Big Pharma Has Tough Road Ahead

Texas Jury Finds Merck Liable in Death of Man Who Took Painkiller Vioxx, Awards Widow $253.4M

Big pharmaceutical companies like Merck (MRK) and Pfizer (PFE) are a lot riskier to own than many believe. Sure they have nice dividends and low P/E’s, but a lack of new drugs to make up for patent expirations, and extreme legal uncertainties will make it tough for these companies to grow.

Before today’s award, Merck was hoping its total Vioxx liability from the thousands of open cases would be no more than $10 billion. Well, the very first judgment against them today should raise some eyebrows.

Many people are recommending the big drug stocks for their fat yields and historically low multiples, but I have been taking the other side of the coin, and will continue to avoid these names.

Enjoy this post? Subscribe and never miss another one: RSS | Email | Twitter

3 Thoughts on “Big Pharma Has Tough Road Ahead

  1. Bill R. on August 22, 2005 at 6:22 AM said:

    Do you believe that Friday’s verdict has a (roughly) -10% impact on the long term outlook for MRK? Or do you believe that MRK was so overvalued before Friday’s verdict, that even at today’s lower valuation it is still unattractive? Or is there some other reason for your negative take on MRK?

    This is a company with a long history of financial performance that exceeds the industry it’s in, good debt ratios, high margins, and now, historically low valuations, and it’s trading at more than 30% off its price a year ago! It seems to me that MRK might fit your stated philosopy of taking advantage of “psychological” shifts in price.

  2. Chad Brand on August 22, 2005 at 7:11 AM said:

    The contrarian investor in me surely loves to see formerly great companies like Merck get hit hard, making them attractive from a valuation standpoint.

    There are two main reasons I still am avoiding Merck despite low P/E’s and high dividend yields.

    The first is the industry and MRK business fundamentals. The days of MRK growing 10%-15% annually are over in my opinion. A P/E multiple on the big pharma group of 12x-15x makes sense to me. Based on MRK’s earnings outlook, it looks less like a bargain in such a case.

    The second is the legal issue, which is clearly unquantifiable at this time. MRK has set aside less than $700 million for Vioxx-related liabilities. Based on the jury award last week, and with north of 4,000 cases pending, this number is too conservative.

    I think the company’s current financial condition (including the dividend) is vulnerable to both its drug business and its legal results. As a result, as much as I would like to be a buyer, I can’t get to a valuation target significantly higher than the current price given what we know today.

  3. Anonymous on August 22, 2005 at 12:18 PM said:

    The Texas laws will be capping this award at $26 million. So a little better off than expected, but I still agree the expected losses will be surpassed.

Post Navigation