investment report Merck & Co. (MRK) business overview from merck.com and reuters.com competition

Transcription

1 investment report Merck & Co. (MRK) business overview from merck.com and reuters.com Merck & Co Inc (Merck) is a global pharmaceutical company that develops, manufactures, and markets a wide range of drugs and vaccines, the majority of which are available by prescription only. Merck s biggest drugs include Zocor, used for the treatment of atherosclerosis, Fosamax, for prevention of osteoporosis, Singulair, for treatment of chronic asthma and yearly allergies, Propecia, for treatment of male pattern hair loss, Proscar, a urology product for the treatment of benign prostate enlargement, and Cozaar and Vasotec, used for treatment of hypertension/heart failure. In addition, in 2006 the FDA has approved five new Merck drugs, the most of any pharmaceutical company this year, which will be available within the coming months. Merck sells its drugs to drug wholesalers and retailers, hospitals, clinics, governmental organizations, and managed health care providers. Merck s products also include vaccines. They offer Varivax, a live virus vaccine for the prevention of chickenpox and M-M-R II, which prevents measles, mumps and rubella. In September 2005, the FDA approved ProQuad, a vaccine that prevents chickenpox, measles, mumps, and rubella. Additionally, Merck produces Pneumovax, which prevents pneumonia, Recombivax HB, for hepatitis B prevention, and Zostavax, for shingles. More recently, Merck has developed the vaccine Gardasil for the prevention of cervical cancer by targeting different strains of HPV and has begun a national advertising campaign. Merck also enters into partnerships with other international drug companies in order to pioneer new research and facilitate the development of drugs throughout the world. The company also publishes unbiased health research for distribution to consumers. Currently, Richard T. Clark, who has been with the company since 2000, is Merck s president, chief executive officer and director. Clark became CEO in late 2004 and has helped to guide the company during the aftermath of the Vioxx withdrawal. competition competitor company description implications for MRK Pfizer Inc. (PFE) A Global, research-based pharmaceutical company. In 2006, Pfizer produced drugs like Zoloft, Lipitor, Celebrex, Viagra, Zyrtec, and Zithromax. Pfizer recently sold off its consumer health division, which manufactured OTC drugs and other products like: Listerine, Rogaine, Sudafed, Rolaids, Neosporin, Visine, Lubriderm, and Purell to Johnson & Johnson. It also has an animal health division. Offers more non-rx products than MRK. Pfizer s market cap is approximate twice that of Merck and has more cash available for R&D

2 Johnson & Johnson (JNJ) Bristol Meyers Squibb Co. (BMY) GlaxoSmithKline plc (GSK) AstraZeneca plc (AZN) Large corporation that owns more than 230 operating companies and produces a range of healthcare and OTC related products in three divisions: Consumer, Pharmaceutical, Medical Devices and Diagnostics. Some of J&J s widely recognized consumer products include: Neutrogena, Aveeno, Band-Aid, Motrin, Johnson s Baby, Tylenol, Stayfree, and Splenda. Key pharmaceutical products: Risperdal (treatment of schizophrenia), Procrit (stimulates RBC production), Ditropan XL (overactive bladder), and Ortho Evra (birth control patch). BMY, inc. produces pharmaceuticals and other healthcare related products through 3 major segments: Pharmaceuticals, Nutritionals, and Other Healthcare. Pharmaceutical revenues mainly come from drugs that trea cardiovascular, virology (esp. HIV), psychiatric infectious diseases and cancer. The Nutritionals segment focuses on the production of infant formulas and is mainly marketed to healthcare professionals. The Other Healthcare segment involves wound/skin care products and medical imaging devices. GSK has two main industry segments: Pharmaceuticals and Consumer Healthcare. Its main markets are USA, Europe and Japan. As of Dec. 2005, 18 products entered clinical trials for the first time. The company has a new focus on creating medicines and vaccines for diseases that affect the developing world. Key pharmaceuticals: Paxil, Advair (treats asthma), Flonaseand Levitra. Consumer products: Abreva, Nicorette, Polident, and Tums 97% of AZN s revenue made from sale of prescription pharmaceuticals. Its prescription drugs are focused on cardiovascular, gastrointestinal, neuroscience, oncology, respiratory inflammation and infection. Key pharmaceuticals: Crestor, Nexium, Arimidex, Seroquel, and Symbicort. Its products available in 100 countries and there are 29 products are currently in Phase III. Offers a wide range of consumer healthcare products w/ recognizable brand names. A wider product line than MRK but a smaller market cap. Consumer product segment offers the wider product line. Mostly focused on pharmaceuticals. AZN has many products in the pipeline which could problematic in the future. financials income statement Looking at the annual report showing data from the past three years, we see that from , sales increased from $22,485.9M to $22, 938.6M. Yet, from , it actually decreased to $22,011.9M. Having a decrease in sales is a bad sign because this is how the company makes their money. In

