Dueling Fools: Merck Bear Rebuttal

I agree with most aspects of fellow Fool Brian Lawler's bullish opener. Merck (NYSE:MRK) is indeed an impressive, profitable company, as are most major players in the lucrative pharmaceutical industry. It's just that I suggest taking a closer look at the competition.

At this year's Berkshire Hathaway annual meeting, Charlie Munger recommended that "you should find something to invest in and then compare everything else against that. That's your opportunity cost. That's what you learn in freshman economics, even if it hasn't made it into modern portfolio theory. That's why modern portfolio theory is so asinine."

The part about modern portfolio theory is a bit superfluous, but I find the entire quote amusing, so have left it in its entirety. But the point about opportunity cost is important in deciding whether Merck is the best choice out of a multitude of investment alternatives.

Brian and agree that the pharma space is a solid industry in which to make an investment. Profit margins are high, patent protection can last for more than a decade, and current valuations are very reasonable for the most part. But in my mind, Merck's recent stock run and current valuation place it at a disadvantage compared with other health-care options.

I find Pfizer (NYSE:PFE) a more compelling tradeoff of pipeline prospects, dividend yield, and valuation, while Novartis (NYSE:NVS) and Glaxo SmithKline (NYSE:GSK) have more stable current product offerings to go with their rosy prospects. And while Merck's dividend yield is among the highest in the industry, any unforeseen Vioxx complications could put the current payout ratio in jeopardy. And although, as Brian points out, most Vioxx cases have gone favorably for Merck so far, the fallout could end up costing Merck billions, as did fen-phen for Wyeth (NYSE:WYE) which suffered to the tune of about $10 billion.

I believe that, barring any major drug breakthrough at Merck, you'll be better off by going with one of the competitors at current price levels. That could change quickly, of course -- we are all well aware of Mr. Market's mood swings -- so keep Brian's bullish opening handy.

• Read the bull argument
• Read the bear argument
• Read the bullish rebuttal
• Sound off in Motley Fool CAPS
• Vote for the winner

Pfizer and Berkshire Hathaway are Inside Value picks, and Glaxo is an Income Investor recommendation. Merck is a former Income Investor pick. Check out either service free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Pfizer but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.