An article published in the New England Journal of Medicine a few days ago showed that Avandia, a popular diabetes drug manufactured by GlaxoSmithkline (GSK), significantly increased the risk of heart attacks in patients who used it.

On some cosmic level it's unfortunate that it works out this way, but that bad news was a positive for Merck (MRK) because MRK sells the market's leading competitor to Avandia, called Januvia. Drug industry analysts immediately noted that a significant amount of the $3 billion spent on Avandia worldwide this year will likely shift to the Januvia franchise.

It's hard to know if this is a done deal because it's possible that Glaxo will strike a deal that would allow the company to make a label change with U.S. drug regulators, averting total disaster for its drug. The Food and Drug Administration is usually wary of making quick changes, so in the interim you can expect a lot of doctors to simply switch to Januvia now and await changes later.

Under one reasonable scenario, analysts expect Januvia to get 60% of Avandia sales over the next three years, resulting in as much as $1.6 billion in upside to current MRK estimates. That's a huge windfall. Even if Januvia only gets 30% of lost Avandia sales, the upside could be as much as $830 million through 2010.