High hopes, steep fall
Medical stocks should come with their own warning labels.
True, they can climb high on the strength of a powerful investment story and even make good on the promise, at least for awhile. But the relentless pressure of expectations and competition make it incredibly difficult for medical companies to sustain the stock market's peak enthusiasm.
Consider developments at two companies: Boston Scientific Corp., the stent maker headquartered in Natick, and Sepracor Inc., a drug company in Marlborough. In recent years, both companies developed what would become flagship products, reaping huge stock market rewards. Now, their positions in lucrative markets are coming under increasingly competitive pressure. Their stocks have come away worse for the experience so far this year.
Boston Scientific, which has split the $5.4 billion market for drug-eluting cardiovascular stents with Johnson & Johnson , is getting jabbed by a series of medical studies. One, prepared by the American College of Cardiology, suggests that drugs do just as good a job as stents in helping patients with heart disease live longer. Two other studies, presented Saturday, suggest an experimental drug-eluting stent made by Abbott Laboratories Inc. could be a strong new competitor.
That's some one-two punch: One report questioning the size of your market, and two others suggesting your slice of the pie may be re cut to accommodate a new comer. Boston Scientific shares sunk $1 yesterday to $14.22. The stock has slumped 17 percent this year and 39 percent over the past 12 months.
Sepracor is familiar with many of these story lines. The company's Lunesta sleep drug already faces competition from the likes of Ambien and Ambien CR, as well as many other smaller threats. But Lunesta and the Ambien products combined control between two-thirds and 85 percent of the market, depending on how you measure it.
Lunesta will face a new kind of competition in just a few weeks, when generic Ambien arrives on the market. Some analysts believe that will cut into Lunesta's customer base and make it harder for the Sepracor product to win the same share of new patients. That's one big reason why Sepracor shares are down 22 percent this year.
Lunesta generated $567 million in sales last year, and some analysts project that figure will approach $1 billion in peak years ahead. "That's a sizable trajectory, and a lot has to break right for it to happen," says analyst David Amsellem of Friedman Billing Ramsey. "I don't think it's going to be a billion-dollar drug."
Competition and increased regulatory scrutiny of the entire sleep-drug category may cause problems for Lunesta, but Sepracor still has another leg to stand on. Its Xopenex asthma drug generated sales roughly equal to Lunesta revenue last year, and other products are under development.
But Lunesta was the investment story that really got Sepracor stock up off the mat in fall 2002. The company's shares climbed from about $4 at that time to a peak of over $65 just before the drug's launch two years ago. Since then, Sepracor shares have actually declined about 10 percent.
High expectations and intense competition are powerful trends to fight. Medical stocks run into them all the time and usually end up worse for the experience.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
