Imagine a world where male pattern baldness is irreversible, human papillomavirus is inevitable, and a routine asthma attack could spell death. That’d be a world without Propecia, Gardasil and Singulair, which would mean no Whitehouse Station, N.J.-based Merck & Co. Inc. (MRK), one of the largest pharmaceutical companies in the world, only outsized by Pfizer Inc. (PFE) and Novartis AG (NVS). In 2013, Merck sold roughly $45 billion worth of drugs that do everything from fight the flu in humans (Afluria) to increase muscle mass in cattle (Zilmax). Merck also publishes some of the definitive titles in medical reference, but makes the overwhelming bulk of its money via its pharma operations.

The company’s roots go back to Germany in the 17th century. 200 years later, a Merck descendant crossed the Atlantic and set up the company’s U.S. operations. Shortly thereafter, the federal government, wary of anything with a Teutonic origin, straight-up commandeered Merck at the onset of World War I, reestablishing it as separate from its parent. The two companies remain distinct to this day.

Easy Pills To Swallow

Some 85% of Merck’s revenue is derived from its pharmaceutical operations, and most of that from just 10 drugs. By far, Merck’s best seller is Januvia, an enzyme inhibitor that treats Type II diabetes. Merck sold more than $4 billion worth of Januvia last year, or around 400 million doses. With the number of Type II diabetics increasing tenfold over a generation, drugs such as Januvia represent something of a growth industry.

Merck’s second-biggest offering by revenue – to the tune of $2.7 billion a year – is cholesterol-lowering drug Zetia. It retails for around $6.60 a pill and accounts for about 400 million doses a year.

And if your colon is ulcerated, inflamed, or otherwise in bad shape, chances are good that your physician will prescribe Remicade. That Merck creation earned the company $2.3 billion in the latest fiscal year and treats ulcerative colitis, Crohn’s disease and related conditions. Those ailments are considerably less widespread than are Type II diabetes and high cholesterol; only around half a million people in the U.S. and Canada are being treated with Remicade. But with few players in the industry, even fewer capable of synthesizing such a drug, and patent law granting Merck years of exclusivity anyway, it should be no wonder that Remicade is expensive. Classified as a specialty medication, a vial of Remicade will run close to $900. Merck sold 2½ million doses of Remicade last year, which fortunately requires only intermittent administration in the neighborhood of once a month.

The aforementioned Gardasil is another specialty medication, a vaccine intended for adolescents of both sexes. It protects girls from the risk of future vaginal and vulvar cancers, and boys from the less cataclysmic but still unpleasant risk of genital warts. As a vaccine, unlike Januvia and Zetia, Gardasil is taken once only – in a series of three administrations over a six-month period. Again, with only a single chance to profit off each patient, Merck sets its prices accordingly. Each half-milliliter syringe costs about $230, contributing $1.8 billion to Merck’s revenues annually. That’s 8 million doses, which means that slightly more than half of the kids eligible and recommended for Merck’s HPV vaccine are actually receiving it. The market is nowhere near saturated.

Widely Prescribed, Too

The roster of Merck’s best-selling pharmaceuticals contains a mix of both expensive specialty medications and cheap daily drugs. The company grosses an additional $1.8 billion off Janumet, another Type II diabetes treatment. At a mere $5 a pill Janumet is among Merck’s least expensive per-use drugs. And, not surprisingly, another one of its most prescribed, at a million doses a day.

From the mid-1980s until recently, human immunodeficiency virus drugs were among the costliest in pharma. The science was novel, the patient population small, and the effects often too inconclusive to make pronouncements about. Then came the integrase (a type of enzyme) inhibitors in the early 2000s, a new class designed to fight HIV infection. Among the first to be approved by the U.S. Food and Drug Administration was Isentress, developed by Merck and remarkably less expensive than many of its predecessors. Isentress is among Merck’s fastest-growing new drugs with sales of over $1.6 billion last year. Approved for use in 2007, and for use by children in 2012, Isentress runs about $50 per pill. Granted, patients take the pills twice a day, and typically in combination with one or two other drugs, but $100 worth of Isentress daily is still a bargain when compared with the course of treatment (and long-term prognosis) for a HIV patient even as little as 20 years ago. Doing the math, Isentress is prescribed for as few as 45,000 patients. A market that small can still be profitable when the product they’re buying is of such vital importance.

The Bottom Line

Some multinationals sell carbonated sugar water. Others profit from the spread between borrowing money and then lending it out at a higher interest rate. But few can produce products that save or lengthen the lives of millions of sick people (or at least make them far more comfortable). Whether combating river blindness in Zambia or treating arthritis in Canada, Merck continues to prove its worth in the marketplace and among demanding investors.

Related Articles
  1. Investing

    Is the Ebola Epidemic Officially Over?

    Learn how the struggle against the Ebola virus continues in Africa, and read about an exciting development that could lead to the end of the fight.
  2. Investing News

    How Doing Your 'Share' Has Enriched Facebook

    The phenomenon of Facebook, and the speed at which users joined and continue to join, is unprecedented. But just because a novelty is adopted by a large chunk of humanity, does that mean it’s ...
  3. Stock Analysis

    How Oracle Remains A Relatively Unknown Software Giant

    Among the world's largest corporations by market cap, few companies are as unfamiliar to the everyday consumer as Redwood City, Calif.-based Oracle Corp. How is the world's second-largest software ...
  4. Stock Analysis

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  5. Stock Analysis

    The 5 Biggest Russian Oil Companies

    Discover the top Russian oil companies by production volume and find out more about their domestic and international business operations.
  6. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  7. Chart Advisor

    4 European Stocks to Consider Buying

    European companies, listed on US exchanges, that are providing buying opportunities right now.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Stock Analysis

    3 Solar Stocks to Add to Your Portfolio

    Understand the growth and challenges of the renewable energy market and its success in 2015. Learn about the top three energy stocks to add to a portfolio.
  10. Stock Analysis

    The 5 Best Alternatives to Zillow & Trulia

    Understand the online real estate industry and how Zillow and Trulia are industry leaders. Learn about alternatives to Zillow and Trulia.
  1. Who are Pfizer's (PFE) main competitors?

    In the biotechnology and pharmaceuticals industry within the health care sector, Pfizer (PFE) is the leader. Several large ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!