3 addition to that, net income has steadily declined from year to year, which leads to the EPS decreasing on a yearly basis. Moreover, the 5% decrease in sales was not accompanied by a significant decline in costs, further decreasing the already low gross profit margin. Within the pharmaceuticals industry, a good gross profit margin is around 40-50%, whereas Merck s decreased from 40% in 2003 to 34.8% in 2004 and to 33.5% in From all of this, it is still difficult to project whether or not 2006 will also see a decrease in sales and gross profit margin. However, the most recent 10-Q filings already show a slight decrease in sales and a significant increase in costs as compared to the same quarter in The most likely reason for this decline in sales is the negative image that was brought about by the lawsuits against Merck for their product Vioxx. Even with the recent news that the Vioxx lawsuits will not be turned into a class action suit, the situation for Merck does not seem promising: they are losing money, their image is bad, there are way too many lawsuits still withstanding, and income was decreasing even before the Vioxx controversy began (possibly due to greater competition by generics). From Google Finance balance sheet Between 2004 and 2005 Merck s total current assets increased by a great deal from $13,475.2M to $21,049.3M. Normally, this significant increase would be a good thing, but it is important to note that their investments have sharply decreased $5,619.2M. If the company is not investing as much as before, then it means that they are holding cash for a reason, most likely for lawsuits. Current liabilities have also increased in addition to long term debt. Normally, this would mean that the company is borrowing to grow, but with the slight increase in PP&E and the Vioxx situation, it shows that Merck is borrowing in order to be able to payoff the upcoming lawsuits. Stockholder equity, despite all of these factors, has increased by $628.4M, and because the goal of corporate finance is to increase shareholder wealth, this shows that there is still some life in this company.

4 From Google Finance statement of cash flows Since 2003, net income has been dropping yearly, a sign that the company s profitability has been on the decline. This is most likely due to the negative image Merck has received as a result of the Vioxx controversy. The money being brought in from continuing operations has also been dropped between 2004 and Merck managed to get money in 2005 only from investing activities but continued to lose money through financing activities. Finally, Cash and Cash Equities increased significantly from , but this seems to have been done intentionally (partially seen in the large sale of securities, subsidiaries, and other investments) so that Merck will be able to off lawsuits. This cash inflow from investing activities, in addition to the sale of investments and subsidiaries, slightly outpaces Merck s their new investments, leading to increased cash flow.

5 From Google Finance valuation Since Merck s stock hit an all-time low after it pulled its blockbuster drug Vioxx from the pharmaceutical market in late September 2004, the company has performed remarkably well over the past two years. The stock has appreciated from $27 to $44. Its 1-year goal of $46 a share has already been achieved this year, in late October 2006, although the stock price has stabilized in the high $44 range. The company s stock has rebounded under the new leadership of CEO Richard T. Clark, who assumed the company s top post after Merck pulled Vioxx and CEO Raymond Gilmartin resigned. The gradual climb of Merck s stock to pre-vioxx levels has occurred despite the fact that nearly 7,000 lawsuits surrounding the company s questionable drug are still pending. For the past three quarters Merck has surpassed earnings predictions, adding credibility to Clark s commitment to improve the firm s position.

