Novice Investing - Merck Kills Its Own Pain

Date: Sunday 20th 2008f July 2008 12:49:23 PM

Merck Kills Its Own Pain - 10/16/2006

By: Novice Investing Staff

For decades, Merck Co & Inc. (MRK) has been the steady performer for its shareholders. As a drug company with numerous blockbuster drugs, Merck raked in billions of dollars year after year. Stock price reached its plateau in the fall of 2000, at $ 90 per share. It has never looked back since then. Concerns of its cholesterol drug patent expiration has kept the stock depressed. Meanwhile, promising pipelines seem to turn sour at the latest stage. Then, it happened. In the summer of 2004, the pain reached its peak for Merck. Merck announced that it withdrew its blockbuster painkiller drug, Vioxx, due to safety concern. Merck shares imploded and eventually reached a ten year low of $ 26.00 in late 2004, a sickening 71% drop from its peak.

The reason? With $ 2.5 Billion in sales in 2004, the loss of Vioxx revenue would pummel Merck's profit hard. It did. Merck profit shrank form $ 3.20 per share in 2004 to $ 2.40 expected in 2006. Furthermore, there are thousands of lawsuit due to Vioxx withdrawal, waiting to be unraveled around the corner. Investors fear that these lawsuits, if won, will cripple Merck's financial and eventually its competitive advantage. As you know drug companies depend on the abundance of its R&D for survival. When money is tight, R&D will be the first one to be neglected. That is the story that everyone knew and that compels Merck to trade to as low as $ 26.00 per share at its nadir.

How does it turn out? Hold your breath. It turns out that Vioxx lawsuit amounts to more than 22,000 cases. And so far, Merck has been tried for, ehm, nine cases with five wins and four losses. This is within a time span of one year. Nine cases per year with total damage of around $ 20 Million if any. Merck can manage that. It earns $ 5000 millions annually. Yes, the other 22,000 cases will get their turns. Meanwhile, Merck still standing strong with positive net cash of $ 10 Billion and $ 1 Billion more each quarter.

That is the real point here. Merck can still continue at a going concern despite the tens of thousands of lawsuits standing before them. Even if it has to pay out tens of billions of damage, it would do so not in one lump sump but rather in ten if not more years. So, what happened now?

It had added quite a formidable revenue streams with the addition of its new cholesterol treatment, Vytorin, cervical cancer vaccine and a new diabetes treatment, Januvia, which is expected to be approved this week. That will probably more than offset the loss of revenue of its cholesterol drug, Zocor, and Vioxx withdrawal. While analysts do not yet foresee it, we believe that Merck will most likely begin its earning growth as soon as 2007. Stock price, meanwhile, has risen to $ 43.00 lately on this positive spin.

The jackpot question would be: What would you do when Merck was trading at $ 26.00 per share? Can you foresee the positive despite the pile of glooming news, affecting your rationale? The concept of fair value needs to be enforced here and helps you to keep focused no matter what everybody else is saying.

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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.

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