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The patent cliff -- the patent expirations of numerous high-profile drugs from big pharma companies -- is swinging through the health care sector with all the subtlety of a sledgehammer. Merck (NYSE: MRK  ) has taken a massive hit in 2012: Singulair, its best-selling asthma and allergy treatment that made up more than 13% of the company's pharmaceutical sales in 2011, lost its patent protection in the United States this year, and sales are already on the decline.

Merck's been left in a tough spot with Singulair's loss, but does the company have something ready to take its lofty space as a blockbuster drug -- or should it think about a timely acquisition in order to shore up sales?

A Singulair problem
Singulair might be the biggest loss of Merck's portfolio -- sales were down 55% in 2012's third quarter compared to the same time a year ago -- but it's not the only problem the company's facing. While several other drugs will also lose patent exclusivity soon -- including Singulair's European protections next year and Japanese protections in 2016 -- a non-patent problem could be threatening another billion-dollar drug.

Apotex's generic variant of Nasonex was found not to infringe on Merck's patent in a court ruling back in June. While Apotex's drug hasn't been approved by the Food and Drug Administration yet, Merck identified the potential of problems for its respiratory drug, which recorded nearly $1.3 billion in sales last year. The company's most recent quarterly report states, "If generic versions become available, significant losses of Nasonex sales in the U.S. market are anticipated."

Singulair's impact has already been felt, as the drug's decline single-handedly drove Merck's pharmaceutical revenues for the third quarter below 2011 levels, although sales were roughly flat with currency considerations taken into account. In a bright spot for the company, however, Merck does have two promising candidates in development that could shore up losses in the near future.

What's in the pipeline?
Merck lost its former osteoporosis star when Fosamax -- which once sold $3 billion a year -- lost patent exclusivity back in 2008. Though Fosamax sold just $152 million in the last quarter, a new star could soon be ready to soar in the osteoporosis market.

Odanacatib is one of Merck's most promising drugs in development, used to treat osteoporosis and bone metastasis. Merck ended phase 3 trials for the drug early because of its superb effectiveness and safety, two good signs after a plethora of lawsuits sprung up in Fosamax's wake. While it's expected that Merck will apply for regulatory approval in 2013, JPMorgan (NYSE: JPM  ) expects approval by 2014 and for the drug's sales to hit $1 billion by 2017. That's good news for a drug with patent exclusivity until 2024 at the earliest, particularly with an aging population likely to boost the osteoporosis market.

That's not all of the good news out of Merck's pipeline portfolio, however. The FDA recently accepted the company's new drug application for suvorexant, an anti-insomnia agent with a marked absence of any notable side effects  besides occasional headaches and (duh) sleepiness.

Although the insomnia market's a competitive one -- with generic versions of Sanofi's (NYSE: SNY  ) blockbuster Ambien all over the health care field -- suvorexant has shown great signs of promise. The drug crushed its phase 3 trials in meeting most goals, and its lack of concerning side effects so far has it on pace to avoid the hazards of recent anti-insomnia flameouts, such as GlaxoSmithKline's (NYSE: GSK  ) discontinued almorexant. Suvorexant also has few competitors at this point, giving Merck the advantage of establishing a new foothold in the insomnia market before its rivals. Barclays predicted potential sales of $900 million, which is certainly nothing to turn up.

Ongoing strong sales
Merck still has numerous strong sellers in its drug portfolio, such as Remicade and Zetia, each of which recorded more than $2 billion in sales for the company last year. Neither is in any patent-cliff-related danger, so investors can hold off worrying about those two top sellers. Merck's two diabetes drugs, Januvia and Janumet, have really taken off. This daring duo recorded nearly $1.4 billion in sales last quarter, more than Singulair posted in 2011's third quarter, when it still had patent exclusivity.

The company also has several strong joint ventures with other big pharma players. Merck's venture with Sanofi for developing and marketing vaccines in Europe has pulled in nearly $800 million through the first nine months of this year, slightly down from last year. Sales of Gardasil, Merck's best-selling vaccine, did post a year-over-year gain of more than 30% under the joint venture, however.

Merck's joint venture with AstraZeneca (NYSE: AZN  ) has also paid off well. Though AstraZeneca has the option of buying Merck's share of the association in 2014, Merck pulled in $1.2 billion from the venture in 2011. However, Merck states in its most recent quarterly report that, "The Company believes that it is likely that AstraZeneca will exercise its option in 2014," so investors likely can count out that source of revenue for the long term.

The verdict
Ultimately, even with Singulair's decline and the AstraZeneca partnership on the rocks, Merck doesn't need to risk a costly acquisition. With other drugs such as Zetia, Januvia, and Janumet still posting solid revenues and a pipeline of more than 15 drugs in phase 3 trials or later -- including odanacatib and suvorexant -- Merck's still got plenty of momentum behind it. While the right acquisition would indeed provide a spark for this big pharma titan, investors shouldn't panic and hope for a quick fix to shore up Singulair's loss. The wrong acquisition would do far more harm than good -- and while Merck's not going to ignite your portfolio with world-beating returns, it's a steady and stable dividend payer that should remain that way if it stays the course.

For nearly 100 years, Merck's cutting-edge research has led to a number of medical breakthroughs. Today, however, this pharma stalwart is staring down a steep patent cliff and facing generic competition for its top-selling drug. Will Merck crumble under its own weight, or will it continue to pay dividends to investors for another century? To find out if this pharma giant has the stamina to keep its Bunsen burners alight, grab your copy of our brand new premium research report today. Our senior biotech analyst Brian Orelli, Ph.D., walks you through both the opportunities and threats facing Merck, and the report comes with a full 12 months of updates. Claim your copy now by clicking here.

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