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.
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.
Companies, having spent hundreds of millions of dollars to develop and test new drugs, want to maximize sales before their patents run out. So they market them as widely as possible, hoping to create a bestseller.
But that has several pitfalls, nearly all of which came into play with Vioxx, the experts said. The company incurs enormous marketing costs, the ads attract patients who would do just as well on older, cheaper drugs, and the marketing maximizes sales in a drug's early years on the market, when unknown side effects are most likely to surface.
Merck spent nearly $200 million on Vioxx advertisements, eventually persuading 20 million Americans to try the expensive painkiller, even though many would have done just as well on aspirin or ibuprofen, according to critics of Vioxx. Now an FDA researcher estimates that Vioxx may be to blame for 27,000 heart attacks and strokes.
"Vioxx is going to turn out to be a watershed in the industry. It is emblematic of everything that critics say is wrong," said Tom D'Amore, pharmaceutical analyst for the research firm Morningstar Inc.
Merck officials have repeatedly defended their handling of the drug, saying they kept the FDA and the medical community informed about what their studies showed and pulled the drug as soon as a rigorous trial confirmed the cardiovascular risk.
Even so, drug companies are going to have to change the way they market drugs, said Princeton University health economist Uwe E. Reinhardt.
"The whole blockbuster model is not going to survive the next decade" because scientists will eventually be able to use genetics to figure out in advance for whom the drug will work. Such research may reduce serious side effects, but it will also cut substantially into the potential market for each drug, he said.
Wall Street analysts say they expect successful drug companies will have to develop an array of more narrowly targeted drugs, each with a smaller market. Such a strategy would make firms less vulnerable to problems with individual products but also means companies can't count on a single successful product to cover all of their research and development costs.
The changing climate doesn't rule out the possibility that some firms will hit it big with ground-breaking medicines. For example, French drugmaker Sanofi-Aventis may be in for dynamic growth if its experimental weight-loss drug Acomplia wins approval and works as well as it appeared to in recent clinical trials.
"Even today, the industry is really driven by the products in an individual company's portfolio," said Richard G. Stefanacci, director of the health policy institute at the University of the Sciences in Philadelphia.
And President Bush's reelection is also viewed as good for drug company profits because Democratic opponent John F. Kerry had supported drug reimportation from Canada and wanted to empower Medicare to negotiate price discounts for the new drug benefit. Bush has also made clear he wants to make it harder to win big damage awards from companies over defective products, a key drug industry issue in the wake of Vioxx and other withdrawals. The Bloomberg pharmaceutical index spiked briefly the day after the election, rising 1.93 percent, but it has since given back all of its gains.
Staff researcher Richard Drezen contributed to this report.