Merck's New Innovation

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Pharmaceutical investors know that there's plenty of uncertainty in the drug sector. Experimental medicines that at first seem promising can, and often do, fail even in the most advanced clinical trials. The Food and Drug Administration tightly regulates the industry, so that even the slightest misstep can mean major headaches. These issues, among others, make defining the value of pharmaceutical manufacturers pretty tricky.

At the moment, Motley Fool Income Investor pick Merck (NYSE: MRK) may be the poster child of uncertainty in a segment rife with such sentiment. It's well known that the Vioxx withdrawal was a major catastrophe. But just how big a debacle it is remains to be seen. Some analysts have put the liability at $18 billion, and given that Wyeth (NYSE: WYE) has taken $21 billion in charges related to litigation over the diet drug fen-phen, that estimate may not be far off the mark.

Nevertheless, there is some good news that at least partially offsets the gloom and doom. Two potentially multibillion-dollar medicines, the human papillomavirus (HPV) vaccine Gardasil and diabetes treatment muraglitazar, appear to be on track to hit the market soon. And yesterday, Merck showcased another potential winner: an experimental vaccine for shingles called Zostavax. In the study, Zostavax reduced the incidence of shingles by 51% and cut pain from an outbreak by 61%. In April, Merck submitted paperwork seeking FDA approval for Zostavax.

The full potential for Zostavax is not clear. Shingles, a painful blistering of the skin that typically afflicts people older than 50, can occur in anyone who has had chicken pox. Merck estimates that group to include 90% of all adults, so the potential market for a vaccine appears to be massive. Still, not everyone who is exposed to chicken pox gets shingles -- about 800,000 to 1 million cases crop up in the United States each year. But with the proper marketing, it seems likely that Merck will get a lot of mileage out of this drug.

Vioxx is going to be a major drain on Merck. But investors should also keep in mind that Merck continues to have some aces up its sleeve. In the near term, the stock isn't going to see huge gains, but the company is here to stay and will keep innovating.

For more on Merck, check out these articles:

• Once More With Merck
• Where Angels Fear to Tread

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.