Investment Rx may be drug stocks

File two lawsuits and call me in the morning.

That has been the prescription for dealing with drug side effects lately. As a result, the pharmaceutical industry is in a fever over class-action suits, large settlements and Food and Drug Administration actions.

But, experts say, that doesn't necessarily make them bad investments.

Eli Lilly & Co. recently established a $690 million fund for plaintiffs who agree to settle claims that they developed diabetes-related conditions from its antipsychotic drug Zyprexa. It has already settled dozens of lawsuits involving antidepressant Prozac.

The stock of Lilly barely moved on news of its Zyprexa settlement. In fact, Albert Rauch, pharmaceutical analyst for A.G. Edwards & Sons Inc., is recommending it.

"Investors aren't so worried about one-time events, because these companies have strong balance sheets, and their cash flow is of more concern," said the Chicago-based Rauch, noting the companies also have insurance covering such events. "Once payment is made, it is history, and investors look at the future earnings stream to value the stock."

More than 2,000 cases have been filed against Merck & Co. over now-withdrawn pain reliever Vioxx, and some experts estimate potential liability could reach $18 billion. A study has indicated long-term use of Vioxx increased a patient's risk of heart attack and stroke.

Amid the tumult, Bristol-Myers Squibb Co. has pledged not to promote any new medicines directly to consumers for at least a year. It will instead market new products to doctors and develop consumer advertisements about the conditions the medicines treat.

All of this could leave some investors in drug stocks with a queasy feeling in their stomachs.

"Medicine and science are targeting serious diseases with new products, and a lot is going through the FDA pipeline," said Dana Taschner, a Los Angeles attorney specializing in product and drug-maker liability cases who is representing Vioxx plaintiffs. "The nature of reporting about global products is that there may already be 100 adverse reports by the time the FDA is even cognizant of it."

Legal activity is accelerating because lawyers are aggressively pursuing these types of cases with television commercials and Web ads to attract potential plaintiffs, Rauch said.

One reason Rauch likes Lilly's stock is a federal court's dismissal in April of legal challenges from three generic manufacturers to Lilly's Zyprexa patent, which delays generic competition. In addition, he said, the company's pipeline of new products looks impressive.