Merck (MRK 1.03%), both a Dow component and one of the biggest drugmakers on the planet, is facing a unique set of challenges. The company's revenues took a hit recently after the its multi-billion dollar asthma medication Singulair lost patent protection. Does Merck have any drugs in clinical development that can potentially fill the void left by Singulair? Will Merck be able to grow its earnings over the next few years? Can it afford to continue paying a dividend, or is this in jeopardy, as well?
These are just a few questions that investors need to ask before they decide to buy or sell this stock. In our brand new premium research report on this pharmaceutical stalwart, our Senior Biotech Analyst breaks down Merck's market opportunities, biggest threats, and reasons to both buy and sell. The following is just a taste of what you'll find in the full report.
Merck's Pipeline
Without a doubt, the long-term future of Merck will be directly tied to the success of its pipeline. Without the development of new drugs, there can't be growth over the long term.
As of July 2012, Merck had a whopping 20 drugs in phase 3 trials, and almost as many a little further back in phase 2 development. There are a lot of base hits in there -- lower-risk drugs that won't be blockbusters, but will add incrementally to revenue -- but Merck isn't afraid to swing for the fences, as well.
Take its insomnia drug suvorexant, for instance. The drug passed its phase 3 trial, helping patients fall asleep faster and stay asleep longer compared to placebo. As part of the trial, Merck switched some of the patients off the drug after a year, and the patients saw their insomnia symptoms return compared to those who continued to get suvorexant. Merck expects to file with the FDA in 2012.
Insomnia is a $2 billion market and, while suvorexant will have considerable competition, there's an opportunity to steal patients away, because a lot of patients aren't happy with their current medication.
The osteoporosis market is even larger, with even more competition, but that hasn't kept Merck from taking another stab at the market. (It developed Fosamax years ago, which is now available as a generic.) The clinical trial for its new osteoporosis drug, odanacatib, was stopped early, because it was clear that the drug was working. While the overall safety profile looked good, there were some safety concerns in select areas.
Given the competition, many of which are available as cheap generics, those safety issues will likely determine whether odanacatib can reach blockbuster status. Merck plans to file for approval in the U.S. and EU in the first half of 2013.
Finally, there's tredaptive, which Merck has been trying to get approved for years. The drug is designed to raise good cholesterol without causing patients to feel flush like niacin does. Despite solid data showing that the drug decreased bad cholesterol, raised good cholesterol, and decreased lipids, the FDA made Merck run another trial to confirm that it also decreased cardiovascular events such as heart attacks and strokes.
That phase 3 trial hasn't read out yet, so tredaptive is the riskier of the three, but it likely has the most upside, as well. The lack of side effects will give tredaptive a distinct advantage over niacin and, while the FDA's additional requirement delayed its approval, outcomes data will help tremendously in selling the drug.
Ability to pay a dividend
One of the main reasons for owning Merck is that it generates large amounts of cash, which it shares with investors through dividends. If Merck is able to increase its free cash flow, it'll be able to pay a higher dividend. A larger dividend not only puts more cash into investors' portfolios, but it also helps to support the stock price.
|
2010 |
2011 |
LTM Ending Q2 '12 | |
|---|---|---|---|
|
Free Cash Flow (in millions) |
$9,144 |
$10,660 |
$11,088 |
|
Dividends Paid (in millions) |
$4,734 |
$4,691 |
$4,899 |
|
Payout Ratio |
52% |
44% |
44% |
Source: S&P Capital IQ. LTM = Last Twelve Months.
It sure looks like Merck will have no problem servicing the dividend. Revenue lost from Singulair's patent expiration is going to hurt Merck's free cash flow, but it would take a much bigger hit to cause Merck to cut its dividend.
We hope you enjoyed this sneak peek at our new premium research report on Merck. To get more in-depth information on this stock -- including reasons to buy and sell -- click here today to learn more.
