Can Merck Help You Sleep at Night?

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Heading into the next four years, the economic uncertainty that persists on a global basis may make it difficult for you to sleep. Fortunately, Merck (NYSE: MRK) is on the cusp of receiving FDA approval for its new insomnia drug suvorexant. While sales of the new drug will only put a small dent in the lost revenues left from Merck’s blockbuster asthma medication Singulair going off patent, the company continues to build its pipeline and position itself for the future. Overall, Merck is well positioned within the market to perform and should be considered a buy for your core portfolio.

Insomniacs Rejoice

Merck’s suvorexant is a part of new class of drugs that works by blocking certain chemical signals that keep people awake. The medication has entered standard FDA review, which is a ten-month process, which will be followed by a special review that should take an additional four months. The additional review is needed because the drug will likely be classified as a hypnotic sleep drug; the additional review is standard for all drugs in the class.

To put the importance of the drug into context, insomnia is a $2 billion market, but Merck will be one of many competitors for these dollars. By comparison, in 2011, Merck reported $1.43 billion of revenue from sales of Singulair. The company has a good chance of picking up significant market share in the sleep segment because its drug is believed to have fewer side effects than those of competitors. Even if the drug sails to approval, however, it is very unlikely that suvorexant will come anywhere near replacing the hole left by Singulair.

The Way Forward

In addition to its insomnia drug, Merck has taken various steps to remain competitive looking into the future. As a major drug maker, Merck has experience with both the expiration of a key patent and with ensuring a strong pipeline. The company has twenty drugs in phase 3 trials and nearly as many in phase 2; while the bulk of these are not likely to turn into blockbusters, maintaining a solid base is an important part of staying competitive. Additionally, despite seeing an increase in year-over-year revenue in the most recent quarter, Merck actually made an increase to its R&D spending.

The above R&D commitment is somewhat unique to Merck. Pfizer (NYSE: PFE), which is facing major patent expirations of its own, reduced R&D spending by about 24%, despite seeing an 8.7% decline in revenue. This is not to suggest that Pfizer is not without its strengths, but it seems to be targeting strategic alliances and acquisitions over internal development. Bristol-Myers Squibb (NYSE: BMY), which also suffered a decline in revenues, increased its R&D spending.

The Performance Differential

While all three of the above drug companies have faced significant patent expirations this year, Merck has performed the best over the last six months. Looking at the chart below, you can see that where Merck is up over 15%, Pfizer is up less than 8% and Bristol-Myers is down. All three companies offer strong dividend yields – ranging from 3.6% to 4.2% - but the performance differential is not explained by disparate dividends.

<img src="http://media.ycharts.com/charts/07a90f889a9fec5dca96a76be19bec88.png" />

MRK data by YCharts

Over the past three months (see chart below), the three companies have performed very similarly, meaning that the six-month spread was created during the first three-months of that period. Looking at the relative performance, we see that Merck has offered very stable performance that was still greater than Pfizer’s. Bristol-Myers got punished for an earnings miss, explaining its divergence from the other two. The takeaway is that Merck’s march higher has been stable and can be expected to continue into the future.

<img src="http://media.ycharts.com/charts/314825d85e9aebd775b4956798df2d10.png" />

MRK data by YCharts

The Trade

Merck is the type of stable performing stock that offers a solid income element and should help you sleep at night without the aid of the company’s new drug. While the drug maker works to develop new blockbusters, it continues to perform and drive revenue with a broad portfolio. Merck is a buy at current levels for your core portfolio.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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