Merck Marking Time

Barring something out of character for the company -- like, say, an acquisition, Merck (NYSE:MRK) will probably be a tough stock to hold for the next year or so. Odds are, whatever news comes out on Vioxx won't be all that good, and there just isn't likely to be much going on internally that would move the needle for impatient investors.

For instance, fourth-quarter sales at this drug giant were flat. Flat is certainly better than down, but it's still not really exciting. There was good growth from Singulair, but most of the other large drugs, including Cozaar/Hyzaar, Fosamax, and Zocor, saw sales either barely up (2% growth for Cozaar/Hyzaar) or down. Of course, the company's cholesterol-drug joint venture with Schering-Plough (NYSE:SGP) is seeing good growth, but accounting rules don't let Merck include those sales into its own.

Profitability was a bit of a mixed bag. Gross margins fell but were still above 74% for the quarter. Looking at operating income, I chose to exclude restructuring costs and other income/expense but include the equity income from partnerships. On that basis, operating income actually grew 25% in the quarter.

For what it's worth, excluding the joint-venture income reduces the operating income growth to 3% Nevertheless, I think it's significant to note that despite all of Merck's well-publicized troubles, it's still growing.

The near-term pipeline is a bit of a mixed bag. It's fair to note that the number of new-drug applications in the next two years is probably only going to be about four, excluding filings for two vaccines -- Rotateq and Gardasil. But while small in number, these new products could pack a punch. Gardasil will likely hit the market before GlaxoSmithKline's (NYSE:GSK) competing entry and could be worth as much as $2 billion in revenue. Likewise, MK-524A/MK-524B for fighting cholesterol (a compound worth maybe as much as $2 billion) and Januvia in diabetes (perhaps a $500 million drug) could be significant contributors. Merck is also likely to file for approval for a new sleep drug and a new HIV antiretroviral, but I'm less optimistic that those two will make a major sales impact.

If you already own Merck, you probably understand that patience will be the order of the day here. It'll take time for Vioxx litigation to reach resolution and for new drugs to hit the market and contribute. Given how much the stock has already recovered from the fall of 2005, though, I'm not sure it's such a compelling bargain today.

For more related Foolish takes:

• Speed the Plough
• Novartis Marches On
• Merck's Tighter Belt Bet

Merck and GlaxoSmithKline are Motley Fool Income Investor recommendations. Mathew Emmert believes that dividends will cure what ails you. Pick up a free, 30-day supply of his Income Investor newsletter today!

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).