Drug company sales and earnings picked up steam in the second half of 1997--and that roll is likely to continue well into 1998. With aging baby boomers contributing to surging demand for prescription drugs, sales by the industry's top 10 players should be up 12% this year, vs. 8% last year, predict Cowen & Co. analysts Stephen M. Scala and Ian C. Sanderson. "The elements that drove the industry in 1997 will still be there in 1998," Scala says.

While price increases continue to climb, up about 2.9% in the third quarter of 1997 compared with the third quarter of 1996, that is still a far cry from the hikes of 7% and more that the industry racked up in the late 1980s. That's why drugmakers are relying on breakthrough products to drive the top line. Among the expected introductions in 1998 are Eli Lilly & Co.'s newly approved osteoporosis drug, Evista, and Pfizer Inc.'s impotence drug, Viagra. Both products could top $1 billion in sales.

Successful new drugs actually could increase pressure on the industry from managed-care providers. Prescription drug costs rose rapidly in the last year, in part due to expensive new drugs, and health maintenance organizations are looking for ways to rein in those expenses. That means HMOs will try to tighten restrictions on which drugs their members can use--and look for ways to pass on more of the costs to consumers. Pharmaceutical executives expect that HMOs will consider the cost effectiveness of drug treatments, however. "There has been a recognition that pharmaceuticals can reduce your overall health-care costs," contends Richard Jay Kogan, chief executive of Schering-Plough Corp.

SALES MESSAGE. Drugmakers increasingly will take their sales message directly to patients. Research firm IMS America Ltd. expects consumer advertising for pharmaceuticals to hit $1 billion in 1998, almost double the amount spent in 1997. Says Stephen S. Tang, a vice-president with A.T. Kearney Inc.: "Pharmaceutical companies have suddenly woken up to the fact that brands are important."

Big drug players will continue to form partnerships with smaller biotechnology companies. A growing number of biotech operators focus on providing research services to larger drugmakers, including identifying genetic targets for new treatments. At the same time, after some high-profile failures in 1997, including the withdrawal of Interneuron Pharmaceuticals Inc.'s obesity drug, Redux, investors are hoping for some new product hits in 1998. One promising candidate is BioChem Pharma Inc.'s hepatitis-B drug, Lamivudine, which should be launched early this year. "This could be one of the biggest products yet to come from the biotech industry," says UBS Securities analyst Eric T. Schmidt. If drugmakers can keep managed care cost-cutters at bay, that sort of innovation will make 1998 a standout.