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The Honolulu Advertiser

Posted on: Saturday, December 25, 2004

Drug stocks ailing after recent setbacks

By Rachel Beck
Associated Press

NEW YORK — 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, setting 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. "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. withdrew Vioxx after a study showed that patients taking the drug 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 Dec. 17.

The biggest surprise was from Pfizer Inc., 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. 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 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. added a boldface warning to the label for its drug Strattera, indicating that the medication for attention deficit/hyperactivity disorder 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.

The S&P Pharmaceutical Index is now down about 10 percent this year, compared with 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. Still, just a hint of risk is enough to spur some drug-sector analysts to tell their clients to get out of drug 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.

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.

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