Merck’s Trouble With Vioxx May Be Catching
Big Pharma is in for some harsh medicine.
The furor over Vioxx, the arthritis drug that Merck & Co. withdrew because studies showed it sometimes increased the risk of heart attacks and strokes, is merely one of the ominous threats hanging over the industry.
When Sen. Charles E. Grassley (R-Iowa) accused the Food and Drug Administration last week of being “under the thumb” of the pharmaceutical companies it is supposed to regulate, the sentiment -- seconded by other members of the Senate Finance Committee -- assured that FDA regulation would be tightened.
That means clinical trials of proposed drugs will take longer, while fewer new drugs will be approved to come on the market each year. And that will extend a trend, shown clearly in FDA statistics, affecting all forms of pharmaceuticals. In turn, sales and earnings growth for the industry will slow.
The stock market, forever forward-looking, has already taken notice.
Merck, of course, was hit hard by its withdrawal of Vioxx on Sept. 30 and by evidence that has since surfaced that the company waited far too long to remove the profitable drug from circulation. In recent months, Merck shares have fallen from $45 to Friday’s close of $27.12. But Merck was already trading way off its 2001 peak of $95 a share.
Similarly, Pfizer Inc. has retreated from a lofty valuation of 35 times earnings in 2001 to just 13 times earnings today. Other drug companies have taken similar falls. In the parlance of Wall Street, they are “broken stocks.”
What happened?
It was only a couple of years ago that the pharmaceutical industry, a $250-billion-a-year colossus blending high technology and even higher profits, was being hailed as a sure-fire success story of the 21st century. The future seemed nothing but bright given the aging of the baby boom population and Uncle Sam’s impending move to expand the Medicare program by covering the cost of drugs for seniors.
Yet the sector has staggered and stumbled like someone who swallowed too many of the wrong kind of pills.
Indeed, Vioxx is not the first so-called wonder drug found to be a danger. The diabetes treatment Rezulin was withdrawn by Warner-Lambert Co. in 2000 after being cited as a suspect in 556 deaths. Pfizer acquired Warner-Lambert around that time and set aside almost $1 billion to compensate victims.
More recently, antidepressants prescribed for children have been required to carry poison warning labels. Fresh clinical trials, meanwhile, are being ordered for other drugs.
As the public’s awe has turned to skepticism and disdain, the industry has become a target of class-action lawsuits. A mountain of litigation, potentially involving $4 billion to $18 billion in damages by one estimate last week, is already in the works against Merck on the Vioxx matter.
And some think that the entire affair could force more clinical trial data into the public arena, giving trial lawyers even more fodder to bring suits against the drug industry.
“The regulatory question raised by Vioxx is who should own the information gained in clinical trials,” says Stuart Schweitzer, a professor of public health at UCLA and a pharmaceutical economist. “Should it be the company or the FDA?”
In spite of all this, there is a case to be made that Merck will rebound in due course, and stock market bottom feeders stand to make some serious money when it does. Morgan Stanley analysts Jami Rubin and Nancy Yu are among those who see Merck’s shares “moving forward from a significantly lower base.”
But other seasoned investors take a more somber view -- and it goes well beyond just Merck.
As these folks explain it, the phenomenon of relatively few new drugs coming to market is not going to reverse itself quickly.
“The problem is that the industry is in transition between old science and new science,” says Viren Mehta, head of Mehta Partners, a New York firm that analyzes 300 drug companies worldwide.
Traditional research into chemical compounds with broad applications, such as major antibiotics, is not yielding many results these days. And, Mehta says, the promise of new drugs based on genetic engineering has not arrived “as fast as we anticipated in the late 1990s.”
The result is that companies are not getting the “productivity from research” that they previously enjoyed. And Mehta believes that the transition from chemical to genetic medicine could take five years or 15 years -- or even longer. “We can’t really predict,” he says.
In the meantime, the industry will continue to do what it always has: look to make drugs that serve the biggest markets possible. The arthritis painkillers -- Vioxx as well as Pfizer’s Celebrex and Bextra -- fall into that category.
What is clear now is that these powerful pills can come with major side effects -- not only for the users of the drugs, as it turns out, but for regulators, corporations and their shareholders too.
James Flanigan can be reached at jim.flanigan @latimes.com
