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Investors are finding no solace in Merck's reaffirmation that it'll still hit its earnings numbers this year. Instead they're punishing the stock after the company announced what everyone is calling a surprise and a significant setback.

Yesterday I blogged about regulatory risk and late yesterday the Food and Drug Administration provided Merck

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[MRK  Loading...      (%)   ] with another example of it. The agency rejected the drugmaker's cholesterol treatment formerly known as Cordaptive and now called Tredaptive (The FDA sometimes makes companies change proposed commercial drug names for any number of reasons.)

In a press release Merck didn't divulge the FDA's problem(s) with the drug, but analysts suspect it has something to do with safety issues. Tredaptive combines Niacin with a new drug to reduce the extremely bothersome facial flushing side effects of Niacin.

Anecdotally, two co-workers at CNBC told me separately in the days leading up to the FDA decision date that they'd both taken Niacin, but had to go off of it because the turned red, tingly and hot. Abbott Labs

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[ABT  Loading...      (%)   ] markets A Niacin drug under the brand name Niaspan. ABT shares are rallying on the elimination of, at least, a near-term threat to the drug which brought in $660 million in revenue last year.

Just last week European regulatory authorities recommended approval of Tredaptive. That, perhaps, goes to the point. Schering-Plough

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[SGP  Loading...      (%)   ] Chairman and CEO Fred Hassan made in my interview with him last week, that he believes the regulatory, political and media environment in the U.S. is putting the country at risk of ceding its drug innovation leadership position to overseas.

Indeed, Merck has suffered two FDA slapdowns in as many days. Last Friday, the agency said no to MRK and SGP's combo allergy drug and then late Monday came the Tredaptive decision.

Analysts are all over the story. Miller-Tabak healthcare analyst writes in a stinging research note to clients: "Two non-approvals in one week. Is this a record for MRK? It seems more like PFE. We had expected this drug to be a blockbuster in the middle of the next decade. Obviously this is called into question."

And Catherine Arnold at Credit Suisse says: "MRK's late stage pipeline is seen as mediocre absent Cordaptive...."

Merck has a diet and another cholesterol drug in development, but similar drugs at competitors have not fared well. CS has banked Merck and wants to do it again.

If investors didn't realize it before, this week's events (and the week is young) are a painful lesson (unless you're on the short side of the trade) that the pharma-biotech sectors are rife with risk. Not just regulatory, but also clinical. This morning before the opening bell Genentech

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[DNA  Loading...      (%)   ] and Biogen Idec

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[BIIB  Loading...      (%)   ] announced their late-stage test of Rituxan on lupus didn't meet its goal. Both stocks are getting hammered.

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