Lilly, whose stock price soared 27.6 percent in 1998, is down 29.0 percent so far this year. Pfizer's shares, up 67.6 percent last year, are down 17.2 percent in 1999. But before they can do so, they'll have to overcome some big obstacles. First, analysts say, the market will probably have to absorb at least one more interest rate increase by the Federal Reserve. Most companies are sensitive to rising interest rates because higher borrowing costs eat into their profits, but drug makers are particularly vulnerable.
Inflation makes a big difference in the potential value of a drug that is in the pipeline.
This past week, as hopes intensified that the Fed will raise rates only modestly, some drug stocks revived. Drug companies may also be pressured as insurance reimbursement rules change. Some managed health care plans have eliminated coverage of some of the most popular prescription drugs. Aetna U.S. Healthcare, for example, won't fully pay for Prozac to treat depression or Lipitor to lower cholesterol. Meanwhile, President Clinton wants to add drug benefits to Medicare, opening the door to price controls that could also erode profits.