Merck Not Immune To Struggles

Merck & Co. Inc. (MRK) reported third-quarter financial results and lowered the high end of previously issued full-year adjusted-EPS guidance. The company’s vaccine business, propelled by Gardasil, and other products such as Januvia for diabetes have been the catalysts for revenue growth. Mega-blockbuster Singulair as well as Gardasil have recently experienced significant flattening in sales but will continue to be huge contributors to Merck’s topline.

Vioxx litigation risk, although not eliminated, is greatly reduced with the 2007 settlement. The patent expiration of Fosamax and the issues surrounding Vytorin and Zetia will slow revenue growth. EPS growth will come from continued cost-cuts. We believe the recent underperformance of key drugs will translate into revenues falling 1% in 2008. We look for EPS of $3.30 for the full-year.

Merck currently trades at roughly 8.9x our 2008 EPS estimate of $3.30. This is slightly below the peer-group average of 9.2x. However, given the strong performance of Januvia and a potential for a rebound in vaccine and Singulair sales in 2009, we look for sales to grow almost 5% in 2009. Despite all its challenges we think Merck’s fundamentals warrant holding the shares. The valuation is fair at the current price. Our $34 target is based on 10.3x our projected $3.30 in EPS for the full year 2008.

Report by Brian Marckx. Jason Napodano, CFA, contributed to the report.

Posted in Categories: Contributor, External Research, Health Care, Stocks.

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