Merck’s Mega-Monday Morning

Health Care Reform
Health Care Reform

Many analysts, lobbyists and industry executives have been saying for months that healthcare reform would probably end up being a net positive for the drug companies.

Presumably with more people being covered, big pharma could make up in volume what it might lose on government-negotiated price.

But now that the House has passed a billWall Street seems to be treating that theory like a sudden revelation. The AMEX pharmaceutical index and, in fact, all of the big pharma stocks, both foreign and domestic are higher. Novartis hit a new high. And Merck is getting an assist from an upgrade to the equivalent of “Buy” with a $38 target at Leerink Swann.

Analyst Seamus (Shay-mus) Fernandez actually put out two research notes to clients on MRK today. One is about the upgrade and the other is about the Zetia vs. Niaspan study that’s coming out in “The New England Journal of Medicine” and at the American Heart Association meeting at, according to Fernandez, 11:07 a.m. ET next Monday. Regarding the stock Fernandez writes, “We believe near-term concerns may offer liquidity opportunities to build, or add to, a position in MRK.”

One of those near-term concerns is the drug study called Arbiter 6. I know it sounds more like the name of a NASA space program, but there it is. Zetia is a stand-alone cholesterol-fighting drug owned by Merck and it’s also used in the company’s combo pill Vytorin (Zocor is the other ingredient.) Abbott Labs makes Niaspan. Leerink Swann, which specializes in healthcare stocks, did a survey of more than a hundred docs: 31 cardiologists and 72 primary care physicians. A majority of the docs thinks Niaspan is the winner of the head-to-head battle. And if that’s true, the survey says Zetia/Vytorin prescriptions could fall 25-35 percent over a 12-month period. If that happens, Fernandez estimates Zetia/Vytorin sales could fall between $600 million and $900 million and that Merck’s earnings per share could take a 20-cent hit.

So, I guess on the one hand Fernandez is telling investors to brace themselves and, on the other, to be ready to buy MRK on the potential weakness. I’ll be reporting live from the AHA meeting in Orlando a week from today.

Update: The AHA says the embargo will lift on the Arbiter 6 data at 8 a.m. ET next Monday. I'm sure the companies appreciate the results not coming out during the trading day, so this will give analysts/investors a good hour-and-a-half to digest the data before the opening bell.

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