Streetwise - Drug companies offer some investing relief
By Lauren Rudd
for the Savannah Morning News
Looking for some relief from Wall Street's ups
and downs? Pharmaceutical companies are good
for more than just headache medicine. According
to the Bureau of the Census, the 55-plus age
group is projected to increase to about 26
percent of our total population by the year 2010.
Furthermore, this segment of our population
spends more on health care, both in actual dollars
and as a percentage of total expenditures, than
any other age bracket.
Therefore, a pharmaceutical company with
patent-protected drugs in established niches is
likely to produce some excellent earnings. And if I
had to pick a single pharmaceutical company to
invest in, it would have to be Merck. Although
Merck's accomplishments include bringing to
market a number of trailblazing drugs such as
Crixivan for AIDS, Fosamax for osteoporosis,
and Zocor for cholesterol, its medicine cabinet
includes a variety of nostrums, ranging from
antibiotics to ulcer medication.
Merck's Vasotec hypertension and heart failure
drug is the No. 1 cardiovascular medication in the
world, while its cholesterol-lowering drugs, Zocor
and Mevacor, continue to hold about 40 percent
of the worldwide market. According to Merck,
the cholesterol-lowering market is growing at a
rate of more than 20 percent a year.
Wall Street worries that competition, coupled
with the upcoming expiration of several patents,
will hurt Merck and depress the stock price. I
would disagree. The Street is not giving enough
credit to Merck's pipeline of new products.
Consider, for example, Vioxx. It is one of a new
line of pain relievers known as Cox-2 inhibitors
designed to treat pain and arthritis without the
gastrointestinal side effects often seen in aspirin
and Ibuprofen.
What is the potential for Vioxx? If the competition
is any indication, initial Vioxx sales could easily
top $500 million in year 2000. Monsanto's rival
drug Celebrex had one of the industry's most
successful introductions with more than 600,000
prescriptions being written since its introduction
last January.
Merck will present its Vioxx research to a Food
and Drug Administration panel April 20, with
approval expected sometime in the spring.
Meanwhile Merck announced March 22, that the
initial launch for Vioxx would take place in
Mexico since Mexican health authorities
approved the drug in February.
If sales of Vioxx ramp up more quickly than
expected, or if Vioxx receives a significantly
stronger label from the Food and Drug
Administration than was awarded to Monsanto,
Merck's earnings for the year 2000 could easily
exceed the Street's expectations. A stronger FDA
label is possible because Merck has conducted
studies that indicate Vioxx works well in treating
both menstrual pain and the pain caused by the
removal of wisdom teeth. Monsanto's Celebrex is
not approved for use in treating either one.
Merck watched as its stock price took a beating
after the company announced that it would not
pursue its research on MK-869, a new
depression drug, despite the drug being in Phase
3 trials. However, a new second-generation drug
for the same application is now in Phase 2B trials.
Success here could also mean higher than
expected earnings.
One reason Merck trades at a lower P/E ratio
than its peers is because many of the company's
key products are due to come off patent in the
years 2000 and 2001. Keep in mind that no other
pharmaceutical company knows more about
navigating the complex drug approval process
than Merck. Therefore, the company will likely
try to receive approval to expand the uses of
some of these drugs, as it recently did with
Mevacor.
When this was written, Merck had closed at 83
and was trading at 38 times earnings. I would
estimate Merck's earnings for 1999 to be around
$2.60 per share and $2.90 per share at the end
of year 2000. Using a P/E of 38 would give you a
stock price at the close of each year of 98 and
110, respectively. Allowing for a 15 percent
return (divide 98 by 1.15) gives you a price of
85. Some food for thought: Does Merck really
deserve a P/E of 38 when the industry's P/E is
49?
You can write to financial columnist Lauren Rudd
at 6 Keelson Lane, Savannah, GA 31411 or by
e-mail LRudd@g-net.net or visit him on the Web
at savannahcapital.com.
Web posted Sunday, March 28, 1999
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