summary of BS MRK upgrade courtesy of Barron's Online...
Merck's Pipeline Dream
Merck & Co. (MRK: NYSE)
By Bear Stearns & Co. ($43.60, Jan. 3, 2007)
WE ARE UPGRADING Merck to Outperform from Peer Perform.
We increased our 2007, 2008 and 2009 earnings per share to $2.64 (up two cents), $2.82 (up 10 cents) and $3.29 (up 15 cents), respectively, versus consensus EPS estimates of $2.59, $2.72 and $3.14.
We lowered our 2006-2010 selling, general and administrative costs' compounded annualized growth rate (CAGR) to 2% from 3% versus Merck's 0% estimate. Our 2005-2010 EPS CAGR is 6.3% versus Merck's greater-than-or-equal-to 10% long-term target.
We increased our Vytorin/Zetia [two cholesterol drugs Merck markets with Schering-Plough] three-year sales CAGR to 23% from 20%. The cholesterol joint venture will account for 22%/27% of Merck's pretax income in 2007/2010.
Lower-priced generic simvastatin is a risk to the statin class, but appears to have had a limited impact on Vytorin based on: robust LDL-lowering; safety versus high-dose statins; 27% discount to high-dose Lipitor; and ease of shifting uncontrolled generic Zocor users. Vytorin is the primary choice for generic Zocor users needing stronger LDL-lowering.
Januvia [a diabetes drug] and vaccines are new pillars of growth. Merck posted best new product flow/regulatory execution among pharma companies in 2006.
We see upside to several new products as consensus estimates appear to be underestimating performance. We project combined 2007/2010 Gardasil, Januvia, RotaTeq sales of $2.2 billion/$5.9 billion versus the Street's $1.4 billion/$4.0 billion. An additional delay to Novartis' Galvus (late February PDUFA [Prescription Drug User Fee Act] action date) is a likely first-quarter catalyst. Also, we assume Gardasil/RotaTeq U.S. competition from GlaxoSmithKline's Cervarix/Rotarix in 2008.
Merck has three planned 2007 regulatory filings that could be catalysts: gaboxadol (insomnia); MK-0518 (HIV-integrase inhibitor); and MK-0524A (niacin/flushing inhibitor). These three franchises (including MK-524B) account for 28% of our five-year adjusted incremental sales of $6.1 billion. The Arcoxia PDUFA action date is in April, with a first-quarter 2007 Food and Drug Administration advisory committee decision likely.
We are establishing a year-end 2007 price target of $53. Our price target assumes Merck trades at 18.6 times our 2008 EPS of $2.82. Merck's performance rests in its ability to execute on launches through major patent expirations (Zocor/Fosamax in 2006/2008), while holding SG&A flat.
Vioxx litigation will add volatility, with four cases entering New Jersey courts on Jan. 16.
-- John Boris
-- Rajeev Jashnani
--Nicholas Wu |
