Until recently, drug companies were at the top of the corporate heap -- highly profitable, politically powerful, technologically at the cutting edge. They contributed significantly to U.S. exports, created high-paying jobs and helped everyone live longer and healthier. Drug stocks were a part of any self-respecting investment portfolio.
But the sharp fall in the fortunes of the major pharmaceutical companies was all too apparent last week when a Texas jury found that Merck had acted with "conscious indifference" in marketing Vioxx, a popular painkiller that its researchers long ago suspected might cause heart problems. Ten of 12 jurors voted to award $253 million in actual and punitive damages to the family of a 59-year-old triathlete who died of a heart problem that, they concluded, might well have been linked to the drug. The company said it would appeal.
Although the Texas award is almost certain to be reduced, the industry's legal woes are just beginning. There are already more than 7,500 suits pending against Merck, and thousands more may be filed against other drugmakers with painkillers in the same class as Vioxx that also have been pulled from the market. Analysts' estimates of the industry exposure run to the tens of billions of dollars. After the verdict, Merck shares fell 8 percent, to close just over $28. Five years ago, they were trading at $90.
Other broad challenges facing the industry include the impending loss of patent protection for many of today's top-selling drugs, along with a dearth of replacements in the pipeline. The future seems to lie with biotech drugs and genetic fixes that lie outside the traditional competencies of large pharmaceutical companies.
The business and regulatory environment has also turned hostile in response to escalating drug costs. State governments are threatening to import drugs from countries with lower prices, and Democrats in Congress want the federal government to negotiate prices directly with the manufacturers. Meanwhile, newly powerful pharmacy benefit managers have driven down wholesale prices by using financial incentives to get consumers to switch to cheaper generic alternatives. The efforts have been so successful that three of the largest such firms just reported record, or near-record, earnings.
On another front, the industry, faced with public backlash, has been forced to adopt voluntary curbs on its direct-to-consumer advertising.
Critics have long complained about the cozy relationships between drug companies and doctors. But the Journal of the American Medical Association opened another front in the war against unethical practices by exposing a widespread practice of doctors receiving fees from investors and industry analysts to give them early, inside information about drug trials still in progress. The JAMA article estimated that nearly 10 percent of the nation's doctors have signed up as consultants to hedge funds, venture capitalists and other investment firms.