The Dow Hangs Tough as Pfizer, Merck Offset Telecom Weakness

Pharma stocks are doing well on mixed news from the merger front.

May 19, 2014 at 11:00AM

On Monday morning, the Dow Jones Industrials (DJINDICES:^DJI) stayed within a narrow range, initially losing about 50 points but clawing back most of that loss within the first hour of the trading day. As of 11 a.m. EDT, the Dow was down just eight points. Although a few stragglers remain to report first-quarter earnings and economic data reports still have the power to move the Dow, most of investors' attention today went to the mergers and acquisitions arena, where pharma stocks did well even as telecoms lagged following the announcement of a big merger in that arena. Pfizer (NYSE:PFE) shareholders celebrated what appears to be the end of its buyout bid for AstraZeneca, while Merck (NYSE:MRK) climbed in the aftermath of its sale of its consumer-products division to Bayer.

Pfizer jumped 1.5% after the drug giant made what it called its final bid for its British counterpart, which was promptly rejected. Ordinarily, given shareholders' positive reception to the news of the original merger bid, you wouldn't expect Pfizer stock to climb after what appears to be the end of the drugmaker's efforts to boost growth, earn cost savings, and make a highly advantageous tax-home move across the Atlantic. But this morning's advance in the share price shows that Pfizer shareholders believe the bidding was getting too high, and investors are breathing a collective sigh of relief in the hopes that Pfizer will maintain its discipline and not try to pay an even higher price tag than the last $117 billion offer. Strategically, the rejections might be a setback for Pfizer, but the drug company still has solid long-term prospects and a healthy cash hoard to use for other acquisition ideas if it wants.

Mrk Vaccine

Source: Merck.

Meanwhile, Merck gained 0.6% as investors begin to look at the possibilities that will emerge from the sale of its consumer-care segment to Bayer. Most investors have focused on the $14 billion in cash that will change hands as a result of the deal, as well as the cost savings and profit boost that Merck could enjoy from divesting the division in order to focus more on its core pharmaceutical business. But in addition to the change of hands for consumer care, the agreement between Bayer and Merck also calls for collaboration on developing drug prospects in the cardiovascular space together. With Merck facing intense competition in other hot areas of the drug market, such as hepatitis C treatments, the possibility of improving its standing in the cardiovascular realm is attractive. Investors hope the company will succeed in getting cash and pipeline enhancement from the deal, and there's every reason to be optimistic that Merck could look much better in the near future as an investment prospect.

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