Is it Time to Run Away from Merck?

Merck (MRK) has run up all year -- actually, for more than a year -- in part due to real success and in part due to increased efforts to explain its pipeline of products yet to be approved. The question for investors -- is it real or is it activity to support the price of the stock in face of the Zocor patent expiration and another big one next year? I vote for the latter. Why?

Merck is facing a huge patent expiration next year -- Fosamax for bone density in February, less than two months away --a $3 billion plus drug. Don't be surprised if the company loses 80% of its market share by year-end, probably sooner. That is a lot of easy revenue to replace. And the drugs in the pipeline are not that close to approval. Are they worth investing in?

The first drug is a new and improved anti-cholesterol drug that would be better than generic statins. The problem is this drug is very similar to torcetrapib, a drug Pfizer (PFE) pulled from trials because of very serious side affects.

The second drug is an obesity drug that works the old fashioned way -- it suppresses the appetite and cravings rather than involve itself with the metabolism of hunger and satiety. Simply put, old technology that is very similar to the Sanofi-Aventis (SNY) drug Acomplia that the FDA has put in the deep freeze and will probably, in my opinion, not get to market in the U.S.

The consensus says the company will have flat revenue in 2008 -- yeah, right -- and they will earn $3.40. That they might do with cost cutting. So they are selling at a slight premium to the market -- about 18 times next year's earnings. With zero growth prospects.

One other thing to consider -- there is a reasonable probability that price controls of many Merck products will come into play in 2009 when the Dems or a weak Republican take the White House -- even some Repubicans back giving Medicare the right to negotiate prices -- so watch out. The run is over.

MRK 1-yr chart:

Comments

[DNA*]

I agree with your analysis of Merck's cannabinoid receptor antagonist. But the cholesterol drug that they plan to file for marketing approval is Cordaptive (a niacin drug) rather than anaceptrapib (their CETP inhibitor). Cordaptive is nothing like Pfizer's torcetrapib. Would this change your outlook for Merck?

[Tom B]

Torcetrapib was a train wreck, judging from its chemical structure. A well-managed company would not have put it into human trials, unless the animal studies looked amazingly better than one would expect.

[Value guy]

This idiot doesn't know what he is talking about. "the metabolism of hunger and satiety" ...he meant to say "the MECHANISM of hunger and satiety" but he is scientifically illiterate. I would sooner take stock advice from my 9 year old than this turd. His track record is atrocious. He tells his clients to short stocks and the proceeds to bad mouth them in his column. Pathetic.