What gives? Merck
I shouldn't just pick on Merck. Pretty much all the other major drug companies are struggling with what's known as the R&D "pipeline problem." Patents on the drugs that are now making money for them are about to expire, and they have few new drugs in development to replace them. It's pretty hard to grow a company without new products.
Even worse, more and more of big pharma's most lucrative prescription drugs are now being sold as margin- squeezing, over-the-counter products. Market-stealing generic drugs continue to come on stream, and political debates over prescription imports from Canada and Medicaid reimbursements are casting a dark shadow over the whole industry.
Where's the love?
Not surprisingly, pharma stocks are losing investors' affection. Prices have fallen far in the past 12 months, reflecting lower R&D productivity, heightened competition, and slower earnings growth. The S&P 500 pharmaceuticals and biotech index added 3.1% this year, lagging gains of 4% for the broader market. Last year, the gap was wider: Pharmaceuticals gained only 6% against 26% for the market.
Fools know that the best buys are found among the unloved. So, with prices beaten down across the pharmaceuticals industry and the quarterly reporting season here, do any opportunities pop up?
Merck is probably suffering the most from the pipeline pickle. Sure, the company has forged clever and profitable supply agreements with U.S. wholesalers and European drug giant AstraZeneca (NYSE ADR: AZR) and marketing arrangements with Schering-Plough
Still looking? Wyeth
Then there's Bristol-Myers Squibb
It's hard not to like Pfizer
A mixed bag
All in all, pharmaceuticals remains pretty much a mixed bag. Saggy share prices will no doubt offer a good time to buy some stocks, but a bad time to buy others. Knowing which ones will go up or down in this tricky industry demands not only research, but, alas, also a bit of guesswork.
Mind you, don't be surprised if pipeline-driven products re-emerge as the big stock-price driver. Companies that can translate R&D into profitable products will regain our love. Conversely, companies with thin pipelines or aging drugs will probably produce disappointing returns and face investors' wrath.
If you want to talk some more about Merck, check out the discussion board.