Dueling Fools: Merck Bull Rebuttal

As fellow Fool Ryan Fuhrmann pointed out so eloquently in his bear case, Merck (NYSE:MRK) will be dealing with some patent expirations and generic challengers for some of its top drugs in the next several years, as will all large-cap pharmas. The difference between Merck and Pfizer (NYSE:PFE), for instance, is that Merck will continue to grow sales as new products come to the market to replace the lost sales from its genericized drugs. With nearly 60 drug candidates in clinical testing or awaiting regulatory approval, Merck will undoubtedly have no problem bringing new drugs to the market.

To see that Merck is expecting sales to continue to grow, all you have to do is read its annual business forecast. Merck expects sales to grow in the mid-single digits until 2010, but because of billion-dollar cost-reduction initiatives and the huge gross margins of more than 70% that it will continue to bring in, earnings-per-share growth will "reach double digits" by 2010 according, to Merck. Once again, contrast this with Pfizer, which is expecting flat revenue growth until at least 2008 and then is facing patent expiry on almost 25% of its revenues in 2010, and its not hard to see which pharma has the shakier future.

It's also worth mentioning once again that Merck will have some serious cash in its wallet in the coming years that it will either need to give back to shareholders in the form of more dividends and share buybacks, or else use the money to acquire additional promising drugs. With Merck's long-term success in rewarding shareholders, investors probably won't be too unhappy however that cash gets used.

The Vioxx court cases are important for all Merck shareholders to follow, and it's vital that Merck continues to win the majority of these cases even before appeals. The biggest risk to Merck's future earnings are adverse outcomes in these cases, but they also offer the biggest potential chance for earnings outperformance if litigation costs eventually start to decline.

The future can't be predicted, but Merck's history shows its ability to weather even the toughest pharmaceutical-development environments. My bet is that Merck continues this tradition and remains wildly profitable in the future.

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Pfizer is an Inside Value selection. Merck is a former recommendation of Income Investor. Check out either service free for 30 days.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .