The logic is that there is always a steady demand for drugs, and even when times are tough, people won't forgo spending money on their medications. Drug manufacturers have also been regarded as a solid investment as their business approach is slow and steady, as each new product needs to be carefully researched and developed, which allows investors to see what new products are in the pipeline years in advance.
That common investment strategy, however, appears to be facing a challenge over the past few weeks, as the drug industry continues to be in the media limelight.
First came the announcement by U.S. pharmaceutical giant Merck which recalled its blockbuster anti-inflammatory drug Vioxx from the market about two weeks ago. The medicine, which is one of the most widely prescribed to treat arthritic pain, was withdrawn from the market after the data safety monitoring board of the Food and Drug Administration found that long-term use of the drug led to an increased risk of serious cardiovascular problems.
The recall has seemingly made Merck, a company that is a component of the Dow Jones industrial average, a risky investment. For one, the drug maker potentially faces a major legal battle with a huge price tag as it anticipates a slew of lawsuits from former Vioxx users. Moreover, Merck will face a huge loss as it forfeits earnings from a drug that raked in $2.5 billion in sales last year alone.
But that's not all.
Merck is facing another potential financial blow as its cholesterol-treating drug Zocor faces a patent expiration in 2006, which means that it will no longer have a huge advantage in that market in just over a year's time. Together, Vioxx and Zocor make up 33 percent of Merck's total revenue.
That has led credit rating agency Standard & Poor's to downgrade the drug maker's long-term outlook, and the company's share price took a nosedive, plunging to low for the year of $29.75 from the year's high of $49.95. But even as S&P warned against Merck's financial prospects over the next two to three years, its credit analyst Arthur Wong made a point of arguing that "while the loss of Vioxx was a major blow to Merck's business profile, especially in light of the looming U.S. patent expiration on Zocor, the company still has a superior business profile and a very conservative financial profile."
Indeed, while the company's stock nearly halved over the past two weeks, the share price has held relatively steady at around $30 for the past five trading sessions.
And even as Merck continues to struggle over the recall of Vioxx, other drug makers have seen their fortunes soar over the past fortnight. Indeed, for some manufacturers, a lost opportunity can spell big financial rewards for them.
MedImmune is certainly a winner this season, as the United States faces the prospect of a shortage of the flu vaccine. British drug maker Chiron, which is one of just two companies that provides the United States with the vaccine, was ordered to suspend production at their Liverpool plant, which has led to a shortage of the medication nationwide.
Worries about the dearth of the vaccine continues to rattle the nation, but for MedImmune, the shortage is a major business opportunity as it hopes to sell more of its flu vaccine FluMist that is taken nasally. Prior to the shutdown of Chiron's plant, the United States expected to have 100 million doses of the flu vaccine, up from 87 million doses that were available last year. That supply, however, is expected to be around 54 million instead, provided by Aventis Pasteur. MedImmune, meanwhile, is expected to provide around 2 million doses of its nasal spray, and the director of the National Institute of Allergy and Infectious Diseases Anthony Fauci expects demand for the spray to soar this year as a result.
MedImmune wasn't so lucky last year, as the company had to toss out about 4 million doses of the flu spray due to low demand for the relatively pricey drug. This year, however, the company is already considering beefing up its production in anticipation of high demand.
MedImmune's share price is expected to remain strong, as it continues to trade around $26 per share on the Nasdaq exchange, up from its 52 week low of $20.77, though still off its high of last year of $33.80.