Merck's Pipeline Hopes Lead the Dow's Bumpy Ride Higher

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The markets haven't gotten their feet under them today as the Dow Jones Industrial Average (DJINDICES: ^DJI  ) trades near breakeven. The Dow Jones has managed to gain a meager 14 points as of 2:30 p.m. EST, led by Exxon-Mobil.

Health care has had an up-and-down day so far. While Merck (NYSE: MRK  ) has jumped 1.2% to rank among the Dow's top leaders, Johnson & Johnson (NYSE: JNJ  ) has fallen to the bottom of the pack, losing 0.6% so far. Let's catch up on what you need to know.

A bright spot for Merck?
Merck brought in a wave of good news this past weekend for investors concerned about the company's sluggish response to the patent cliff's impact on its sales and earnings. The company reported solid interim phase 3 trial results from its developmental hepatitis-C virus drugs MK-5172 and MK-8742, both of which scored cure rates nearing 100% in patient groups.

Merck still trails the leaders in the race to develop an all-oral hepatitis C therapy. This market has caught on with firms ranging from big pharma's biggest names to biotechs small and large, as some analysts have projected that the oral hep-C market could be as large as $20 billion. Rivals Gilead Sciences and AbbVie are leading the pack here, but analysts think Merck's two hepatitis-C drugs in development could be big hits of their own if they record more strong data in the future. It's a good sign for a company whose research and development division has been slammed for its high costs and lackluster results, which led recently to a big shakeup in the business.

That wasn't the only good news for Merck, however. The company's developmental HPV vaccine V503 showed that it might provide stronger prevention against the virus than the company's currently offered HPV vaccine, Gardasil. Gardasil has done well in recent quarters, but some analysts are hopeful that V503 could one day become a blockbuster if it continues on its path. If so, Merck could be on the way to locking down the HPV market.

It's been good news for Merck investors, but Johnson & Johnson shareholders aren't feeling the same love today. The company and its subsidiaries agreed to pay out $2.2 billion to settle accusations of promoting three off-brand non-FDA-approved prescription drugs. The government's criminal and civil allegations included Johnson & Johnson's alleged promotion of antipsychotic drugs Risperdal and Invega, along with heart failure therapy Natrecor.

This is a big blow to Johnson & Johnson's wallet -- it's the third-largest legal settlement for a U.S. health care firm -- but it's not one this company can't overcome. The firm's recent quarterly report showed continued strength in its drug business, which has kept Johnson & Johnson's earnings and sales on track. For the long term, this company's outlook looks as strong as ever.

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