10 - have issued profit warnings because of expired patents.

A further $40bn of drugs will lose patent protection during the next five years, including AstraZeneca's Prilosec ulcer treatment - the best-selling drug in the world in 2000 - if it loses a court case currently under way in New York.

Brand-name drugs are also losing market share much more rapidly in the US when they go off patent as managed care companies have become more aggressive at pressuring doctors to prescribe generic copies.

Within two months of the launch last year of generic versions of Prozac, the branded version lost nearly 80 per cent of its sales.

At the same time, the industry is facing growing pressure over prices. In Europe and Japan, industry claims governments have become tougher at pushing for lower prices.

In France, for instance, some companies have threatened not to launch new medicines in the country if the government sets the prices too low.

In the US, the scope for increasing prices has been limited by pressure from managed care companies and government at state and federal levels. "If you cannot increase the volume of sales, then companies are not able to introduce big price increases as they were once able to," says Daniel Vasella, chairman of Novartis.

The issue that is troubling pharmaceuticals executives the most, however, is the performance of the industry's research labs.

Last year, the US Food and Drug Administration (FDA) approved only 28 new molecular entities (NMEs) - short-hand for genuinely new drugs - the lowest figure since 1994. Eight of the leading pharmaceutical companies did not get a new drug through the FDA last year.

Across the industry, executives are trying to work out what is the best way to run a research department. While being part of a large organisation has advantages when it comes to clinical trials or setting up computer systems for screening new targets, the fear is that the bureaucracy of big companies is stifling creativity.

A number of companies have tried to break their research operations into small units to try to recreate the entrepreneurial spirit more often found in biotechnology companies.

Tachi Yamada, head of research at GlaxoSmithKline, even admitted that the company might consider spinning out parts of the R&D department if productivity does not improve during the next decade.

The ongoing debate about whether size is an asset in research could lead to investors to baulk at acquisitions aimed at forging even bigger companies, despite the speculation that reduced earnings this year will spark a new round of consolidation.

Facing declining productivity from the labs, the pharmaceutical industry has been leaning ever more heavily on the biotechnology sector as a source of new drugs.

These deals bring their own risks, however, as Bristol-Myers has discovered with its partnership with ImClone, a New York-based company with a promising drug for cancer of the colon.

Bristol-Myers invested $2bn in the company last August, only for the Food and Drug Administration to refuse in December to review Erbitux, the cancer drug. The ImClone debacle has underlined how management of collaborations with biotechnology companies has become a central challenge for pharmaceutical executives.

"Big pharma's" loss is another's gain, however. The obvious winners from the end of patent protection on so many drugs are the generics manufacturers, although the uncertainty of the actual timing of the expiry of patents due to the lawsuits that accompany each case makes it hard for these companies to plan effectively.

Drug delivery companies, which specialise in developing new formulations or new ways of consuming existing drugs, are also benefiting as pharmaceutical companies desperately try to devise slightly different versions of their medicines to maintain market share when the original patent expires. And for biotech companies that have come up with innovative medicines, the drought in the pharmaceutical labs means that these companies are prepared to pay more to license those products.

"For all these types of mid-cap companies, the problems of the large pharmaceutical companies actually creates opportunities," says Paul Donofrio, a managing director of Bank of America in New York.

So is the "big pharma" business model bust? Not just yet. The industry is hoping that the growing understanding of genetics - including the mapping of the human genome - will give it a new lease of life.

For a start, genomics has thrown up a whole new range of targets that could lead to new drugs. And by understanding more about the link between genetics and disease, companies hope to improve the efficiency of the research process - for instance, by discovering earlier if a new drug will have serious side-effects.

Genetics could also give companies a better idea about which patients will respond to particular drugs. This brings commercial risks, of course: companies could end up denying themselves potential customers by showing that a product would not work for them.

However, the success of Herceptin, Roche's breast cancer drug which works on only about 20 per cent of patients with the disease, has convinced many companies that this type of knowledge can allow them to charge a premium price and win bigger market share.

Goran Ando, president of Pharmacia's research department, says: "If we raise the effectiveness to 80 or 90 per cent of patients, then you can take a much larger market share. The total financial return will be higher and you will not be playing Russian roulette with patients."

However, the fruits of the genetic revolution could well be many years off. Scientists admit that they are at the early stages of coming to terms with the mountain of new information that genetics has opened up.

"Despite the huge spend on this area, the new targets are much less well understood," says Nick Turner, a former research scientist and now an analyst at Jeffries in London. "There is maybe not enough knowledge within industry to push them forward."

Given that the healthcare industry is set to grow by around 10 per cent this year, executives from other sectors might question the current tone of pessimism. Yet many of the large pharmaceuticals companies have some serious problems to resolve if they are ever to return to their former level of performance.

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