Merck Looking to Cut Costs

Merck & Co. Inc.'s (MRK) results for the past several quarters were far above consensus expectations. Analysts have clearly under-estimated the power of what three new big drugs such as Vytorin (cholesterol), Januvia (diabetes), and Gardasil (cervical cancer vaccine) can do.

The slide in sales of osteoporosis drug Fosamax and cholesterol fighter Zocor in 2008 will be offset by the growth in the vaccine business and the continued strong ramp of mega-blockbuster asthma treatment Singulair and Januvia/Janumet.

The issues surrounding cardiovascular drugs Vytorin and Zetia will slow revenue growth. We, however, look towards the second quarter for a clearer picture. Merck's very recent pipeline troubles are also of concern. We believe the uncertainty surrounding sales of the cholesterol business will limit the upside to the stock.

MK-0524 had the potential to benefit from all the recent debate in the U.S. surrounding the effectiveness of statins, while the combo product of Singulair/Claritin would have muted generic erosion of Singulair when it comes off patent in 2012. While it's possible both products may one day eventually gain approval from the U.S. Food and Drug Administration, the likelihood of that happening is now significantly reduced.

We think Merck remains a solid fundamental story. We expect the majority of earnings growth in the next few years to come from cost-cutting initiatives and stock buybacks. The valuation is fair at the current price hence our Hold rating. Our $40 target is based on 12.2x our projected (adjusted) $3.28 in EPS for the full year 2008.

Moderate Stance on Biotech CVTX

Several big regulatory decisions are expected for CV Therapeutics Inc (CVTX) in 2008. The U.S. Food and Drug Administration is set to rule on three separate applications for expanding the company's Ranexa label in July. The first-line angina sNDA and the anti-arrhythmic claim look solid in our view, though we are cautious on the full NDA in diabetics. Our call is that investors should Hold onto the shares at this level as fundamentals are improving.

Despite growing Ranexa sales, CVT will need approval for the first-line indication to reach profitability perhaps in 2010. The approval of Ranexa in Europe is also a key positive event to watch in June 2008. Longer-term, however, we continue to see little overall movement in the shares until investors can get a better handle on the total peak sales potential for Ranexa worldwide.

Right now Ranexa looks like a $200-250 million drug. A favorable FDA ruling in July may work to double that potential, and as a result could potentially double CVT's stock. The stock looks well supported at these levels and 2008 could be a pivotal year for management. CVT could easily head to $20 if things come together.

The Street is pretty split on CVT right now.