A quick glance at some of the major pharmaceutical companies will show that many of their stocks have tanked recently.  Concerns about safety issues, and the fear that the Food and Drug Administration may not be doing its job, have set off a wave of selling that is apt to continue for some time. 

But a closer look at the industry as a whole, and the hardest-hit companies in particular, shows great potential for the medium- to long-term investor.¹
 
There are a number of trends that point to one inescapable conclusion:  When it comes to the big pharmaceutical companies, what comes down must go up.  People aren’t going to stop taking drugs, and big drug companies are not going to stop inventing blockbusters. 
 
The troubles began last September 30, when Merck & Company withdrew Vioxx from the market after research showed that people who had been on it for a year and a half were twice as likely to have heart attacks.  Merck was looking at an immediate hit of possibly $18 billion in legal costs, and its stock plunged from around $45 to well under $30 within a few weeks.  Since Vioxx’s withdrawal, Merck has lost $28.1 billion in market capitalization — 30 percent of its value — and is cutting 5,100 jobs.
 
We had all seen drug companies stumble before, but then on December 17, Pfizer, Eli Lilly, and AstraZeneca all made disastrous announcements.  Pfizer said its hit drug Celebrex increased heart attacks.  Lilly added a boldface warning to its drug Strattera, and AstraZeneca said its widely-used lung cancer drug had proven no better than a sugar pill.  This seemed like too much coincidence, and the market responded harshly. 
 
Pfizer lost 7 percent, AstraZeneca tumbled by 10 points, and Lilly lost 4 percent.  The Standard & Poors Pharmaceutical Index went down 10 percent, while the overall S&P 500 was moving up 9 percent.  When it comes to drug companies and the huge liability they face from adverse patient reactions, the market is hypersensitive to bad news.  But when you look at the facts and trends, you see quite a different picture. 
 
For one thing, Lilly’s Strattera has been in use by two million people in addition to the 6,000 who took part in clinical trials — all...