NEW YORK, Nov. 11 -- The 40 percent share price slide in Merck & Co. in the five weeks after it pulled the painkiller Vioxx off the market highlighted larger problems in the pharmaceutical industry that may depress performance for years, according to academics and stock analysts who follow the sector.
The Bloomberg U.S. pharmaceutical index, made up of Merck and 13 other large players in the industry, closed Thursday at 66.46, down about 9 percent from a year ago. In the same period, the Standard & Poor's 500-stock index has risen more than 11 percent. The long-term picture is even worse -- the drug company index is down more than 30 percent since Bloomberg created it at the end of 1998.
Merck's shares have lost 40 percent of their value since the company announced it was pulling Vioxx from the market.
(David Hulshizer -- AP)
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The drug companies "have been in a slump for a couple of years, and we don't see a catalyst for change," said Herman Saftlas, a pharmaceutical analyst for Standard & Poor's. "We have holds and avoids on all the major [pharmaceutical] stocks. We have no buys in the group."
Few major new drugs are in the pipeline, competition from generics and legal costs are way up, and drug prices are facing downward pressure from a variety of other sources. Drug companies also may face increased regulatory scrutiny as the Food and Drug Administration copes with allegations that it should have acted sooner on concerns that Vioxx increased the risk of heart attacks and strokes. The pulling of Vioxx from the market also calls into question whether the industry can, or should, continue to bet the bottom line on a few heavily advertised blockbuster drugs.
Even one of the year's bright spots -- the addition of a prescription drug benefit to Medicare -- may turn out to have a dark side. The new legislation creates a new source of revenue -- estimated at $400 billion to $530 billion over 10 years -- but many experts believe price controls will eventually follow as drug bills soar.
"Prices will come down, and the margins will get smaller. The question is whether the volume will make it up," said David Moskowitz, managing director of health care research at Friedman Billings Ramsey Group Inc. "These companies are in transition."
Drug company stocks are trading at about 14 times projected earnings, down from 30 to 40 times in the 1990s, he said.
What happens in the drug industry can have broader side effects, too. Merck and Pfizer Inc. are part of the Dow Jones industrial average, and 13 pharmaceutical companies account for 6.9 percent of the S&P 500.
The Vioxx withdrawal, which has sparked congressional hearings and hundreds of lawsuits, underscores how reliant the drug companies have become on a small number of products, many of them heavily marketed "me too drugs," which are not clearly better than older, cheaper products.
According to FDA statistics, only 10 percent of the 314 drugs approved between 2000 and 2003 were based on new molecules that offered a significant improvement over drugs already on the market. The rest were molecularly similar to or no better than existing drugs.
