Dow Jones 10417.20 -33.43 11:25 am PST, August 26, 2005  NASDAQ 2125.01 -9.36 For info, visit access.smallcapnetwork.com S & P 500 1207.31 -5.06 Change your subscription status here Russell 2000 649.41 -8.29 VOLUME 05: ISSUE 65  Feature: Profiting From Controversy - The Vioxx Trade(s). There's little doubt that the Vioxx controversy has been bad for everyone: patients, families, Merck, (NYSE: MRK) its shareholders, the drug sector and the markets. In no way is this piece biased against those patients and families seeking redress. When found guilty of wrongdoing, Merck -and others--should pay. And as we face years of Vioxx litigation--approximately 5000 cases have been registered so far-- the truth will likely come out. That said should the entire drug sector--or even Merck itself--be eternally punished? Past history shows that's relatively unlikely. The tone of the press we're seeing regarding the culpability of Merck as a result of the Vioxx controversy resembles the op/ed pieces that castigated big tobacco and asbestos companies years ago. Like Merck's current situation, those cases focused on allegations that companies lied or covered up facts about the effects or side effects of their products. Or at the very least failed to warn consumers. As with big tobacco, judgments for and against Merck as well as potential suits against other drug companies will likely go back and forth for years. In the meantime, those same Pharma companies, including Merck by the way, will continue to develop, produce and commercialize cutting edge drugs, therapies and continue their aggressive R&D programs. I would go so far to say that demographics as well as the vehement public demand for these products will continue to ensure the robust growth of the drug sector--regardless of litigation. I make no conclusions as to the worth or danger of any product; merely to reference the effect of prolonged litigation on a comparative situation's share price. And as the long-term chart for Altria Group (NYSE: MO) evidences, while volatile, the controversy has had marginal effect on the long-term forward progress of its share price after the initial decline. Like Altria, Merck will likely enter into some sort of settlement agreement, which will go a long way to mitigate its current travails. And hopefully give CNBC something else--read anything else--to squawk about. Alternative Investment Remedies. Let's drill down and look at the current and future fortunes of the drug sector, Merck and a big-cap pharmaceutical ETF. In the midst of the controversy, contrary investors may find some decent opportunities. The press on Merck has ranged from supportive to the foreshadowing of its eventual demise, so, as usual, there's lots of room for interpretation. And perhaps some good trade potential. As one would expect, the Vioxx controversy had a depressing effect on the drug sector as evidenced by the recent decline in the Amex Pharmaceutical Index (Amex: ^DRG). To us, it appears that the action in the Index is attempting to clean everyone out somewhere beneath the blue line. There is likely still big accumulation going on and once the support area is cleaned out, average investors will likely then throw in the towel. Big rallies tend to happen once the big money has filled its cheeks with enough stock. The drug stocks are currently way out of favor. Eventually good money will be made for those willing to step up to the plate soon. Timing is of course the wildcard in the current environment. As everyone throws in the towel, the sector will begin to improve, just when, if history is any guide, it appears to make little sense to invest.  So, What now? The Pharmaceutical Holdrs Trust (AMEX: PPH) looks very interesting to us. Merck makes up about 10 percent of the value and the other 9 companies that make up the remaining 80-plus percent represent the rest of the big-cap household names you'd expect. Against the backdrop of the ^DRG above, the PPH looks fairly constructive as it currently sits on its .618 retracement line. For long-term investors, the PPH may well make sense even now as a candidate for accumulation. There's no question the drug sector will be volatile--always has been--but to assume it is all going to go horribly wrong because of Vioxx is to fully discount the robust sector pipeline and amazing R&D. We believe that would be the wrong way to view the activity. Will it be smooth sailing? No. Will long-term investors who take a contrarian view here and begin accumulation make good money down the road? In our opinion, yes. For those with strong constitutions, the PPH also has options. So as not to turn this treatise into a book, I'll merely give you the link. You can click across the top of the page and check out expiries and strike prices for Puts and Calls out to January 2008. Here you go: http://finance.yahoo.com/q/op?s=PPH Merck-y? While it's the disaster du jour, Merck has held up surprisingly well. No matter how hard or often CNBC interviews lawyers and a myriad of interested others, the shares have carved off only a small percentage--about 10 percent-- since the Texas Vioxx verdict. Even the plaintiff's lawyer in the Texas case said that the $250 million judgment will probably be reduced exponentially and that it will likely be five years if or before his client sees a dime. As I said, this dance will go on for years, both back and forth. And I suspect that a settlement package may be forthcoming depending on the outcome of the next couple of trials. Or even before. Our opinion is that the downside target for Merck shares will appear somewhere around the level of the lower yellow circle on our chart. The most significant share price damage was done last year when the rumblings began regarding Vioxx. By the time the Texas verdict was reached, there wasn't much further for the shares to fall. Will Merck and its peers be litigated out of business? Doubt it. Should long-term investors begin picking away at the shares at these levels? Likely, yes. We still believe that there is a major drug rally coming. While it may be derailed for now by the fear of more Vioxx litigation and other potential lawsuits, the drug companies and their value to patients and the markets aren't going away anytime soon. Oh yes, there are options available on Merck also out to January 2008. Have a look. http://finance.yahoo.com/q/op?s=MRK . There may well be strategies you can use whether a bull or bear.  Most everyone currently dislikes Merck and by extension the drug sector. Patient investors who take the contrary view might be a tad early, but since no one rings a bell, beginning accumulation of shares of Merck, some of its peers and/or the Pharma Holdr ETF should eventually pay off nicely in our opinion.       We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 3525 Del Mar Heights Rd #334 San Diego, CA 92130 Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. Add your email address below and make sure to check your email inbox and confirm your opt-in request to start receiving the SmallCapDigest Email Newsletter on a regular basis. 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