Novice Investing - Merck Ultimate Weapon

Date: Sunday 20th 2008f July 2008 12:42:43 PM

Merck Ultimate Weapon - 06/23/2006

By: Novice Investing Staff

Our sample portfolio pick, Merck Co & Inc. (MRK) lost patent protection of its biggest cholesterol drug, Zocor, today. It then paves the way for generic version of Zocor to be marketed. This has been widely expected. One thing unexpected is that Zocor itself will cost cheaper than the generic version. Wow. How does that happen?

Merck cut a deal with health insurance companies, one of them UnitedHealth (UNH), to enable patients to get Zocor for a lower price than generic. Will Merck make a profit from it? Certainly, albeit less. This move is a brilliant move in Merck's part. These days, developing a blockbuster drug takes far more resources and time. Therefore, if Merck can compete with generic drug manufacturers after its patent expire, then it can recoup some of the investment it made. Nothing to hate here. The company has huge manufacturing advantage based on its years of experience of producing Zocor. Further, it already has distribution networks and patients using Zocor. It just needs to take in a little less of profits. On top of that, Zocor can now be used as generic alternatives of other cholesterol lowering drugs. What would you rather use? A branded version with lower price? or a generic version with higher price? Insane.

Compare that move with this. Keep your Zocor price high and let generic competition eats away your sales. You may make profits but your sales rapidly dwindle. Further, when Merck markets a brand new cholesterol drug, it has to start from zero again. Lawmakers faced with high medical cost, will try to poke around the pharmaceutical companies and demand to lower patented drug price!

So, you see, opportunity is abound with Merck's move of pricing Zocor below its generic counterparts. Drug users are also known to be loyal. Once you have used Zocor and it works for your cholesterol, they will continue using it. Why fix it when it is not broken? Thus, if Merck can convince all the other health insurance companies to provide lower cost drug for Zocor, it will keep its market share in the cholesterol drug. Another interesting point is that Merck suddenly has become a generic drug maker overnight, without spending any penny to buy other generic competitors. With its distribution and sales force, Merck has leveraged its own assets towards selling generic drugs.

We believe that as more and more of Merck's drugs lose its patent expiration, it will continue selling it at an equal or lower price than its generic version. This will keep potential users for other future blockbuster drugs. A wise move, indeed. However, stock price barely budge due to this. Not that the market has discounted this. But, Merck is more affected by the outcome of its Vioxx liability trial more than anything else.

END

You can view other helpful commentary by clicking here

Distributing your own investing content is easy. Simply, click here.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Merck Co & Inc. (MRK) or any other securities.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]