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There's Promise in Merck Pipeline, Growth at a Price in Xilinx

March 14, 2000|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

Merck (MRK)

(Jim: Buy)

(Mike: Buy)

* Jim: If you want to know why the Dow Jones industrial average is drooping these days, a good place to start is with Merck, right, Michael?

Mike: Yes. The stock's been trading near a two-year low.

Jim: Merck is the nation's biggest drug maker, but there are a couple of notable aspects to this company--both of which I think account for why investors have given the stock a cold shoulder. First, Merck has several strong drugs.

Mike: Strong in the sense of being potent, or in the sense of bringing in the moolah?

Jim: Both. But I'm mainly referring to the gobs of money they make for Merck. Trouble is, though, these drugs are going to lose their patent protection over the next two years, and that's bad news.

Mike: Let's name a couple of them.

Jim: OK, one is Vasotec, which treats hypertension and does more than $2 billion a year in sales.

Mike: Then there is Zocor, an anti-cholesterol drug for all of you meat-eaters out there. And speaking of eating, another one is Pepcid, which is used for treating heartburn.

Jim: The problem is when Merck loses its patent protection, that opens the door for generic drug makers to start rolling out their me-too versions--which sell for much less than Merck's drugs.

Mike: Basically, the market gets pretty crowded.

Jim: Right, and Merck's sales of those drugs start dropping in a hurry.

Mike: So the question on everyone's mind is, what will Merck do for an encore?

Jim: That brings up my second main issue with Merck. While the rest of the drug industry has been doing gargantuan mergers like there's no tomorrow, a la Pfizer and Warner-Lambert, Merck has stoutly refused to marry one of its rivals.

Mike: Good point. They're all merging in large part because their patents are also running out and they need to fill their pipeline with new drugs. In other words, sometimes it's easier to buy drugs on Wall Street than to develop them in your own research-and-development labs.

Jim: Merck's response to all this is not to worry, it's got a pipeline full of promising new products that will take up the slack. And it's true, Merck is renowned for its R&D.

Mike: And already we're seeing some of its new drugs take off. One is Vioxx, an arthritis drug that debuted with some very impressive numbers last year, even though it's up against Monsanto's big seller Celebrex. You'll be glad to know, Jim, that Vioxx is in complete compliance with the drug companies' orthography, which is to make complete nonsense out of a brand name. Wouldn't it have been easier to just spell Vioxx with one "x"?

Jim: Let's just be glad they didn't use three "x's," but maybe they didn't want to be mistaken for a porno operation. Anyway, having said all of this, I would buy Merck.

Mike: Would you have bought it at $80, or would you buy it now because it's so much cheaper?

Jim: In good part because it's so much cheaper. Look, I don't discount for a moment the threat to Merck of losing its patent protection for some of its big sellers. But Merck didn't get to this point by having gaping holes in its R&D pipeline, and I see its new products helping Merck maintain its growth. And at this price Merck is a great buy.

Mike: Guess what? I agree with you.

Jim: Consider what we have here: One of the top pharmaceutical companies in the world trading at just 20 times its expected per-share earnings for 2000. Plus, I'm paid to wait a bit for the price to rise because Merck has a decent 2% dividend yield.

Mike: You're right. This stock is a core holding for anybody who wants to be in the pharmaceuticals sector, and there are plenty of good reasons to be there. Yes, it's been bumping along a trough lately, setting new 52-week lows almost every week. But sentiment toward Merck and the drug companies overall is going to turn around, so this is a great time to get in.

Jim: And even if it hasn't turned around yet, I like what I saw in Merck's fourth-quarter results, which were announced in January. Specifically, Merck noted that Vioxx sales helped lift its quarterly profit 12% from a year earlier. That bodes well for its upcoming quarterly results.

Mike: Yes, but it didn't do much for Merck's stock price.

Jim: I know Wall Street will need more than one quarter to get its hooks back into Merck. But that quarter was a good start, an early preview that Merck is still a strong company with a cheap stock that's a screaming buy. And the rebound is already starting: Merck jumped from $53 to more than $60 last week alone.

Xilinx (XLNX)

(Jim: Buy)

(Mike: Buy)

* Jim: This stock showed up on my radar screen because a friend of mine works for Xilinx in Orange County, Mike. But, of course, that won't affect my objectivity in reviewing this stock.

Mike: I should hope not. Now, Xilinx sounds like some character out of the X-Men comic books, but it's actually a chip maker that's on fire.

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