Novice Investing - Oily Rejection for Merck

Date: Tuesday 13th 2008f May 2008 02:46:05 PM

Oily Rejection for Merck - 04/29/2008

By: Hari Wibowo

Our former sample porftolio pick, Merck & Co Inc. (MRK), made another headline today with its cholesterol drug application being rejected by FDA. Cordaptive, also code named MK-0524A was not approvable by the FDA, saying that it need more data from Merck. Merck shares fell 7% in early trading despite reaffirming $ 3.28 - $ 3.38 earning per share forecast of for 2008.

Now, what does this news mean for long term Merck investors? Cholesterol drug historically has been money maker for the pharmaceutical industry. With Cordaptive in big question mark and Vyotorin receiving bad publication from doctors, Merck will have a difficult time of producing sustainable earning growth. Yet, the company also affirmed that it will achieve double digit earning growth through 2010. It is doable with perhaps cost cutting and manufacturing efficiency. However, the risk is tilted towards disappointing investors in the future and this will damage share price further should it happen.

How low should we expect the shares to be? As we pointed out late last month, during 2004 Vioxx debacle, Merck share went to as low as $ 25 per share. That was before the Vioxx settlement and Vyotorin revenue replacing the expired Zocor franchise. With things slightly improving this time, a share price in the $ 28 - $ 32 range would be a good entry for long term investors. Why? Aside from Vyotorin, Merck has several successful drug franchises such as Gardasil for Cervical cancer (> $ 1 Billion) and Januvia for diabetes treatment (> $ 2 Billion). Further, Merck has no legal clout this time around. It has settled its Vioxx liability late last year.

Will Merck get to $ 28- $ 32 range? No guarantee. But when it does, Merck will be your best investment for 2009. Are you willing to wait longer for a good deal to come around?

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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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