Merck’s strong drug portfolio makes it a good risk-reward play

Merck’s (NYSE: MRK) integration of Schering-Plough and its strong pipeline of drugs in development appear to be going smoothly, with Merck recently reporting a 7 percent increase in first-quarter revenue.

Like any drug maker, Merck is dependent on regulators approving its drugs. Its large size means one failure won’t kill it, but it still needs plenty of hits to move the revenue needle.

Merck lost exclusivity for Fosamax recently, but it might have a replacement osteoporosis drug in odanacatib. Competing against generics as well as new drugs will be tough, but the osteoporosis market is huge, so grabbing even a small chunk of the market will result in meaningful sales.

Merck has always been a powerhouse in the cardiovascular arena, and Schering-Plough had a nice selection too. The biggest potential blockbuster of the group is its blood-clot reducer, vorapaxar. Merck hopes the novel molecule will have the perfect balance of reducing heart attacks while not increasing the risk of bleeding.

In the short term, Merck doesn’t look all that appealing. Its stock is not exactly a steal, but it does offer a fat dividend yield around 4 percent.

In the longer term, though, Merck looks strong. There’s plenty of risk of failure, but with so many potential winners, the risk-reward ratio looks good enough to justify holding for the long term.

Ask the Fool

Q: What do you think of viatical settlements as investments? – A.B., Tucson

A: They can sometimes make sense, but they’re not without risk and they may make you uncomfortable.

Viatical settlements involve buying a terminally ill person’s life insurance policy. Imagine John, stricken with a fatal form of cancer and expected to live only three more years. If he needs cash to pay medical bills or just to spend and enjoy, he might sell his life insurance policy to Jane. If it’s set to pay $100,000 on his death, Jane might pay $66,000 for it. That way John gets a lot of cash now and Jane expects to get the $100,000 in about three years. At that rate, she’d be earning roughly a 15 percent annual return.

Viatical settlements are not necessarily win-win, though. The middlemen arranging these settlements take cuts. And John may hang on for many years, significantly reducing Jane’s return. A cure for his cancer might be discovered and he may even outlive Jane! But if he lives, he’s without insurance, and few will want to insure him.

Many people are uneasy about investing in something that has them rooting for speedy deaths and against medical breakthroughs. Also, there have been many instances of fraud with viatical settlements. “Life settlements” are similar investments, focusing on senior citizens.

Learn more before considering investing: www.sec.gov/answers/ viaticalsettle.htm, www.viatical-expert.net, and www.lisassociation.org.

Q: Where can I find the percentage of a company’s stock held by management? – C.M., Lafayette, Ind.

A: One option is just calling the company and asking its investor relations department for the info. Online, enter its ticker symbol at http://finance.yahoo.com; click “Get Quotes” and then “Major Holders.”

My dumbest investment

Our biggest mistake was owning stock in our trusted employer. For more than 35 years, we invested all our savings in it and its related companies. We ended up losing pretty much all of our life’s savings between WorldCom and Level 3 Communications. We had no idea how to buy, sell or place limit orders. – K.B., online

The Fool responds: Parking too much of your nest egg in your employer’s stock is a common error. You may know the company well, but remember that it’s already providing your living. Entrusting your future entirely to it, too, is relying on it for almost everything. Diversification can protect you.

Years ago, few could imagine that companies such as Enron, Delta Airlines, Lehman Brothers, Chrysler, Kmart, General Motors, Polaroid, Dow Corning and Winn-Dixie would file for bankruptcy, but they did, wiping out shareholder wealth.

If you’re going to invest in stocks, learn a lot about the stock market first, such as via Peter Lynch’s books. Level 3 Communications is still kicking, and opinions are mixed as to its potential. Read about it at http://caps.fool.com/ Ticker/LVLT.aspx.