Zeev,
I know you like Merck. Here is a Motley Fool story for you to ponder. Do you still think it will drop to your target area?
Fletch
New Prescription for Merck
Drug giant Merck (NYSE: MRK) announced a new prescription today: It plans to spin off its Merck-Medco pharmacy benefits management (PBM) subsidiary this year. Merck hopes to issue some shares in an IPO around mid-2002 and distribute the rest to shareholders within 12 months.
Purchased in 1993 for $6.6 billion, Merck-Medco has grown to a whopping $26.4 billion in revenues, or 55% of Merck's total. But its slim net profit margins -- under 3% -- drag down the high numbers from Merck's pharmaceutical business. Merck originally hoped that owning a PBM, whose managed-care company customers pay it to handle patient prescription approval and filling, would direct more business to Merck drugs. After regulators stepped in to prevent that potential conflict, other companies, such as Eli Lilly (NYSE: LLY) and SmithKlineBeecham, now part of GlaxoSmithKline (NYSE: GSK), sold their PBMs for losses, but Merck held on and Merck-Medco stayed profitable.
Merck's effort to unlock value and concentrate on its core, higher-margin prescription drug business comes as it struggles with patent expiration of and new generic competition for its five big selling drugs -- blood pressure drugs Vastec and Prinivil, ulcer treatments Pepcid and Prilosec, cholesterol drug Mevacor, and blockbuster arthritis drug Vioxx. Though Vioxx earned a healthy $2.55 billion in 2001 revenues, safety concerns brought that down from company projections of $3.5 billion.
Merck is hardly alone among big pharmas in the pressure to produce more and more blockbusters to keep the profits coming -- Bristol-Myers Squibb (NYSE: BMY), Eli Lily, and Schering-Plough (NYSE: SGP) all reported lowered earnings pictures recently -- and there has been much public pressure for Merck to find a merger partner. But its famed labs may not need all that much help. They've turned out 17 new and approved drugs since 1995, and though Merck expects flat earnings for 2002, it projects a return to double digit growth the next year.
The prospects for investors in the stand-alone Merck-Medco may be good and improving. It led the industry with its drug discount card program, co-marketed with Reader's Digest, and Congress is now looking favorably to PBMs to play a large role in some prescription drug proposals. And for those shareholders who stick around with Merck, the company could deploy the spinoff proceeds profitably in new research and development or paying down the $4 billion-plus long-term debt.
All this could mean that Merck shares, currently beaten back to early 1998 levels and down 33% from their 52-week high, are undervalued.
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