Wait for More Bad News on Merck

Even though it seems like most of the news out on Motley Fool Income Investor recommendation Merck (NYSE:MRK) is bad -- often sensationalized accounts of Vioxx trials -- the stock hasn't been all that bothered by it. Sure, there have been ups and downs, but over the past six months, this stock has done much better than relatively less-troubled pharma stocks like Novartis (NYSE:NVS), GlaxoSmithKline (NYSE:GSK), and Wyeth (NYSE:WYE).

But it's not as though the real-time business has improved all that much. Sales in the first quarter were up a whopping 1%, and while the company did well on gross margins, most of the income growth in this quarter came from joint ventures and a better tax rate. There also weren't any dramatic shifts in the company's leading drug franchises. Cozaar/Hyzaar, Fosamax, and Zocor were all down, while Singulair had a reasonably good performance.

Barring an acquisition (which isn't especially likely, given this company's history), tomorrow's growth will come from the pipeline. Luckily, there's some promise there. The FDA will hopefully review the cervical cancer vaccine Gardasil before early June, and while there are some passionate detractors out there opposed to this vaccine on moral grounds, I still believe it could be a major contributor for the company.

Likewise, the company is hoping that the FDA will get back to it by mid-October with positive news on its application for Januvia -- a DPP-4 inhibitor for diabetes that will compete with a compound from Novartis, as well as other alternative diabetes medications.

More significant, though, could be the drugs in development for cholesterol. There's some thought that the company's Vytorin partnership with Schering-Plough (NYSE:SGP) could see some pressure when Zocor (half of the Vytorin mix) goes generic. What's more, these newer drugs may, in fact, end up being better than Vytorin -- giving rise to the question of what happens to the partnership if Merck thinks it has something better in its pocket.

Vioxx lawsuits will be an ever-present headline risk for a while, but I still believe it's highly unlikely that they'll do lasting damage to the business. That said, the nearly 30% rise in this stock since late '05 has taken a lot of the easy money off the table. I see nothing wrong with holding the stock, but I also can't work up an enormous amount of enthusiasm for buying it today. However, if a little bit of bad news were to hit the stock hard, the shares could once again be more interesting.

For more easy-to-swallow Foolishness:

• Merck Outclassed
• Novartis Bulks Up Its Pipeline
• Wyeth: Waiting on the Pipeline

Merck and GlaxoSmithKline are Motley Fool Income Investor recommendations. Take the newsletter dedicated to great dividend-paying stocks for a 30-day free spin.

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