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Merck & Co. (NYSE:MRK) researchers hailed an experimental cholesterol drug last month that may help the pharmaceutical giant dethrone bigger rival Pfizer (NYSE:PFE) as the king of heart medicines. Merck’s anacetrapib lowers bad cholesterol, raises good cholesterol and appears to be safe, Merck says.

That’s more than Pfizer, the maker of top-selling Lipitor, can say about its program for new heart meds. Pfizer tested a cholesterol medicine similar to Merck’s only to scrap it four years ago due to serious side effects. Both companies badly need to replenish product lines as older medicines face expiring patents that protect them from generic competition. Merck shares dropped almost 1% this year, compared with a 3% decline for Pfizer and a 13% gain for the S&P 500.

A dispute with Johnson & Johnson (NYSE:JNJ) over the shared marketing of anti-inflammatory drug Remicade also continues to be an overhang on Merck’s stock. A decade ago, Merck and Pfizer boasted lofty valuations. Merck now looks cheap by comparison.

Safety, effectiveness and unmet needs are the keys to getting drugs approved and to commercial success. Targeting the cholesterol market may pay off. Lipitor, which faces patent expiration in 2011, is the world’s best-selling drug with 2009 sales of $11 billion. If successful, Merck potentially creates a multi-billion dollar cholesterol drug for a decade.

But Merck isn’t yet close to submitting the drug for a government review. More study is needed and if human trials yield positive results, Merck will take steps in the next several years to sell the drug. Merck’s revenue growth was aided by the takeover of rival Schering-Plough last year but long term, the acquisition will be judged on the drugs that come out of the combined company.

The cholesterol drug anacetrapib came out of Merck’s labs rather than Schering-Plough’s. In all, Merck has 19 drugs in late-stage human studies, testing treatments for everything from insomnia to Hepatitis C. While that sounds impressive, investors should consider the market size for each indication being tested. Hepatitis C is projected to be a sizable market, for instance, but there are a number of other drug companies testing treatments. Swiss drug maker Roche is ahead of Merck in testing a cholesterol medicine.

Pipelines of promising drugs excite many investors but the long path to gaining government approval for drugs can be full of unpleasant surprises. For risk-taking investors, Merck shares are undervalued and rated “attractive” by YCharts Pro.

Disclosure: None

Source: Merck’s Cholesterol Drug May Become Catalyst for Future Growth