Merck: The Good, The Bad And The Ugly

| About: Merck & (MRK)

Merck (NYSE:MRK) has just announced that it has increased its quarterly dividend to $0.44 per share, up $0.01 from $0.43 per share paid last quarter. Payment will be made on January 8, 2014, to stockholders of record at the close of business on December 16, 2013.

The last time Merck announced a dividend increase was in November 2012, when the Board raised the dividend from $0.42 to $0.43 per share. Given the fact that Merck is expected to report lower sales and earnings in 2013, compared to 2012, we thought it wise to take a quick look at the latest happenings at the company.

The Good

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Merck's vaccines portfolio delivered strong 15% growth during the first 9 months of 2013, compared to the same period in 2012 with the company benefiting from higher U.S. public sector purchases of Gardasil and RotaTeq.

Gardasil, Merck's human papillomavirus quadrivalent vaccine, maintained strong performance, with 21% growth year-over-year and US sales increasing more than 30%. Overall, vaccines achieved $3.8 billion in the first 9 months of 2013, compared to $3.4 during the same period last year.

Merck's immunology business also achieved strong growth of 13% during the first 9 months of 2013, with Remicade and Simponi realizing $2 billion in sales, compared to $1.8 billion during the same period last year.

Odanacatib, Merck's Cat-K inhibitor for osteoporosis, which the company decided, in February 2013, to delay its FDA filing as a result of its review of Phase III data, seems to be back on track with the company expecting that it could be in a position to file in 2014.

The Bad

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Merck's respiratory business is running out of breath. It lost $2.4 billion, or 48%, during the first 9 months of 2013. Merck's inability to replace sales lost to Singulair's generics saw the brand losing 71% of its revenue during the first 9 months of the year.

Singulair, which used to be Merck's best selling brand, lost U.S. patent exclusivity in August 2012 prompting an avalanche of competing generics to enter the market.

Singulair's patent also expired in a number of major European countries in February 2013, however, Japanese patent is not expected to expire before 2016. At its peak, Singulair achieved revenue of $5.5 billion.

The Ugly

Downsizing is never a pretty sight. Merck's cost-cutting initiative, while good for investors, will claim over 8,500 positions worldwide and some of these employees are being let out during the holiday season. Total pain and uncertainty to many pharma career families.

In October 500 lost their jobs at Merck's West Point facility, where most of the company's 12,000 Pennsylvania employees work. The company has also closed a plant in Kenilworth, NJ, and laid off 113 workers there.

Merck's manufacturing infrastructure is also taking a beating as the company acts on its $2.5 billion cost-cutting initiative. Production at the active pharmaceutical ingredient plant in Barceloneta is expected to end by late next year, with Merck moving the formulation and packaging done at the facility to outsourced contractors.

Merck is also planning to move its Arecibo formulation operations to its Las Piedras facility, and all work will go to a contractor by the end of 2016.

The recent downsizing is Merck's fourth restructuring exercise since 2008 and a total of 20% of current jobs will be lost.

The Future

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Merck is turning into a leaner, but a relatively smaller, company as it emerges from the most significant period of Singulair patent expiry, which began in August last year. The company anticipates full-year 2013 sales to be approximately 6% lower than last year and earnings to be approximately $1.7 per share, mid-range, for the whole year.

With a capitalization of over $145 billion and a downsizing blood bath, Merck shares are currently trading near their peak for the year and, at a forward 2013 P/E of 29, are rather high.

We tend to agree with Achilles Research that Merck has 27% downside potential. However, since the company is still using precious cash to buy back its own shares, there is no point in shorting the stock.

Merck remains on track to repurchase $7.5 billion of its own stock in the first 12 months of its new $15 billion repurchase authorization announced in May, which could partly explain the 22% increase in share price since the beginning of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.