Merck: Making a Big Pharma Comeback

You can't go to a drugstore and not notice the name Merck & Co. Inc. (MRK). Maker of many proprietary drugs, Merck was recently slammed by a stream of patent expirations, the bane of any pharmaceutical company. Why buy full price drugs when you can get the same, generic version for a fraction of the cost?

The biggest of these, in 2006, was the expiration of the patent on its successful cholesterol drug, Zocor, which fed coffers at Merck to the tune of more than $4 billion in 2005. The losses will continue into the future. In 2008, it will lose the osteoporosis drug, Fosamax and glaucoma drug Cosopt, and in 2010, the patent for anti-hypertensive drug, Cozaar.

Further, lawsuits against Merck for its arthritis drug, Vioxx, will continue to cost the company massive amounts in the upcoming years. Analysts predict that the suits will cost Merck hundreds of millions of dollars, if not billions. Merck withdrew the drug in 2004 due to concerns about increased risk of heart attacks among those who took it. It had been one of the most widely prescribed drugs in the country up until then.

And yet, to my mind, the Vioxx debacle and the patent losses are offset by aggressive research and development that has yielded, and continues to yield, promising new drugs. Perhaps most promising of these new drugs is Gardasil, the vaccine for human papillomavirus [HPV], which is prevalent in young women and is the cause of cervical cancer. The Center for Disease Control and Prevention has recommended that women between the ages of 12 to 26 take the vaccine, and some states are currently starting to legislate mandatory vaccination for HPV, which will be a boost to the success of Gardasil. However, just this week an editorial in the New England Journal of Medicine advised people to take a "cautious approach" toward Gardasil, saying that it may not be as effective as previous heralded, so it is something to keep an eye on.

But there are other drugs that have potential for Merck, including Januvia, a diabetes drug. Additionally, Merck has new HIV and cholesterol drugs nearing full development and 50% more drugs in early stage development than it had a few years back. It's safe to say that Merck's pipeline is bursting with potential.

Merck has solid financials and excellent management, and I think its focus on generating new and exciting drugs is paying off in spades. Wisely, Merck is not just limiting its R&D to in-house developments, but looking beyond its confines to working with external labs, in-licensing products, and making small scale acquisitions to supplement its pipeline of drugs. It is also not afraid to go in on joint ventures with other big pharmaceuticals, and this is paying off; over 29% of pretax profits in first quarter 2007 came from joint ventures. For example, it has successfully co-marketed the cholesterol absorption inhibitor Zetia with Schering-Plough Corp. (SGP). While Vioxx lawsuits and loss of patents were flags against Merck, I'm excited about the long term prospects of this big pharmaceutical.

Type of stock: A giant in the pharmaceutical game, Merck is strengthening its upcoming drug pipeline to offset the pain of important patent losses like Zocor, and the ongoing legal battles involving Vioxx.

Price Target: Trading at $52, some analysts feel this is a rich price right now, but I'm bullish on its prospects. Besides, many sell-side analysts thought the stock was undervalued seven years ago at $90 . . . I think we could see Merck shoot up to $70 in the next six months.

MRK 1-yr chart:

Comments

[Tom B:]

Too early to tell on Gardisil, but I hope it succeeds; it's such a great concept. I also hope we will see fewer and fewer of those frivolous Vioxx lawsuits. If Vioxx is worthy of suing over, we really shouldn't be taking a slew of other, even more dangerous drugs, including aspirin, tylenol, and ibuprofen.

I held my MRK through the Vioxx debacle. I should have boought more when it went down to $27-ish.

2007 May 15 08:34 AM