News of Pharmaceutical Stocks' Demise Exaggerated

With all the bad news coming out of the pharmaceutical industry lately, drug-company investors have to be wondering whether they should be bailing out before more trouble hits.

That's because so many safety questions have emerged about some of nation's best-known drugs, which has set off a stock-selling epidemic that may not slow any time soon.

While that's stirring up concerns about all drug companies and their stocks, some analysts think the negative reaction may be a bit overdone.

"People need to remember that the drug companies aren't going out of business," said Herman Saftlas, an analyst at Standard & Poor's (search). "Yes, we have had some setbacks, but the vast majority of drugs are safe."

It's understandable that investors are jittery about the current state of the drug business. Pharmaceutical stocks, long attractive to both individuals and institutions because of their solid earnings and growth potential, are increasingly under attack amid concerns about some of the industry's blockbuster drugs.

The worries first began nearly three months ago when Merck & Co. (MRK) withdrew its Vioxx (search) drug after a study showed patients taking it for 18 months had double the risk of heart attacks and strokes than those taking a placebo. With estimates putting its potential legal costs at as high as $18 billion, Merck's stock has fallen about 30 percent since the Sept. 30 announcement.

That seemed like an isolated bit of trouble until a triple-hit of industry news came on Dec. 17.

The biggest surprise was from Pfizer Inc. (PFE), which said that a study found an increased risk of heart attacks for patients taking high dosages of its top-selling arthritis pain reliever Celebrex (search). While the company plans to continue to sell Celebrex, the Food and Drug Administration says it is considering warning labels for the drug or withdrawing it drug from the market.

That same day, AstraZeneca PLC said that its lung cancer drug Iressa failed to prolong survival when compared with a sugar pill, and Eli Lilly & Co. (LLY) added a boldface warning to the label for its drug Strattera, indicating that the ADHD medicine should be discontinued in patients suffering from jaundice or liver injury.

Since that news broke, Pfizer shares have tumbled about 7 percent and AstraZeneca stock has fallen about 10 percent. Eli Lilly, which fell as much as 4 percent on its Strattera announcement, has recouped most of those losses.

Those declines have pushed the S&P Pharmaceutical Index (search) is now down about 10 percent this year, compared nearly a 9 percent gain in the S&P 500 stock index over the same period.

Some of the selling may just be a result of investors' sensitivity to adverse news out of the drug sector.

That's something that CIBC World Market's analyst Mara Goldstein touched on in a recent note to clients entitled "Big deal or not?" where she discusses Eli Lilly's Strattera warning label.

She pointed out that the Indianapolis-based company added the label following spontaneous cases of liver injury in two patients, both of whom recovered, and compared that with two million patients treated with Strattera who used the drug with no problems as well as the 6,000 patients who took part in the clinical trial.

Still, just a hint of risk is enough to spur some drug-sector analysts to tell their clients to get out of pharmaceutical stocks. Also worrisome to some is the potential for long-term earnings growth to slow amid increasing competition and pricing pressures as the new Medicare drug plan goes into effect in 2006.

Hibernia Southcoast Capital analyst Bennett Weintraub advised his clients this week to direct their investments away from pharmaceutical stocks and into biotechnology shares. In a note to clients, he said drug companies increasingly are relying on revenues from drugs already on the market, demonstrating their diminishing ability to develop new drugs through their internal research & development efforts. Biotech companies, in contrast, have more drugs in the pipeline.

Yet not all analysts are advocating an immediate exit out of all drug stocks. Some note that the drug sector has long been among the most profitable in the U.S. economy and there are solid opportunities as the baby boomers age and require more medicine.

"The drug business overall is not at risk. Specific companies may be at risk," S&P's Saftlas said.

Investors may also be reassured by the findings of a recent Associated Press poll of 1,002 adults taken Dec. 17-19 that showed more than eight in 10 Americans are at least somewhat confident about the safety of prescription drugs sold in the United States.

With that in mind, some investors may see this as a good time to buy, given that many of the drug stocks have been so badly beaten. But that might not be a risk that everyone is willing to take.