Drug Industry Enters Business Doldrums

In 2006, the Dow Jones Industrial Average has its best performance since 2003. But it was a tough year for the drug industry — one of the nation's most profitable industries. And it doesn't look as though the rough patch will end anytime soon.

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And if Democrats succeed in negotiating lower drug prices for Medicare patients, it could cost pharmaceutical companies billions of dollars. And that prospect is making investors nervous.

As NPR's Snigdha Prakash reports, drug stocks have lagged since the election, while other stocks has soared.

SNIGDHA PRAKASH: Not long ago, the drug industry was the nation's most profitable. The money is still very good, but investors appear to believe that the industry's foreseeable future isn't as bright as its past. There are many reasons for that sober evaluation. High on most lists are fears of what the new Democratically-controlled Congress will do in the New Year.

Mr. IRA LOSS (Equities Analyst, Washington Analysis): The phrase that's often used to describe the concern is price controls.

PRAKASH: That's Ira Loss of Washington Analysis. He's referring to the Democratic pledge to give the federal government new authority to negotiate Medicare drug prices directly with the drug companies. The Democrats say that will lead to lower prices. As Loss says, the industry fears that will happen through the kind of price controls that already exist in every other industrialized nation.

Mr. LOSS: The drug industry charges more in the United States because they can. And the concern is if they were limited in what they could charge here that this would have a negative effect on the amount of money that they put into research and development.

PRAKASH: And a negative effect on profits?

Mr. LOSS: Of course.

PRAKASH: Not only would those low prices reduce profits on sales to the government, but they would ripple through the system, forcing drug companies to offer similar discounts to large insurers for example.

Compare this to the 1990s when sales and profits in the drug industry were growing faster than in the economy as a whole. Richard Evans who, until last week, covered the industry for Sanford Bernstein and Company said back then…

Mr. RICHARD EVANS (Sanford Bernstein and Company): There was a significant period during which the industry increased prices on existing drugs two or three times faster than price increases in the broader economy.

PRAKASH: And Evans says companies were selling more drugs because of…

Mr. EVANS: More and more people getting good drug benefits, and those drug benefits being more and more generous. You no longer have that.

PRAKASH: Increases in price and per capita drug consumption accounted for more than half of the sales growth in the 1990s. And with both under attack, investors rightly believe, Evans says, that drug company profits will be growing more slowly.

Analyst Ira Loss says investors see another important change in the drug industry. In the 1990s, he says, drug makers were introducing lots of innovative new products.

Mr. LOSS: Today, companies seem to be producing slight variations of old drugs and saying that, well, this could have a benefit on safety. But in terms of real phenomenal innovation, not a lot, not a lot, and that causes investors not to want to pay up for an industry that isn't producing some steak with whatever sizzle they've got.

PRAKASH: Add to that the fact that drug companies will lose exclusive marketing rights on some of the industry's most profitable drugs over the next few years - household names like Lipitor and Nexium - and it's even clearer why investors are a little weary of the drug industry right now. Analysts say that cool embrace will likely continue through 2007.

Snigdha Prakash, NPR News, Washington.

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