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Bulls & Bears
This week’s Bulls & Bears: Pat Dorsey, director of stock research at Morningstar.com; Tobin Smith, editor ChangeWave Investing; Scott Bleier, president of HybridInvestors.com; Gary B. Smith, columnist for Real Money.com; Dani Hughes, president of Divine Capital Markets
Trading Pit: “Killer” Verdict?
A jury verdict against Merck (MRK) for $253 million hit the drug giant hard. Merck was down about 8 percent on Friday. Could this verdict kill the stock market and maybe thousands of Americans as well?
Tobin: It could be pretty bad, but I don’t think it will be because Merck has common sense. However, if this becomes a zeitgeist of whether or not to take any risk, it could become a problem. Going forward, I don’t think drug companies will become more cautious in the way they develop new drugs. At the end of the day, they have to develop drugs because that’s how the business is viable. The problem is when there’s something like this that is blown way out of proportion, how does it affect the future of the workforce? After school, many of the people that go to work for pharmaceutical companies probably won’t want to work in a business if there’s the potential to get sued.
Gary B: I own Merck. Friday it took a hit and probably will on Monday too, but I’m not selling it. I think this may end up being a Phillip Morris type story. Five or six years ago, everyone thought the stock was going to zero, but Phillip Morris rallied their legal defenses and now the stock is at an all-time high. I would expect and hope to see Merck do the same thing, maybe not in the next few weeks, but certainly in the next few years.
Dani: Friday we saw the market fall off right after this was announced. It is going to affect pharmaceuticals going forward because it’s a risk/reward ratio. Risk is much higher than expected, but Merck knew about this for years. I think that prosecutors are going to keep taking individuals to juries like this. The stock will suffer big fallout and move down to $8-12.
Scott: This verdict is the poster child for tort reform. It’s quite simply ridiculous. If you take a look at drug companies and the way new drugs are introduced, ten years is spent going through the FDA. I think in the future we will start to see labels and disclaimers put on everything.
Pat: I own Merck and I do like it here. First, Texas juries are notorious for ridiculous awards. It will get reduced on appeal, partly because the appeals court doesn’t have a jury, just a judge. Second, Merck could write a $14 billion check today and write $1.5 million checks every year and still maintain its dividend. It has huge cash reserves.
Also, if anyone tries to make the analogy of Wyeth and Fen Phen, there was a proven mechanism of action for Fen Phen and the type of heart damage that it caused. You can look at the heart and say yes, that was caused by Fen Phen. You can’t do that with Vioxx because it’s much harder to prove.
What stocks will now be winners on Wall Street because Merck and Vioxx were losers in court?
Dani: I’m looking at risk/reward and companies that appreciate that dynamic. My pick is Corning (GLW). The stock has had a run over the last couple of months and will continue to do very well. I own and recommend. (Corning closed on Friday at $18.92.)
Tobin: It’s not as well known that the company also makes diesel engines, which do very well. I like the stock.
Scott: Corning’s had a good run. Its primary driver is the LCD business, which is peaking for the year. Earnings can’t go up anymore and I think it’s topped out.
Scott: I like Quest Diagnostics (DGX), which is the largest laboratory company in the world and just announced the acquisition of LabOne (LABS). The stock has come off its high and now is a great opportunity to buy. It’s the leader in this field and many insurance companies send patients to get lab work done there. (Quest Diagnostics closed on Friday at $49.98.)
Tobin: I’ll send you to get lab work on your brain! It’s too expensive. Let it come down about 10-15 percent before buying.
Dani: I agree with Scott. Buy it here.
Tobin: I like and recommend eResearchTechnology (ERES), which provides technology and services to pharmaceutical companies. It has automated the process of a cardiogram test, which is more important than ever. (eResearchTechnology closed on Friday at $14.98.)
Dani: I don’t think I would buy it here because Merck is going to create a big free-for-all fall for pharmaceutical stocks.
Scott: I like it. It’s a small-cap speculative stock. Plus, it has a lot of insider buying.