Merck: Meek or Muscular? (News) August 9, 1999

Merck: Meek or Muscular?

By Jeff Fischer (TMF Jeff)

August 9, 1999

Merck (NYSE: MRK) shared today that its top-selling cholesterol drug, Zocor, won government clearance for use in raising the level of "good" cholesterol in a body. Zocor is already the leading cholesterol drug in its class, with $4 billion in sales last year (up 10%).

Zocor has long been approved to lower "bad" cholesterol and to reduce the risk of stroke and heart attack in people with high cholesterol. This new application is especially good news given that Zocor's patent protection doesn't expire until December 2005.

The U.S. Food and Drug Administration approved Zocor for this additional use after studies demonstrated that Zocor can increase levels of healthy, high-density cholesterol while dropping the amount of risky blood fats, or lipids, in the blood. In fact, only one group of study participants did not benefit from Zocor: the group fed Big Macs and French fries saw zero improvement.

(That was a joke. It failed.)

The approval of Zocor for this new use is important because studies show that lowering overall cholesterol levels may not be as vital as reaching a balance between different kinds of blood lipids. The expanded use for Zocor will provide a means to help balance all types of lipids, according to Merck.

Drugs that operate in similar fashion to Zocor (which keeps the liver from obtaining a substance required to produce cholesterol) include Warner-Lambert's (NYSE: WLA) Lipitor and Bristol-Myers Squibb's (NYSE: BMY) Pravachol.

Up to 30% of Americans with heart disease have low levels of good cholesterol (HDL), without high levels of bad cholesterol (LDL). Therefore, Zocor may soon be knocking on their doors.

Despite the good news of the approval, Merck's stock continued weak palpitations and ended the day down $1/4 at $62 1/16. The stock is 29% below its fifty-two week high of $87 3/8, reached in March, and is only $5 above its fifty-two week low. The company is granted one of the lowest P/E ratios (at 27.9) of the major pharmaceutical giants. Some peer P/Es look like this:

Company Trailing PE

Pfizer (NYSE: PFE), 38
Johnson & Johnson (NYSE: JNJ), 40
Schering-Plough (NYSE: SGP), 38
Bristol Myers Squibb (NYSE: BMY), 40
Eli Lilly (NYSE: LLY), 32
Abbott Laboratories (NYSE: ABT), 26
Warner-Lambert (NYSE: WLA), 38

Why is Merck ailing? Two issues: pipeline and patent protection.

Two of Merck's four billion-dollar-plus blockbuster drugs come off patent in the next 18 months, while four drugs in total will be off patent before the end of 2001. This means that generic drug makers can sweep into the marketplace and sell the drug for much less. In fact, many pharmaceutical giants will offer their own generic version of their own drug (the very same drug) for less money in order to combat such attacks. Meanwhile, however, many doctors have reason to continue to prescribe a company name drug despite higher cost. Therefore, the expiration of patent protection generally doesn't signify the death a drug, but it can be a significantly damaging shot across the bow, taking out a sail or two. At any rate, the existence of drugs coming off patent keeps investors nervous and a stock tentative.

Merck's drug pipeline (issue two) has potential, although many critics argue that it lacks the potential for many blockbusters, thereby serving to keep the stock's P/E in check. The $62 stock trades at 25.3 times the 1999 consensus earning estimate, and at 22.3 times the year 2000 estimate. Earnings are hoped to grow over 13% annually. To read about the company's pipeline and potential, see this excellent Rule Maker column on Merck.

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