Why Merck Will Move the Dow Tomorrow

Dow earnings are slowing down, but the season isn't over yet. Find out how Merck will respond to Pfizer's big deal.

Dan Caplinger
Dan Caplinger
Apr 28, 2014 at 4:30PM

The Dow Jones Industrials (DJINDICES:^DJI) climbed 87 points on Monday, as investors were relieved not to have seen some of their immediate geopolitical fears pan out over the weekend. Part of the excitement in today's market action came from Dow component Pfizer (NYSE:PFE) and a possible $100 billion Big Pharma megamerger with the U.K.'s AstraZeneca. That clearly has implications for rival Merck (NYSE:MRK), which reports its first-quarter earnings tomorrow morning. With Merck's stock having risen dramatically this year, the big question is whether it can keep executing well on the drug-development front and stand up to larger competition -- especially if an M&A deal at Pfizer raises the stakes even further.

Merck will report its results before the market opens tomorrow, with its earnings release expected at around 7 a.m. EDT based on the timing of releases in past quarters. The company has scheduled its earnings conference call to begin at 8 a.m. EDT.

Source: Merck.

Merck is expected to see revenue and net income fall from year-ago levels, continuing a trend resulting from the loss of patent protection on blockbuster asthma drug Singulair. The large patent cliff that Merck, Pfizer, and several other pharmaceutical giants have faced is a big reason why mergers and acquisitions activity in the pharma industry has picked up so strongly, as bigger players seek the rights to promising pipeline candidates from up-and-coming drug developers. As the price tags for potential deals grow higher, competition for the best blockbuster prospects becomes even fiercer.

Still, Merck has retained some strong-selling drugs in its stable of approved treatments, with Januvia and Janumet claiming a big share of the rising diabetes treatment market. Merck has also pushed heavily into cancer research and has promising treatments for hepatitis C that could eventually unseat some of the industry's leaders in fighting that disease.

Source: Steven Depolo, Flickr.

Even as it presses for growth, though, Merck also must stay aware of threats to areas in which it has traditionally dominated. If a Pfizer-AstraZeneca merger goes through, or if another pharma company steps into the mix and makes a rival bid of its own, then ever-larger competitors will have more resources to conduct research and tap lucrative drug markets. In the long run, Merck might need to respond with more extensive partnerships of its own in order to keep up the pace.

For Dow investors, Merck's relatively low share price doesn't give the stock a huge amount of direct influence over the index. But with several health-care stocks within the Dow, Merck's trends could give insight that will affect the whole sector, and that could well be enough for Merck to move the entire Dow on Tuesday.