The Dow Jones Industrial Average (DJINDICES:^DJI) is off to a solid start in April's final week, and its pharmaceutical components have been major contributors. Pfizer (NYSE:PFE) paced Monday's index gain as it pursued another megabuyout, and today's pop is led by Merck (NYSE:MRK), which is the only one of 30 Dow components to post a gain markedly greater than 1% in early afternoon trading. Investors are cheering the pharmaceutical giant's first-quarter earnings, which beat Wall Street's expectations on the bottom line despite looking somewhat soft on the top.
You probably know a fair bit about Merck, one of the world's largest pharmaceutical companies -- it ranked seventh globally in 2013 revenue on a list that included several competitors with more diverse health-care offerings, and sixth in market cap on the same list -- but how much do you know about the path Merck has taken to become one of the Dow's two pharmaceutical specialists? The company's long history might surprise you. And it is a long history.
Merck traces its origins to 1668, when Friedrich Jacob Merck bought the "Angel Apothecary" in Germany. Apothecaries were pharmacies in the pre-pharmaceutical era, and Merck established his family name in the drugs-and-chemicals business from the very beginning, although it would take over two centuries to expand from Germany to the United States. Merck finally established a subsidiary in New York in 1891, but it only operated as part of the German parent until World War I, when Berlin's aggression prompted the U.S. government to seize German-owned companies and subsidiaries.
The new Merck, reestablished under American ownership, was one of the two most important companies at the start of the modern pharmaceutical industry. Merck was the first company to mass-produce penicillin in 1942; in the 80 years following its first dosage, Merck's shares grew by 9.7% per year, before factoring in the compounding effect of dividend reinvestment.
Four years after it began manufacturing penicillin, Merck's shares left over-the-counter trading and began trading on the New York Stock Exchange. Despite its role in penicillin production, Merck was still primarily a chemicals company, but its enhanced share status gave it the legitimacy needed to merge with pioneering pharmaceutical company Sharp & Dohme in 1953. This new Merck -- which is known as MSD, or Merck Sharpe & Dohme in the rest of the world -- soon became a leader in drug development under the guidance of Maurice Hilleman, who has been credited with saving more lives (thanks to the development of new vaccines) than any other 20th-century scientist.
Merck is known as MSD elsewhere in the world to avoid confusion with the original German Merck, which still does business in the same town where Friedrich Jacob Merck established his family drug business in 1668. The German Merck, which is known as EMD Millipore in the United States, is also a major global pharmaceutical company, but the American Merck outweighs it easily by revenue -- Germany's Merck earned about $15.3 billion in 2013, but America's Merck earned over $44 billion that year.
Merck joined the Dow in 1979 as its first health-care component, and it has vastly outperformed the index ever since. However, only when dividend reinvestment is factored in (total return) does Merck truly shine, as you can see:
Merck is also a leading medical publisher, issuing medical reference books since the 1889 first release of The Merck Index, a compendium of drugs and chemicals. Since then, Merck has branched out to publish books of diseases and symptoms for physicians and medical students (The Merck Manual, since 1899), an animal health care manual (The Merck Veterinary Manual, since 1955), and a health-care compendium focused on elder care (The Merck Manual of Geriatrics, since 1990). Its Merck Manual is the world's best-selling medical textbook.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.