Overview: Merck & Co. (MRK) is a leading global drugmaker, producing a wide range of prescription drugs in many therapeutic classes in the U.S. and abroad. Foreign operations accounted for 47% of total Pharmaceutical and vaccine sales in 2009. In early November 2009, MRK acquired rival drugmaker Schering-Plough (SGP) for about $41 billion in cash and stock. Schering earned $2.5 billion from operations on sales of $13.5 billion in the first three quarters of 2009. Merck's largest-selling products include Singulair (sales of $4.7 billion in 2009), a treatment for asthma and seasonal allergic rhinitis; Cozaar/Hyzaar ($3.6 billion), treatments for high blood pressure and congestive heart failure; Fosamax ($1.1 billion), a drug for osteoporosis (a bone-thinning disease that affects post menopausal women); and Januvia/Janumet ($2.5 billion), treatments for type 2 diabetes.
Prognosis: The stock is down 10% since the start of the year despite executing well on integrating Schering – Plough and moving efficiently to gain cost savings from merger. Pipeline of new drugs was improved significantly by merger as well.
Valuation: MRK is selling for approximately 11 times this year’s consensus earnings and 9.5 times next year’s projected earnings. It is selling at the low end of its five year range based on Price/Earnings, Price/Book Value, and Price/Cash Flow. It has a double AA rated balance sheet and sports a 4.3% dividend yield.
Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:
1. Should take 3.5B out of cost structure via merger efficiencies by 2012
2. One of the stronger pipelines in the industry, including Tredaptive for atherosclerosis, Simponi for autoimmune diseases
3. Almost 50% of sales comes from overseas
4. The dollar value of the global drug market is projected to grow 4%-6% in 2010.
Recommendation(s): Given its growth prospects, improving pipeline, cost reduction efforts, and solid dividend yield; we believe Merck is undervalued. In our opinion, the stock should be trading at a more reasonable rate of approximately 11-12 times next year’s projected earnings of around $3.84. Our target Price is $42-$46, up from the current price of $36.30.
Disclosure: Long MRK
Source: Making the Case for Merck