Novice Investing - Merck's Third Quarter Need No Miracle

Date: Thursday 07th 2008f August 2008 01:41:06 PM

Merck's Third Quarter Need No Miracle - 10/20/2006

By: Novice Investing Staff

Merck & Co Inc. (MRK) continues to deliver better than expected third quarter earning on October 20th, 2006. All in all, Merck earned 51 cents per share during the third quarter as contributions for new drugs and old work wonder on the bottom line. That is equal to $ 941 Million profit per quarter. During the quarter, the company also set aside $ 598 Million for legal expense defending its Vioxx cases. There are currently 23,800 lawsuit against Merck. As been told many times here at Novice Investing, all these cases will not go to court simultaneously. Thus far, the company has won more than it has lost. In the meantime, Merck continues to earn around $ 1000 Million every quarter.

Revenue for the quarter was flat at $ 5.41 Billion. This despites the fact that its Cholesterol blockbuster drug, Zocor, lost patent protection. Revenue for Zocor plunged $ 371 Million from $ 1 Billion average for the past several quarters. In other words, if this hot streak continues, Merck would have registered $ 650 Million growth in revenue per quarter next year. At the very least, Zocor revenue would go to $ 0 and Merck would still register $ 275 Million in revenue growth. Let's take the middle point and assume a $ 450 Million revenue growth per quarter or $ 1.8 Billion additional revenue annually. With 70% estimated gross profit, this is equal to $ 1.26 Billion additional profit per year or 58 cents per share. Okay, fixed cost might have gone up a bit, but I believe that 40 cents of additional profit is warranted here. For 2006, Merck is expected to earn $ 2.48 per share. For 2007, therefore, Merck will earn $ 2.88 per share excluding charges.

This rough prediction of course, leaves out the recently-approved diabetes drug, Januvia. If Merck stumbles badly with this drug, at the very least, it would be a $ 1 Billion business.

Other drugs worth mentioning are: Singulair (Asthma treatment) which registers revenue growth of 25% to $ 868 Million, Fosamax (Osteoporosis) with revenue decline of 1 % to $771 Million, High blood pressure treatment (Cozaar & Hyzaar) which rose 8% to $ 813 Million and Vytorin-Zetia which contributes to $ 500 Million.

What that means is that Vytorin-Zetia has a combined revenue of $ 2 Billion and the growth spurt has barely begun. It registers 50% revenue growth on the third quarter and I always believe that it can exceed or at least replace the revenue loss by Zocor eventually. We will see.

Despite all the funfare, we need to review our 2006 prediction for Merck's earning that was made July last year. At the time, the prediction was for earnings of $ 3.41 per share with revenue of $ 26.6 Billion. At this point, full year revenue would most likely come in at $ 22.27 Billion, a full $ 4 Billion under projection. Frankly speaking, Merck will eventually achieve this target, but not in 2006. At the time, our fair value calculation for Merck is $ 45.48 per share. Now, we believe that it would be much less. This calculation assumes that only the revenue estimation changes. All others (such as gross margin, selling general & administrative expense) remains unchanged.


Revenue Fiscal 2006	Growth rate '03-'04	Fiscal 2005	2006 (As of July '05)	2006 (As of Oct '06)	Growth rate 2005-2006
Zocor	(5%)	$ 4,700 M	$ 4,000 M	$ 2,500 M	(46.8%)
Fosamax	18%	$ 3,600 M	$ 3,960 M	$ 3,500 M	(2.8%)
Cozaar/Hyzaar	14%	$ 3,200 M	$ 3,520 M	$ 3,520 M	10%
Singulair	30%	$ 3,200 M	$ 3,840 M	$ 3,840 M	20%
Zetia	53%	$ 960 M	$ 1,440 M	$ 1,500 M	56%
Vytorin	N/A	$ 325 M	$ 569 M	$ 500 M	53.4%
Prilosec & Nexium	Not found	$ 800 M	$ 840 M	$ 840 M	5%
Gardasil	-	-	$ 500 M	$ 200 M	-
Januvia	-	-	-	$ 100 M	-
Murglitazar	-	-	$ 1,000 M	-	-
Vioxx*	-	$ 0 M	$ 500 M	-	-
Others	9%	$ 6,000 M	$ 6,450 M	$ 6,450 M	7.5%
TOTAL		$22,785 M	$26,619 M	$22,950 M
* Vioxx is currently pulled out of the market due to safety concern

Pro Forma Income Statement for MRK	Fiscal year 2005	Fiscal year 2006
Revenue	$ 22,785 M	$ 22,950 M
Cost of Goods Sold	$ 5,012 M	$ 5,049 M
Gross Profit	$ 17,773 M	$ 17,901 M
SG & A	$ 6,820 M	$ 7,000 M
R& D expense	$ 4,000 M	$ 4,200 M
Interest Expense	$ -	$ -
Profit Before Tax	$ 6,953 M	$ 6,701 M
Income Tax Expense	$ 1,947 M	$ 1,876 M
Net Income	$ 5,006 M	$ 4,824 M
Shares Outstanding	2.08 Billion Shares	1.98 Billion shares
EPS Estimate	$ 2.41	$ 2.44

There you go. $ 2.44 earning per share for 2006. As mentioned earlier, with revenue of Zocor shrinking ( we expect a mere $ 121 Million of revenue in the fourth quarter of 2006), Merck can still keep a flat sales. When this is all and done, in 2007, Merck will have a $ 450 Million quarterly revenue growth or $ 1.8 Billion additional revenue annually. This is equal to 40 cents per share additional profit. For 2007, this trend will continue due to growth of Gardasil and Zetia-Vytorin combo. In 2008, Merck can still achieve the same growth, mainly due to its Januvia franchise which has not begun selling much currently. Thus our rough prediction goes like this:

2006 EPS -- $ 2.44

2007 EPS -- $ 2.80

2008 EPS -- $ 3.20

In 2008, with a Price Earning ratio of 15, fair value will be around $ 48 assuming some Vioxx fallout and Merck's balance sheet. At current price, Merck looks fairly valued. Thus, with deep regret, while we like Merck's prospect going forward, today, we are selling Merck at $ 45.20 currently. Further articles can be found on our portfolio section.

END

Have questions or want to comment on this article? Proceed here

Distributing your own investing content is easy. Simply, click here.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Merck Co & Inc. (MRK) or any other securities.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]