Merck: A return to health?

Despite industry pressure, the drugmaker is focused on boosting its future pipeline.

By TheStockAdvisors Apr 4, 2012 9:58AM

By Ben Shepherd, Investing Daily

Merck (MRK) has failed to excite the market about its prospects as sales and earnings have fallen largely in line with Wall Street estimates over the past several quarters, with few surprises to the upside.

Merck has faced pressure from the looming patent expiration of its blockbuster allergy drug Singulair, which goes off patent in August. With annual sales of about $5.2 billion, Singulair has contributed about 11.1% toward Merck's annual revenue over the past two years, so it's easy to understand why investors might be nervous.

But Merck still boasts a robust development pipeline, and it plans to file approval applications with the FDA for three new drugs this year, five next year and seven in 2014.

In fact, the company will submit more FDA approval applications over the next few years than any of the other major pharmaceutical outfit.

While the odds of all 15 applications being approved are slim, data from ongoing clinical trials for most of Merck's drug candidates appear promising.

In an effort to bolster its development pipeline, Merck acquired Schering-Plough in 2009 and absorbed that company's deep bench of attractive drug candidates at various stages of trials.

Now, some of the best of that former company's slate of drug candidates, such as suvorexant for the treatment of insomnia, are in late-stage trials and will be submitted for FDA approval over the next couple of years.

Meanwhile, the company is financially strong, with attractive free cash flow and relatively low debt. Additionally, Merck's shares offer an enticing 4.5% dividend yield with a 77% payout ratio, so there's room for future dividend growth and research investment.

With manageable patent expirations and a solid dividend, Merck is an excellent play on a return to health for the American pharmaceutical industry.

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