2 Reasons Why Merck & Co. Is Crushing the Dow

The Dow Jones Industrials  (DJINDICES: ^DJI  ) has finally lost some steam this year after its record-breaking gains in 2013. Specifically, the Dow Jones is presently down around 1% on the year. That said, some of its components are still marching northward at a decent clip. Merck & Co. (NYSE: MRK  ) , for example, is up close to 13% this year, making it one of the best-performing health-care stocks and components of the Dow Jones in general. So, here are two reasons why Merck is crushing the Dow and most of its fellow health-care peers as well.

Reason No. 1
While the Dow Jones and other major indexes set new highs last year, Merck was somewhat left behind because the company was struggling with lost revenue due to the patent cliff. Although Merck's shares still gained over 21% in 2013 despite falling revenues, the Dow Jones broadly gained almost 24% for the year and some of its top performers like Boeing Co. soared over 60% in 2013. What's telling is that Boeing has now dropped more than 8% this year, whereas Merck keeps churning higher in the face of this overall downtrend. Nike was also a top performer in the Dow last year, rising 51%, but the stock has fallen close to 8% just four months into 2014. Put simply, stocks putting the most pressure on the Dow now are its former stars like Boeing and Nike. Merck, by contrast, appears to be decoupled from the broader downtrend, perhaps in part because it didn't go ballistic in 2013. 

Reason No. 2
Perhaps the most important reason why Merck's shares are performing well in the face of falling revenues and the market downtrend is that its top clinical prospects are starting to bear fruit. Specifically, its much-anticipated cancer immunotherapy dubbed "MK-3475" is now under regulatory review on a rolling basis with the Food and Drug Administration as a potential second-line treatment for advanced melanoma. What's important to understand is that this regulatory method allows the company to submit its application piecemeal, while still completing the necessary clinical trials for full approval. Presently, MK-3475 is in the midst of three late-stage trials for advanced melanoma. The application is expected to be completed by mid-2014, with analysts estimating peak sales for this indication to hover around $500 million.

While that sounds promising, MK-3475's real potential lies in its ability to be a more generalized cancer treatment, which Merck is actively pursuing through research agreements with Amgen, Pfizer, and Incyte. All told, Merck is seeking to develop MK-3475 as a potential treatment for a diversity of additional cancers, including non-small cell lung cancer, breast cancer, and renal cell carcinoma. The drug is expected to see multibillion-dollar sales if approved for a host of cancer types, making it one of Merck's most closely watched clinical prospects.

Merck's hepatitis C therapy is also showing promise lately, exhibiting a 98% cure rate in treatment-naive, genotype 1 patients in a mid-stage trial. The company is thus planning on advancing the therapy into a late-stage trial later this year, with a possible regulatory filing in the next two to three years. While that seems far off in terms of helping Merck's bottom line, many believe the therapy could be a blockbuster if approved, despite an increasingly competitive landscape for hepatitis C drugs. 

Foolish wrap-up
Stocks moving against the general market downturn have been few and far between of late. Yet, Merck has not only bucked the overall trend but has posted double-digit gains in the process. My view is that Merck's shares are swimming upstream because they did not participate in the broader rally to a large extent and are thus less subject to its ongoing correction now. Moreover, the company's top clinical prospects may be able to restart Merck's flagging top-line growth sooner than previously anticipated, evinced by the early regulatory filing for MK-3475.

That said, you need to keep in mind that Bristol-Myers Squibb (NYSE: BMY  ) has a similar cancer treatment under development called nivolumab that is further along in its development than MK-3475. Nivolumab is expected to directly compete with MK-3475 for many of the same indications, and it remains to be seen which drug has the better clinical profile.

Overall, I am not sure Merck can maintain its momentum, because it's based mostly on the potential of its top clinical candidates. Indeed, Merck's top cancer and hepatitis C therapies won't garner first-mover advantage (being first to market) and both treatments are in a tight race with a diversity of other clinical products.

And while it's tempting to suggest that investors are moving into stocks like Merck for their dividends in a turbulent market, you need to keep in mind that Boeing and Nike also pay dividends but are leading the Dow lower. Moreover, Boeing's dividend is essentially equivalent to Merck's at current levels, suggesting that dividends are not a major factor in Merck's recent market-beating ways. As such, you may want to look elsewhere for stocks that can provide a safe haven in this market.   

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