Dow Pulled in Opposite Directions by Big Pharma

The week kicked off this morning with little hope for a budget deal in Washington, but as the trading day has moved along the clouds appear to be lifting. President Barack Obama will meet with congressional leaders this afternoon and Senate Majority Leader Harry Reid said he is "very optimistic" about an agreement this week.

The Dow Jones Industrial Average opened Monday down about 80 points but has rallied all day: As of 3:15 p.m. EDT the index is up 55 points, or 0.36%.

Big pharmaceutical stocks Merck and Pfizer are pulling the Dow in different directions today. Merck is the biggest loser on the index, falling 1.2%, while Pfizer is the biggest winner, rising 1.6%, an unusual trading phenomenon.


Merck's daily troubles come from downgrades from Jefferies and Bernstein over the past two trading days. Downgrades can often have a short-term impact on a stock, but they're not a fundamental reason to be bearish over the long term because the daily move often wears off quickly.

What should be a concern is expiring patents and competition from the likes of AstraZeneca , which is betting big on immunotherapies for cancer treatment. Merck is one of a short list of companies with approved immunotherapies for cancer. A phase 1 clinical trial from AstraZeneca showed promising results last month and the treatment will now be tested against competitors such as Merck. AstraZeneca is worth watching for the breadth of products it can offer and the combination of drugs in its pipeline.  

Cancer treatments are a huge potential market, and with a head start already, the less competition Merck has, the better it will be for investors. Citigroup recently estimated that immunotherapies for cancer could account for $35 billion in annual sales, which could have a huge impact on declining sales throughout the industry.

MRK Revenue TTM Chart

MRK Revenue TTM data by YCharts.

It may be the Dow's biggest winner today, but you can see above that Pfizer has been hurt more than most by squeezed health-care spending and expiring patents. The sliver of good news last week was that trials showed promising results for rheumatoid arthritis drug Xeljanz and for high doses of psoriasis treatment tofacitinib. Both drugs are in late testing stages so they may be poised to begin contributing to revenue in the near future.

Looking at the big picture, both Merck and Pfizer are struggling with expiring patents and falling returns when they invest in research and development. I don't think we'll see health-care spending free up for the foreseeable future, which means there's less incentive to invest in growth and more incentive to just squeeze what they can from existing drugs.

That said, the U.S. market may be opening up to millions of new consumers, so less profit per user from a bigger base may not be all bad for the pharma industry.

Change is scary for big pharma
Obamacare is scary for investors in everything pharmaceuticals to insurance companies but it's also creating massive opportunities for investors to get ridiculously rich. In this free report, our analysts walk you through these opportunities and the companies that are positioned to exploit changes in the industry. The informational edge contained in it is invaluable, but can only be exploited profitably while the rest of the market remains in the dark. To access this free report instantly, simply click here now.

The article Dow Pulled in Opposite Directions by Big Pharma originally appeared on Fool.com.

Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Investing in Startups

The lucrative and risky world of startups.

View Course »

Income Investing

Grow your nest-egg.

View Course »

Add a Comment

*0 / 3000 Character Maximum