6 Merck has a PE ratio of 19.29, which puts it in the middle of the range for the healthcare industry and towards the higher end for companies in other industries. One of Merck s major competitors, Pfizer, has a PE ratio of while another competitor, Sanovi-Aventis, has a PE ratio of This reflects that investors recognize the strides that Clark has made within the past years and the company s commitment to product innovation, demonstrated by the recent FDA approvals of five new Merck drugs in However, there is still some concern that the company s prospects for growth will be dampened down as Vioxx lawsuits go forward, potentially draining financial resources for continued research and development. key MRK comparison comparison implications for MRK metric to industry to S&P 500 PE Ratio Merck s PE ratio is approximately equal to that of its competitors, indicating that investors believe it will generate returns and are willing to pay more for MRK stock than for stock in companies in other industries. However, in the healthcare sector, investors are not as enthusiastic to invest EPS < 2 Merck s EPS is above that for all major industry competitors, which reveals that its stock generates the highest company earnings per share of stock. It also indicates that Merck has been profitable since EPS allocates company profits to each outstanding share of stock. PEG Merck s high PEG ratio indicates that the Ratio company has the potential to grow significantly based on this year s earnings and the ones projected for FY 2007.

7 Price to Book or Price to Equity Price to Sales 5.01 < Industry competitors range from 2 to just over 4, so Merck is at the high end with a price to book ratio of A high price to equity ratio reflects that investors value the company slightly higher than others in the healthcare sector, which is an interesting paradox considering it has a average PE ratio Merck has a higher PS ratio than both its industry competitors and the S&P 500, which reveals that the stock s per-share sales are relatively high when compared to its stock price. investment opportunities strong research pipeline Merck is an internationally recognized, innovative leader in drug research and development. Its pipeline includes a host of therapeutics targeting the following areas: arthritis, cancer, cardiovascular diseases, diabetes, infectious diseases, neurology and much more. Merck states that it currently has more new medicines and product candidates in its pipeline, in all three phases, than ever before. In fact, as of August 1, 2006, Merck had twenty-eight candidates in phase one, eighteen in phase two, four in phase three, and four under FDA review, two of which were recently approved. In alone, seven new products were approved by the FDA. Evidently, Merck has many promising drugs in its pipeline, which continues to expand. successful partnerships More than one-third of Merck s sales come from alliance products and patents. Since 1995, more than twenty new products have been launched as a result of joint ventures and licensing alliances. This fact attests to Merck s history of and ongoing participation in successful collaborations that promote groundbreaking research in medicine as well as in diagnostics and devices. For example, Merck recently announced its collaboration with Neuroptix Corporation for the detection of Alzheimer s Disease through the use of ocular scanning diagnostics. Merck continues to benefit from joint ventures such as these, which promote groundbreaking research in medicine, technology and product development. successful marketing strategies Merck is a huge competitor in the pharmaceutical industry. Its products are sold in most major markets, and in more than a hundred countries worldwide. The company has also developed successful marketing strategies to enhance brand recognition. Their newest and most aggressive marketing campaign is for their new vaccine Gardasil and its ability to prevent certain kinds of cervical cancer. saving plan Merck expects to save billion dollars by 2010, by minimizing costs. The company plans to redesign its manufacturing processes worldwide to streamline the manufacturing process.

8 investment risks Vioxx lawsuits In 2004, Merck withdrew VIOXX, a best-selling arthritis drug, from the market after studies found its potential to increase cardiac risk. As a result, Merck faces countless product liability lawsuits. In fact, Merck has set aside1.57 billion dollars for future legal costs, and so far, it has only been winning half of its cases with thousands left to go. These lawsuits, in addition to company papers and s suggesting Merck knew of VIOXX s potential to cause heart attacks before it began selling the drug in 1997, has decreased investor confidence. sluggish sales Despite the introduction of new products such as Januvia, which targets Type-2 Diabetes, Merck sales have been decreasing. Moreover, these sales are expected to decrease next year as well due to increasing generic competition and drugs going off patent. threat of generic drugs & lack of diversification Like all large pharmaceutical companies, Merck struggles to compete with generic drugs. Each time Merck drugs lose their patent-protections, generic drugs take over the market, and thus sales decrease rapidly. For example, after Merck s highly successful, cholesterol drug Zocor lost its patent-protetion in June, its sales dropped 65%. Generic drugs pose as one of, if not the greatest, risks in the pharmaceutical industry. Because Merck s strategy has been to rely on the sale of a few blockbuster drugs for the majority of its revenue, increasing generic sales will lead to a significant reduction in sales, and thus revenue, if the company does not diversify its product base. If Congress decides to shorten patent-protection terms, then Merck will (like its competitors) struggle to pay the costs of research and development of its products.