NEW YORK (CNN/Money) - Merck and Pfizer, drug giants once considered safe havens, have lost considerable stock value over the last year and have underperformed the drug industry as a whole, but many analysts are confident about their chances of recovering.

"These companies are very resilient," said Anthony Butler, analyst for Lehman Brothers. But recovery can be slow because the development of new drugs is a lengthy process, often taking up to ten years, Butler said.

Merck & Co., Inc. (down $0.05 to $30.50, Research) and Pfizer Inc. (down $0.44 to $28.08, Research) have been hamstrung by health risks surrounding their arthritis painkillers. On Sept. 30, 2004, Merck withdrew Vioxx, a $2.5 billion product, because of risks of heart attacks and strokes. The company now faces of thousands of lawsuits, the first debuting in a Texas court in July. On April 7, 2005, the Food and Drug Administration asked Pfizer to recall Bextra, a $1.3 billion drug, and said it was considering a black box, its most serious warning, for Celebrex, a $3.3 billion drug.

The bad news has taken its toll on stock prices, with Pfizer losing about one-fourth of its value over the last 12 months and Merck dropping one-third. The companies have underperformed the industry as a whole. In the same 12-month period, the Philadelphia Drug Index, which tracks 14 companies traded on the Philadelphia Stock Exchange including Merck and Pfizer, rose slightly, while the Amex Pharmaceutical Index decreased only slightly, despite Merck and Pfizer's losses.

Some analysts believe that the bad news is priced in to Merck and Pfizer stocks and that their pipelines will pull them out of their slumps. Butler of Lehman Brothers said that Merck and Pfizer were "oversold" on their troubles with Vioxx, Bextra and Celebrex. Robert Hazlett, analyst for Suntrust Robinson Humphrey, said he recommended a "buy" for both companies because the worse-case scenarios are already built into the stock prices.

"Investors had overly discounted the effect of [Vioxx] on Merck's operations," said Hazlett. "Pfizer and Celebrex will ultimately be able to rebound from this negative perception and grow the franchise."

But in terms of R&D, the companies will have trouble capturing the multi-billion dollar losses they face with key products.

Merck faces impending patent expiration of Zocor, a $5.2 billion statin, in 2006, and Fosamax, a $3.2 billion treatment for osteoporosis, in 2008. The company's lead pipeline product is diabetes treatment MK-0431.

Pfizer faces $14 billion worth of patent expirations through 2007, according to the company, including exclusivity losses on Zoloft, a $3.4 billion antidepressant, in 2006, and Norvasc, a $4.5 billion treatment for high blood pressure, in 2007. This represents more than a third of its annual sales.

Projected sales from new products would recover less than half of Prizer's lost revenue. Hazlett of Suntrust Robinson Humphrey projects that Lyrica, a drug for epilepsy that was recently approved by the FDA, could eventually reach $2 billion, and Exubera, inhaled insulin for diabetics that is awaiting an FDA decision, could reach $1.4 billion by 2008.

Pfizer is also locked in a patent battle over its top-selling product, the $10.8 billion cholesterol treatment Lipitor, with Indian firm Ranbaxy Laboratories (up $0.16 to $25.37, Research) in a Delaware district court. The results of this challenge are expected later this year, said Pfizer spokesman Paul Fitzhenry.

Pfizer is in the process of overhauling its corporate structure to save money. Fitzhenry said the company's restructuring should result in annual savings of $4 billion by 2008. This, combined with new pipeline products, a plan to combine Lipitor with cholesterol-adjusting torceptrapib to reduce heart disease, and targeted acquisitions, should allow Pfizer to achieve double-digit adjusted earnings per share growth by 2006, said Fitzhenry.

"We think between what's in our current pipeline and what we hope is going to be on the market over the next few years, combined with the savings we are going to realize from our efficiency initiation, that we will meet our growth target for the longer term," said Fitzhenry.

Much of Pfizer's restructuring involves scaling back its sales force. Barry Zimmerman, president of GfK Market Measures, a research firm, said the drug industry will be changing the way it handles sales reps, with more targeting of desired consumers and less saturation.

"I think the pharmaceutical industry is getting more sophisticated, where they're better able to understand their individual consumer, rather than take the shotgun approach," said Zimmerman.

Merck did not immediately return comment.