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Merck & Co., Inc. Recommendation Sell

Merck & Co., Inc. Recommendation Sell. Yuqian(Annie) Zhang Nov. 4 th , 2004. Our position. Own 300 shares Purchased at $70.5 on Dec. 2 nd , 1999 9.4% of the portfolio (cost) Closed at $ 27.87 on Nov.3 rd , 2004 The loss up to -$12,793.26 (-60.48%) 2.7% of the portfolio (market value)

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Merck & Co., Inc. Recommendation Sell

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  1. Merck & Co., Inc.RecommendationSell Yuqian(Annie) Zhang Nov. 4th, 2004

  2. Our position • Own 300 shares • Purchased at $70.5 on Dec. 2nd, 1999 • 9.4% of the portfolio (cost) • Closed at $27.87on Nov.3rd, 2004 • The loss up to -$12,793.26 (-60.48%) • 2.7% of the portfolio (market value) • Present P/E: 9.39 • Present EPS: 2.97 • Market Cap: 61.84B

  3. Company profile • A global research-driven pharmaceutical products company with history back to 1887 • Ranked 83 in Fortune 500, 15 in FT Global 500 • Operations in the United States, Europe, Middle East, Africa and Japan with 63,200 employee • 59% of sales came from the US vs. 41% outside the US in 2003. Product Therapeutic Category2004 Net Sales ZOCOR Cholesterol modifying $4.9 to $5.1 billion FOSAMAX Osteoporosis $3.0 to $3.2 billion COZAAR / HYZAAR Hypertension $2.7 to $2.9 billion Coxibs Arthritis and Pain $2.8 to $3.0 billion (VIOXX and ARCOXIA) SINGULAIR Asthma and Seasonal Allergic Rhinitis $2.4 to $2.7 billion Source: Merck &Co. 04 Q2 release

  4. Pharmaceutical Industry overview • Global sales of prescription (including both branded and generic drugs) and over-the-counter (OTC) remedies is around $300 billion annually. • Many large US employers have seen a doubt digit annual increase in their employee health-care costs for the past more than five years. • Traditional top three markets are the US, Western Europe and Japan, while the rising living standards in other regions/countries increase the demand for better health care and sophisticated drugs. • The world's increasing aging population is another factor driving the industry. • Focus on products for chronic rather than acute diseases. The world's two best-selling drugs, Merck's Zocor and Pfizer's Lipitor, both treat high cholesterol. • Increasing M&A in the industry.

  5. Pharmaceutical Industry Issues Pressures on sales growth: • Aging population requires cheaper drugs. • Impact from imported prescription drugs. • Impact from any change of corporate health-care budget. • Increasing patent expiration issues. • Impact from any change of FDA policies. Pressures on profit as well as cash flow: • Huge R&D cost: In 2003, the Pharmaceutical Research and Manufacturers of America member companies invested an estimated $33.2 billion, 17.7 % of domestic sales on R&D. • Increasing cost to handle legal issues.

  6. Pharmaceutical Index DRG vs. SP500 –two years

  7. MRK vs. DRG two year

  8. Peer group- five year key ratios

  9. Peer group- R&D to Sales • Merck: kept a well below industry average R&D to sales ratio from 1996 to 2003. Has struck 145 deals, of which only 21 for products. • Pfizer: the world's largest pharmaceutical research effort with more than 13,000 scientists supported by $7.1 B in 2003; pipeline includes 234 deals, of which 63 for products. • Eli Lilly: R&D to sales at the top of industry; has launched five new products in past 15 months; pipeline includes 130 deals, of which 49 for products.

  10. Merck Issues Update • According to SG Cowen brokerage, a frightening 29% of 2003 revenue at risk due to product patents expiring between 2004 and 2008, vs. 16% among the Big Pharmaceutical companies. • In Feb., Apr. and Aug. 2003, discontinued three phase I or II clinical trails; In Nov. 2003, discontinued two phase III clinical drug development program for treatment of depression and diabetes. • Sept. 30, 2004, announced the withdrawal of Vioxx, share closed down $12.07, nearly 27 percent, to $33, resulting in market capitalization loss $26 billion. • A.G. Edwards analyst predicted that FDA may want 18-month safety studies like they wanted for Vioxx for the successor to Vioxx, Cox-2 inhibitor Arcoxia. • Oct. 11, 2004, began a search to replace CEO Raymond Gilmartin. • Nov 1, 2004, share price plunged more than 10 percent, after a media report said that documents show Merck hid or denied evidence for years. Law suit cost is estimated up to 12B.

  11. Valuation -DCF Sales growth Vioxx sales EBIT margin Discount rate 7.77 8.46 9.16 Target price(constant growth) 48.1 41.9 37.1 Target price (P/E) 39.1 35.8 32.6

  12. Sensitivity analysis-scenario one

  13. Sensitivity analysis-scenario two

  14. Sensitivity analysis- scenario three

  15. Recommendation: Sell • Short to medium term • Voixx withdrawal hurts sales & cash flow • Potential litigation cost will hurt profit & cash flow • Management uncertainty • Long term • Long term growth will decrease due to the lack of pipelines • Long term profit will shrink due to increasing generic competition • Industry uncertainty • Competition from peer group

  16. Q&A

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