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| Date: Saturday 04th 2009f July 2009 08:17:35 PM |
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Diabetes Drug Not So Sweet - 10/28/2005 |
| By: Novice Investing Staff |
| Another trouble abound for our stock portfolio, Merck Co & Inc. (MRK). After a setback back in Mid Oct 2005, Merck's marketing partner Bristol-Myers Squibb (BMY), said it may scrap up plan to market diabetes drug Pargluva, also known as Murglitazar. |
| The right thing to do now is to revise our EPS estimation downwards. We now will not count Pargluve as a revenue generator for Merck. Furthermore, it is certain that Merck won't even have any revenue from Vioxx for its fiscal year 2006. This results in downwards revision of $ 1.5 Billion less revenue for fiscal year 2006. Here is what the revenue figure and income statement looks like now. |
| Revenue | Growth rate '03-'04 | Fiscal 2005 | Growth rate 2004-2005 | Fiscal 2006 | Growth rate 2005-2006 |
| Zocor | (5%) | $ 4,700 M | (9.6%) | $ 4,000 M | (14.9%) |
| Fosamax | 18% | $ 3,600 M | 12.5% | $ 3,960 M | 10% |
| Cozaar/Hyzaar | 14% | $ 3,200 M | 12.5% | $ 3,520 M | 10% |
| Singulair | 30% | $ 3,200 M | 23.0% | $ 3,840 M | 20% |
| Zetia | 53% | $ 960 M | 74.5% | $ 1,440 M | 50% |
| Vytorin | N/A | $ 325 M | 90.1% | $ 569 M | 75% |
| Prilosec & Nexium | Not found | $ 800 M | 0% | $ 840 M | 5% |
| Gardasil | - | - | - | $ 500 M | - |
| Murglitazar | - | - | - |
- |
- |
| Vioxx* | - | $ 0 M | - |
- |
- |
| Others |
9% |
$ 6,000 M |
9% |
$ 6,450 M |
7.5% |
| TOTAL | $22,785 M | $25,119 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 | $ 25,119 M |
| Cost of Goods Sold | $ 5,012 M | $ 5,526 M |
| Gross Profit | $ 17,773 M | $ 19,593 M |
| SG & A | $ 6,820 M | $ 7,161 M |
| R& D expense | $ 4,000 M | $ 4,200 M |
| Interest Expense | $ - | $ - |
| Profit Before Tax | $ 6,953 M | $ 8,232 M |
| Income Tax Expense | $ 1,947 M | $ 2,305 M |
| Net Income | $ 5,006 M | $ 5,927 M |
| Shares Outstanding | 2.08 Billion Shares | 1.98 Billion shares |
| EPS Estimate | $ 2.41 | $ 2.99 |
| Let's figure out Merck's fair value again this time. As of Jun 30th 2005, it has $ 13 Billion in cash and $ 5.67 Billion in long term debt. This translates into $ 6.25 and $ 2.73 per share respectively. We estimate Vioxx liability to be about $ 10 Billion, which adds $ 5 per share into Merck's liability. Total long term debt is therefore $ 7.73 per share for Merck. |
| We will sell Merck when it is yielding 7%. Therefore, fair value for MRK is with a P/E of 14.3. Our 'P' here is not merely stock price. It is real price paid to Merck's business. With a P/E of 14.3 and estimated EPS of $ 2.99, Merck's real price = $ 42.76. Now, let's calculate Merck's stock price at fair value. |
| Real price = stock price - (cash+ short-term investment) + long-term debt. |
| Stock price = $ 42.76+ $ 6.25 - $ 7.73 = $ 41.28. |
| This is the fair value of Merck's stock. Obviously, our buying price does not give us 50% potential return. However, at a recent price of $ 27, it does give Merck that much potential return. |
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For more discussions about our stock portfolio pick, please click here. |
| Or....for preliminary research, you can browse our collection of annual reports 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 other securities. |
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