CS Merck & Co. (MRK) Neutral C. Arnold
CP: US$ 35.33 TP: US$ 40 CAP: US$ 75.8b
Rough Seas Before SEAS, Lowering Estimates and Target Price to $40 (from $46)
• MRK's outlook (ex-cholesterol) has become incrementally challenging over the last 6 months and the 2Q results increased
that notion. Weakness was visible in core franchises like Gardasil and Singulair. If not for a (much) lower than expected tax
rate, MRK would have missed consensus estimates.
• The company's decision to not provide 2008 equity income, 2008 EPS and long-term guidance with results was blamed on
cholesterol uncertainty due to the just-released SEAS results. Certainly SEAS added pressure, but we think weak Gardasil
and Singulair product performance made previously stated goals a stretch.
• Gardasil shortfalls were material, $124MM short of our "at consensus" $450MM forecast (global consolidated revenues). Our
estimates are revised downward considering the structural/behavioral challenges to securing business in the age 19-26
cohort, which may be harder to achieve via promotional program fixes. Singulair too may require patience with weekly TRx
trends in the -10% range year-over-year.
• The reaction to SEAS was overdone, but we admit that despite a positive effect on ischemic events by Vytorin there is risk to
disruption in prescription trends if meaningful media attention on the higher cancer rates (dismissed as to chance by the
detailed analysis of Dr. Peto of Oxford, UK) succeeds the release. We have decreased cholesterol JV revenues in a range of
$330 to $710 MM through 2012 with our aim to add conservatism on this issue.
• More cautious forecasts for Gardasil, vaccines and Singulair, and aforementioned cholesterol revisions, reduce 2008 & 2009
EPS from $3.29 and $3.70 to $3.23 and $3.51. Our target price is reduced from $46 to $40 in response to these revisions
and a reflection of a lower S&P valuation as we use a 50/50 blend of DCF and relative valuation and now assume a 2009 P/E
for the S&P of 13.3x (from 14.7x). |
