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ANALYSIS OF MERCK

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Merck Medco Revenues derived from filling and management of prescriptions and ... The IPO of Merck Medco will add value to company ... – PowerPoint PPT presentation

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Title: ANALYSIS OF MERCK


1
ANALYSIS OF MERCK CO., INC.
2
OVERVIEW
  • Top pharmaceutical company in Sales
  • NYSE MRK
  • Sector Healthcare
  • Industry Major Drugs
  • Market Capitalization 112,639 Million
  • Beta 0.43
  • Share Price (Close 4/17/02) 55.05

3
CORE BUSINESS
  • A global, research-driven pharmaceutical company
    that discovers, develops, manufactures and
    markets health products
  • Operations managed on a products and services
    basis.
  • Two Reportable Segments
  • Merck Medco Revenues derived from filling and
    management of prescriptions and health care
    management programs.
  • Merck Pharmaceutical Revenues derived from
    sale of therapeutic and preventive agents, sold
    by prescription, for the treatment of human
    disorders.

4
CUSTOMERS
Merck a.) Drug wholesalers and retailers b.)
Hospitals c.) Clinics d.) Government Agencies e.)
Managed health care products f.) Divested
businesses. Merck-Medco a.) Corporations b.)
Labor Unions c.) Insurance companies d.) Federal
and State Employee Plans
5
Percentage of Revenues
Percentage of Revenues
6
  • Holds eight research centers in United States,
    Europe, and Japan
  • 31 plants dedicated to chemical processing, drug
    formulation, and packaging operations in United
    States, Europe, Central and South America, the
    Far East, and the Pacific Rim.
  • Some products include
  • 1.) Atherosclerosis Products
  • 2.) Hypertension/heart failure Products
  • 3.) Anti-Inflammatory/analgesics
  • 4.) Osteoporosis Products
  • 5.) Respiratory Products
  • 6.) Vaccines/ biologicals
  • 7.) HIV Products

7

COMPETITORS
  • Pfizer (PFE)
  • Johnson Johnson (JNJ)
  • Bristol-Meyers Squibb (BMS).
  • Eli Lilly (LLY)
  • Schering-Plough (SGP)
  • Abbott (ABT)

8
RESOURCES TO MEET COMPETITION
  • Quality Control
  • Flexibility
  • Meeting exact customer specifications
  • Efficient distribution system
  • Strong technical information service

9
CURRENT STRENGTHS
  • High RD capabilities
  • Established relationships with industry
    participants
  • Redefining of sales and marketing efforts
  • Patent protection
  • Trademarks
  • Strong customer relationships
  • Efficient distribution system
  • Internet initiatives

10
GROWTH PROSPECTS
  • Increased number of products
  • Increases in Medicare
  • HIV medicines related relationships
  • Global outlook
  • Maintaining high levels of RD
  • Establishment of more joint ventures, licensing
    arrangements, and health care partnerships

11
SETBACKS
  • Highly competitive business
  • Highly regulated
  • Legislations encouragement of the use of
    generic products
  • Ease at which RD is being imitated
  • Patent expirations
  • Pending legal cases

12
RISKS
  • Pfizers merger to Warner-Lambert
  • Loss of market exclusivity due to patent
    expirations of top sellers
  • Global distribution of generic HIV drugs
  • Faces higher material costs
  • Use of derivatives for hedging
  • Foreign exchange rate risks
  • Government actions abroad

13
RECENT NEWS
  • Registration form filed with the SEC for an 1
    b. IPO of Merck Medco
  • Withdrawal of Arcoxia from FDA approval process
  • Label change for Vioxx

14
FINANCIAL PERFORMANCE
  • Analysis of statements indicates that Merck is
    in good financial standing to handle current
    economic uncertainty.
  • Credit Rating AAA by Moodys and SP
  • Cash provided by operations continues to be
    primary source of funds to finance operating
    needs and capital expenditures
  • Management effectiveness indicated by ROA, ROE,
    and ROI above industry averages.

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Balance Sheet Breakdown
22
SNAPSHOT
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25
CASH FLOW
  • Took depreciation and amortization expense out
    of material and production expense and other
    (income) expense, net from the original
    statements and created contra accounts.
  • Added depreciation and amortization to after tax
    operating income to get Mercks ability to
    generate cash.

26
CASH FLOW PROJECTIONS
  • FACTORS TAKEN INTO ACCOUNT
  • Expiration of several patents at the end of 2001
    will affect revenue growth in 2002 and 2003.
  • Expected increased production costs
  • 2003 and 2004 will see the introduction of new
    products
  • 2004-2008 will experience CF growth rates similar
    to that of past normal years. Benefits derived
    from the potential introduction of new products
    in this period will begin to be counteracted by
    increased competition as there will be more
    entrants.
  • 2009-2010 are estimated to have constant growth
    rates of 3 and 3 in perpetuity . Lower rate due
    to maturity of industry and probable influx of
    new entrants, which would make high earnings
    growth unsustainable.

27
Calculating the WACC   Wdebt Total Debt/Total
Capital 8865.3/ 24,915.4 .356 Wequity Total
Equity/Total Capital 16050.1/ 24,915.4
.644 Kdebt After Tax Interest Expense / Total
Debt 5.24 Kequity 5.24 3   WACC Wdebt
Kdebt Wequity Kequity 7.17
28
VALUATION
  • Merck is UNDERVALUED
  • Value per share 85.35
  • Viewpoint Neutral with some conservatism

29
SENSITIVITY ANALYSIS
30
CONCLUSIONS
  • Recommendation BUY
  • Reasons
  • Merck has been a constant positive cash flow
    generating firm
  • The IPO of Merck Medco will add value to company
  • Has remained as a leading company in an
    extremely competitive industry
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