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Can Merck Produce a Growth Stimulant?

By Amy Tsao

Pharmaceutical giant Merck (MRK) has made plenty of headlines over the past year, but not the kind that make investors smile. The company posted no growth in 2002 and growth is expected to be modest in 2003. And Merck has been plagued by controversy over the selling practices of Medco, its division managing pharmacy benefits. It appears that Merck has no drugs in the pipeline that look like potential blockbusters -- and that has investors wondering what will replace revenues lost to patent expirations over the next several years.

Shares in this venerable blue chip are trading at around $53. At a 2003 price-to-earnings (p-e) ratio of 16, its valuation looks cheap, near its 5-year low of about 15. Yet to some, that still seems too expensive for the short-term. "I don't feel enough confidence with what the earnings will be in a couple of years," says Steve Paspal, senior research analyst at Sovereign Asset Management. "Right now, the [business] momentum is idling along. I'm not sure if it firms up." Paspal doesn't personally own Merck stock, though his company does.

UNKNOWN QUANTITIES. The next couple of years look to be a period of flux for Whitehouse Station (N.J.) -based Merck, the world's third-largest drugmaker. To Wall Street's relief, it plans to spin off 100% of Medco, which should soon put the pricing controversy behind it. But cholesterol-lowering Zocor -- Merck's No. 1 seller -- loses patent protection in 2006, and Fosamax, an osteopor

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