ANALYSIS OF MERCK

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ANALYSIS OF MERCK CO., INC.
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OVERVIEW

• Top pharmaceutical company in Sales
• NYSE MRK
• Sector Healthcare
• Industry Major Drugs
• Market Capitalization 112,639 Million
• Beta 0.43
• Share Price (Close 4/17/02) 55.05

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CORE BUSINESS

• A global, research-driven pharmaceutical company
  that discovers, develops, manufactures and
  markets health products
• Operations managed on a products and services
  basis.
• Two Reportable Segments
• Merck Medco Revenues derived from filling and
  management of prescriptions and health care
  management programs.
• Merck Pharmaceutical Revenues derived from
  sale of therapeutic and preventive agents, sold
  by prescription, for the treatment of human
  disorders.

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CUSTOMERS
Merck a.) Drug wholesalers and retailers b.)
Hospitals c.) Clinics d.) Government Agencies e.)
Managed health care products f.) Divested
businesses. Merck-Medco a.) Corporations b.)
Labor Unions c.) Insurance companies d.) Federal
and State Employee Plans
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Percentage of Revenues
Percentage of Revenues
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• Holds eight research centers in United States,
  Europe, and Japan
• 31 plants dedicated to chemical processing, drug
  formulation, and packaging operations in United
  States, Europe, Central and South America, the
  Far East, and the Pacific Rim.
• Some products include
• 1.) Atherosclerosis Products
• 2.) Hypertension/heart failure Products
• 3.) Anti-Inflammatory/analgesics
• 4.) Osteoporosis Products
• 5.) Respiratory Products
• 6.) Vaccines/ biologicals
• 7.) HIV Products

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COMPETITORS

• Pfizer (PFE)
• Johnson Johnson (JNJ)
• Bristol-Meyers Squibb (BMS).
• Eli Lilly (LLY)
• Schering-Plough (SGP)
• Abbott (ABT)

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RESOURCES TO MEET COMPETITION

• Quality Control
• Flexibility
• Meeting exact customer specifications
• Efficient distribution system
• Strong technical information service

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CURRENT STRENGTHS

• High RD capabilities
• Established relationships with industry
  participants
• Redefining of sales and marketing efforts
• Patent protection
• Trademarks
• Strong customer relationships
• Efficient distribution system
• Internet initiatives

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GROWTH PROSPECTS

• Increased number of products
• Increases in Medicare
• HIV medicines related relationships
• Global outlook
• Maintaining high levels of RD
• Establishment of more joint ventures, licensing
  arrangements, and health care partnerships

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SETBACKS

• Highly competitive business
• Highly regulated
• Legislations encouragement of the use of
  generic products
• Ease at which RD is being imitated
• Patent expirations
• Pending legal cases

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RISKS

• Pfizers merger to Warner-Lambert
• Loss of market exclusivity due to patent
  expirations of top sellers
• Global distribution of generic HIV drugs
• Faces higher material costs
• Use of derivatives for hedging
• Foreign exchange rate risks
• Government actions abroad

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RECENT NEWS

• Registration form filed with the SEC for an 1
  b. IPO of Merck Medco
• Withdrawal of Arcoxia from FDA approval process
• Label change for Vioxx

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FINANCIAL PERFORMANCE

• Analysis of statements indicates that Merck is
  in good financial standing to handle current
  economic uncertainty.
• Credit Rating AAA by Moodys and SP
• Cash provided by operations continues to be
  primary source of funds to finance operating
  needs and capital expenditures
• Management effectiveness indicated by ROA, ROE,
  and ROI above industry averages.

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Balance Sheet Breakdown
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SNAPSHOT
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CASH FLOW

• Took depreciation and amortization expense out
  of material and production expense and other
  (income) expense, net from the original
  statements and created contra accounts.
• Added depreciation and amortization to after tax
  operating income to get Mercks ability to
  generate cash.

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CASH FLOW PROJECTIONS

• FACTORS TAKEN INTO ACCOUNT
• Expiration of several patents at the end of 2001
  will affect revenue growth in 2002 and 2003.
• Expected increased production costs
• 2003 and 2004 will see the introduction of new
  products
• 2004-2008 will experience CF growth rates similar
  to that of past normal years. Benefits derived
  from the potential introduction of new products
  in this period will begin to be counteracted by
  increased competition as there will be more
  entrants.
• 2009-2010 are estimated to have constant growth
  rates of 3 and 3 in perpetuity . Lower rate due
  to maturity of industry and probable influx of
  new entrants, which would make high earnings
  growth unsustainable.

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Calculating the WACC   Wdebt Total Debt/Total
Capital 8865.3/ 24,915.4 .356 Wequity Total
Equity/Total Capital 16050.1/ 24,915.4
.644 Kdebt After Tax Interest Expense / Total
Debt 5.24 Kequity 5.24 3   WACC Wdebt
Kdebt Wequity Kequity 7.17
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VALUATION

• Merck is UNDERVALUED
• Value per share 85.35
• Viewpoint Neutral with some conservatism

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SENSITIVITY ANALYSIS
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CONCLUSIONS

• Recommendation BUY
• Reasons
• Merck has been a constant positive cash flow
  generating firm
• The IPO of Merck Medco will add value to company
• Has remained as a leading company in an
  extremely competitive industry