Group 8 Valuation Project Merck

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Group 8 Valuation Project Merck Co.

• Eyad Bizreh
• V. J. Eapen
• Goran Kulic
• John Merriwether
• Brenda A. Garcia
• Gracie Salinas

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MISSION STATEMENT Merck Co., Inc. is a leading
research-driven pharmaceutical products and
services company. Merck discovers, develops,
manufactures and markets a broad range of
innovative products to improve human and animal
health, directly and through its joint
ventures. OUR MISSION The mission of Merck is to
provide society with superior products and
services by developing innovations and solutions
that improve the quality of life and satisfy
customer needs, and to provide employees with
meaningful work and advancement opportunities,
and investors with a superior rate of return.
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Merck Co.

• Sector Healthcare
• Industry Biotechnology Drugs (23)
• Sub-Industry Major Drugs (61)
• Market Cap 124.6 B
• Sub-Industry Rank 3 (10)
• NYSE MRK
• Founded 1887

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Background Analysis

• Major Products Pipeline (2002)
• Zocor 5.6 B (10.8)
• Vioxx 2.5 B (4.8)
• Fosamax 2.3 B (4.4)
• Cozaar/Hyzaar 1.9 B (3.7)
• Singulair 1.7 B (3.3)
• Research Development (2002)
• 2,677.2 M (2 x PFE, almost 3 x JNJ)

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Further Analysis Current Events

• New Products
• Zetia FDA approval in November 2002
• Existing Products in the Headlines
• Vioxxs cardiovascular side effects (mid 2001)
• Sales margins not met earnings down price
  plummeted
• Finastride aka Proscar, Propecia
• Mixed Results for Drug Used to Prevent Prostate
  Cancer NYT, 6/24/03
• Mercks ties to Medco subsidiary
• Formal complaint to be filed in September
• U.S. Accuses Merck Unit of Cheating Health
  NYT, 6/23/03
• 42.5 million settlement?
• Medicare Drug Benefits Proposal

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Ratio Analysis Strengths
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Ratio Analysis Weaknesses
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Stock Valuation FCFE

• 2002 FCFE 5,307 M, 0.983 per share
• 2.37 per share outstanding
• 2001 FCFE 9,434 M, 1.747 per share
• 4.21 per share outstanding
• 2000 FCFE 4,676 M, 0.866 per share
• 2.09 per share outstanding

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Valuation Discounted Cash Flows

• Challenges
• Forecasting the cash flows
• FCFE post-debt FCF
• Estimating the discount rate (r or ke)
• Reflective of risk and TVM (Rf)

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Market Efficiency Weak form

• Industry-specific
• June 20, 2003
• Possibly increased regulation

• Firm-specific
• May 28, 2003
• Divesting of Medco

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Risk Analysis

• Calculated Beta 0.733
• 0.81 morganstanley.com, 0.45 SP 500 Report
• Actual ke via DCF 10.23 (Merck)
• Actual ke via CAPM 8.9 (SP 500 benchmark)
• Total risk premium 4.4
• Rf 4.5
• RSP500 10.5
• Market risk premium 6
• ke via CAPM lt ke via DCF stock is undervalued

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Cost of Capital and Optimal Capital Structure

• 38 Equity, 62 Debt (30 tax bracket)
• WACC cost of equity after-tax cost of debt
• 2002 6.43
• 2001 6.78
• 2000 6.19
• Cost of Debt (kd)
• 2002 5.83
• 2001 5.85
• 2000 6.22

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Holding Period Returns

• Time horizon 1 year

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Conclusions

• Group Recommendation Strong HOLD
• SP-Adjusted Consensus Opinion HOLD
• Consensus Recommendations
• Source www.moneycentral.msn.com/investor/invesub/
  analyst-recommend
•  

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Credits

• www.morganstanley.com
• SP500 Stock Reports
• Yahoo! Finance
• MSN Money
• www.msn.com
• www.merck.com
• New York Times
• CBS MarketWatch
• Peter HoWei Hwang