Merck Could Plummet On FDA's Warning For Propecia

| About: Merck & (MRK)

Many of us tend to be vain to an extent, and some of us worry about the way our appearances are perceived by others. It's got more to do with our own insecurities than how our appearance makes a difference in our lives. Nonetheless, men and women find it difficult to stop focusing on changing texture of skin and thinning hair, both of which can cause a lot of concern among most people, if not everyone.

Talking about thinning hair, of particular importance is male pattern baldness, for which only two drugs are approved by the FDA: Minoxidil and Finasteride. Minoxidil is easily tolerated and with continued use, men tend to keep much of their hair, even if they can't grow back what they have already lost. However, Finasteride is not tolerated well by many men and many discontinue taking it because of its side effects, most notably, sexual dysfunction.

Merck's (MRK) hair loss drug Propecia will now begin to carry labels that warn users of potential sexual dysfunction even after the treatment is stopped. This could cause considerable damage to Merck, which has continuously maintained its position that Propecia is well tolerated among men. The argument goes that clear causal facts between Finasteride and sexual dysfunction or loss of libido have not been established.

Growing empirical evidence suggests that men may experience sexual dysfunction in terms of loss of libido, erectile dysfunction, reduced sperm quality and infertility even when they stop using Finasteride to fight hair loss. Men tend to worry about their sexual functioning and a black label that warns them against possible sexual dysfunction may stop many men from using Finasteride. While I wouldn't say that this announcement alone will change the course of Merck's stock, it may certainly have an impact on the way people assess their hair loss treatment regimen. This increased vigilance may lead to lower sales of Propecia, ultimately resulting in loss to Merck.

Investors do not really have to worry about this announcement, as Merck's competitors too face several problems related to their drugs' efficacy and even with the way their products are doing in the market. For instance, Pfizer (PFE) has become notorious for not bringing new products to chemists' shelves and analysts have noted a lack of vitality when it comes to stock movement. Pfizer's volatility has remained low paradoxically because of its success and stability. Success and stability may affect stock if there is no real activity or a catalyst that would cause people to buy more stock.

On the other hand, Merck shows vitality and there is reason for people to either buy or sell, which is a healthy sign in financial market. Moreover, it was recently announced that Pfizer is not entitled to protection from certain cases that hark back to the days of its non- operating bankrupt Quigley unit. Quigley has a number of asbestos related injuries claims. While Pfizer may not be directly involved in these cases, it will hurt the company if tables are turned against it. The federal court's ruling stands as proof to that.

One competitor that is doing well is GlaxoSmithKline (GSK). The company's CEO, Sir Andrew Witty, recently spoke about the company's commitments to corporate responsibility and how the company may also purchase Micro Labs' India business. Moreover, GlaxoSmithKline's new once-daily HIV drug may compete against Merck's products. On the other hand, the company is also collaborating with Japanese labs to discover new cancer treatments. With such positive vibes from GlaxoSmithKline, Merck may need to catch up and work its way towards building a better image among consumers and shareholders.

Fortunately for Merck, many other pharmaceutical giants are facing a number of problems at the moment. Eli Lilly (LLY) is facing stiff generic competition and the company has maintained that it even cost cutting would not help solve its drug sales loss. At the same time, Eli Lilly is spending time in discovering new treatments for Alzheimer's disease and it has made much progress with its leading experimental product, solanezumab. Though the company is not doing well, it is devoting much of its resources towards developing newer drugs.

Coming back to Merck, I strongly feel the company should be more transparent about the side effects of Propecia. Now that the company is forced to attach warning labels on Finasteride strips, it will have to work towards building a good PR and public image among its consumers. The first step in doing so depends on Merck's ability to develop drugs that help combat hair loss but do not cause sexual dysfunction.

The company must hence focus on developing newer drugs and invest more cash in research and development. Merck is in a better position, when compared with Eli Lilly or Pfizer and it can certainly fight against blows to its image due to the latest FDA warning. If you have invested in Merck, you do not have much to worry. The FDA regularly updates warnings related to medicines, and major pharmacies have continued to work towards improving their drugs' tolerance.

This will allow Merck to reconsider what men have always been complaining about, and work towards formulating drugs that combat hair loss without sexual side effects. That might be a tall order to ask, but in big pharma, labs have little choice, but to develop newer drugs that come with fewer side effects. Merck knows this bit of truth too well, and will not let an FDA warning ruin its business or its investors' confidence. Most stock analysts expect Merck to invest more money in to R&D, build consumer trust and develop newer drugs that are more tolerable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.