Sunday, February 05, 2006

Merck (MRK) Analysis

Merck has been in the news lately because of the lawsuits related to Vioxx. It also lost a Vioxx trial in Texas where the jury awarded $250 million to the deceased. In this segment, we look at Merck business and see if it is a worth a buy at these levels.

From Merck's 10-K, the business can be described as follows. "Merck & Co., Inc. (“Merck” or the “Company”) is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and through its joint ventures."

The companies business segments are Atherosclerosis, Hypertension/heart failure, Osteoporosis, Respiratory, Anti-inflammatory/analgesics, Anti-bacterial/anti-fungal, Vaccines/biologicals, Urology, Ophthalmologicals, HIV and other category. The pharma sector in general has been down in the past couple of years as many drugs are coming off patent protection which would mean the company would lose exclusivity in the markets they are in.

First let us look at the drugs coming off the patent list in the next few years and look at the Vioxx effect.

Zocor, an anti cholesterol drug lost its patents in Canada and Germany in 2003. It is expected that it will lose its market exclusivity in June 2006 in the U.S. Drugs for atheroscerosis make up about 25% of Merck's revenue and Merck has stated that this will cause decline in Merck's revenues. Another drug, Fosamax to fight osteoporosis is also expected to lose its exclusivity in Feb 2008. Fosamax and other drugs contribute 14% to the companies revenue.

In the first nine months of this fiscal year, Merck's revenues declined by 5.5% on a year on year basis. However, the operating earnings increased by 7%. The increase in operating earnings is primarily because of focus on the bottom line. Also, on a positive note, Merck's Rotateq won an approval in the U.S. This is a drug that fights the leading cause of severe diarrhea in infants. This news should give Merck a boost in the coming weak.

Merck also pays out 50% of its operating earnings as dividends which gives an yield of 4.6% given the current stock price of the company. However, earnings are expected to decline as Merck states in its 10-K once the Zocor patent is lifted in the second half of this year. There would be more competition from the generics which provide the same benefit. The other big challenge Merck faces is the large number of Vioxx trials. Merck has already earmarked about 650 million dollars for its legal defence and it thinks it can claim some money from insurers for its defence.

The company has an attractive P/E but as earnings are expected to decline somewhat moving forward, it is in the 18-20 range for forward earnings. It is not clear yet if the market has factored in the decline in sales from Zocor. Since the exact numbers are difficult to come by, waiting till the end of December 2006 for the numbers to be clear may not be a bad idea.

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