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. Offers more non-Rx In 2006, Pfizer produced drugs like Zoloft, Lipitor, products than MRK. Celebrex, Viagra, Zyrtec, and Zithromax. Pfizer Pfizer’s market cap is recently sold off its consumer health division, which approximate twice that of manufactured OTC drugs and other products like: Merck and has more cash Listerine, Rogaine, Sudafed, Rolaids, Neosporin, available for R&D Visine, Lubriderm, and Purell to Johnson & Johnson. It also has an animal health division. Johnson & Large corporation that owns more than 230 operating Offers a wide range of Johnson (JNJ) companies and produces a range of healthcare and consumer healthcare OTC related products in three divisions: Consumer, products w/ recognizable Pharmaceutical, Medical Devices and Diagnostics. brand names. 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). Bristol Meyers BMY, inc. produces pharmaceuticals and other A wider product line than Squibb Co. healthcare related products through 3 major MRK but a smaller (BMY) segments: Pharmaceuticals, Nutritionals, and Other market cap. 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. GlaxoSmithKline GSK has two main industry segments: Consumer product plc (GSK) Pharmaceuticals and Consumer Healthcare. Its main segment offers the wider markets are USA, Europe and Japan. As of Dec. product line. 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 AstraZeneca plc 97% of AZN’s revenue made from sale of Mostly focused on (AZN) prescription pharmaceuticals. Its prescription drugs pharmaceuticals. AZN are focused on cardiovascular, gastrointestinal, has many products in the neuroscience, oncology, respiratory inflammation and pipeline which could infection. Key pharmaceuticals: Crestor, Nexium, problematic in the future. Arimidex, Seroquel, and Symbicort. Its products available in 100 countries and there are 29 products are currently in Phase III. financials income statement Looking at the annual report showing data from the past three years, we see that from 2003-2004, sales increased from $22,485.9M to $22, 938.6M. Yet, from 2004-2005, 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 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 2005. 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 2005. 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. 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 2005. 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 2004-2005, 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. 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. 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 16.26 while another competitor, Sanovi-Aventis, has a PE ratio of 30.39. 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 2006. 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 19.29 19.61 31.7 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.