Analyst expects the company will boost dividend after its merger with Schering-Plough.

Matthew Herper, 05.29.09, Originally published in Forbes.com

Merck could increase the size of the dividend payment it makes to shareholders every quarter following its $41.1 billion purchase of rival Schering-Plough, although the company will not commit to an increase now.

Chief Financial Officer Peter Kellogg told analysts and investors Thursday that Merck ( MRK – news – people ) “will be generating a lot of cash” and that the company does see the need to “ultimately make sure shareholders benefit from that.” He also said, “It’s too early to declare how we will do that.”

Kellogg made his comments at the Strategic Decisions conference, organized by Sanford C. Bernstein, in response to a question from Timothy Anderson, Bernstein’s pharmaceuticals analyst. Anderson noted that Merck had previously stated it intends to have free cash flow of $15 billion by 2013, potentially making a bigger payout possible. (Click here for a transcript of Merck’s presentation at Strategic Decisions.)

In a note to investors Friday, Anderson noted that Merck shares already have a dividend yield around 6%. Right now, Merck has committed only to maintaining its current dividend after the merger, but any increase could make the new company “the highest-yielding drug stock,” Anderson says, “and this would probably be received well.” He writes that his calculations show no increase is likely until next year.

Investors are already looking for a dividend increase from Merck’s longtime rival Pfizer ( PFE – news – people ), which is spending $68 billion to acquire Wyeth ( WYE – news – people ). Pfizer cut its dividend to help pay for the deal, but in a May 12 note to investors, Catherine Arnold, the pharmaceuticals analyst at Credit Suisse ( CS – news – people ), wrote that would be “surprising” if Pfizer didn’t boost its dividend after it integrates Wyeth.

Both Merck and Pfizer are facing patent expirations on top-selling drugs, but their respective mergers will allow for dramatic cost cuts. Year-to-date, Merck shares have dropped 10% and Pfizer shares are down 15%.

Aside from patent expirations, Merck is facing disappointing sales of its Gardasil vaccine for the virus that causes cervical cancer and eroding sales of the cholesterol drugs Vytorin and Zetia, which it sells with Schering.

Johnson & Johnson ( JNJ – news – people ) is also challenging whether Schering should retain the rights to sell J&J’s rheumatoid arthritis drugs in international markets. Analysts say that Merck appears to have the upper hand in the battle, but some expect the company to make some concession to J&J in order to get the Schering acquisition done.

©2012 An Inconvenient Woman. All Rights Reserved.

The following is an excerpted article that was originally published in TheScientist.com. To read the full article, with citations, click on the hyper link below. The Inconvenient Woman thought it was very important to illustrate the prevasive corporate culture of deception that has taken over the once respected Pharma Giant, Merck.  Two generations ago Merck was renowned for  innovative research  and being science-driven organization.  That was long ago. Today Merck is being run by lawyers, accountants and one of the best marketing brain trusts in the world. Apparently ethical behavior is no longer part

©2012 An Inconvenient Woman. All Rights Reserved.

Reported by David Jolly

With the purchase, Merck is expanding its franchise in cardiovascular, respiratory and oncology drugs and shoring up its research pipeline, in particular with a Schering-Plough product called TRA, a promising drug designed to prevent blood  clotting.

In addition, Merck will benefit from the worldwide reach of Schering- Plough, which generates about 70 percent of its sales outside the United States, including more than $2 billion in annual revenue from emerging markets.

The companies said in a joint statement that the merged company would keep the name Merck and that the deal had been unanimously approved by their boards. Richard Clark, Merck’s chairman and chief executive, will lead the combined company.

The deal is the second major pharmaceutical deal this year after Pfizer, the world’s biggest drug maker, agreed in January to pay $68 billion for Wyeth. And Roche, the Swiss pharmaceutical company, is pursuing a full acquisition of the California biotechnology company Genentech, in which it already owns a majority stake.

Merck is among the drug makers that face the hardest time in the next decade because of patent expirations, said Richard Purkiss, a drug sector analyst at Atlantic Securities in London. Most pressingly, it faces the expiration in 2012 of the patent on Singulair, the asthma drug that is its top-selling product.

In contrast, “Schering- Plough doesn’t have much exposure to patent expiries in the same time frame,” he said. “This is really about combining to protect earnings.”

Shares of Schering- Plough rose more than 8 percent Friday amid speculation that the company had been pursuing a deal with either Merck or Johnson & Johnson, with which it jointly produces the arthritis drug Remicade.

Under the terms of the agreement announced Monday, Schering-Plough shareholders will receive 0.5767 share of the combined company and $10.50 in cash for each share of Schering-Plough. Each Merck share will automatically become a share of the combined company. Based on Merck’s closing stock price Friday, the deal values Schering-Plough at $23.61 ar share, or $41.1 billion, a premium to Schering-Plough shareholders of about 34 percent.

The 44 percent of the deal that is being paid in cash will include $9.8 billion from existing cash balances and $8.5 billion from financing provided by JPMorgan Chase.

Merck shareholders will own about 68 percent of the merged company, and Schering-Plough shareholders will own the rest. Merck said it expected the deal to contribute “modestly” to its earnings in the first year and “significantly”  thereafter.

“We are creating a strong, global health care leader built for sustainable growth and success,” Clark said in the statement. “The combined company will benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines and an expanded presence in key international markets, particularly in high-growth emerging markets. The efficiencies we gain will allow us to invest in strategic opportunities, while creating meaningful value for  shareholders.”

The transaction will be structured as a “reverse merger” in which Schering-Plough, renamed Merck, will continue as the surviving public company.

Merck said it expected annual cost savings of about $3.5 billion after 2011. The savings “are expected to come from all areas across the combined company and from the full integration of the Merck/Schering-Plough Pharmaceuticals cholesterol joint venture,” it said, and are in addition to previously announced cost-cutting measures at the two companies.

David Moskowitz, an analyst at Caris & Co. in New York, suggested that the companies might have to raise the offer price above $23.61.

“I think it should be at least $12 billion to $15 billion higher,” he told Reuters, as investors might not be happy until the price reaches “the high $20s or $30″ a share.

©2012 An Inconvenient Woman. All Rights Reserved.

The forth quarter earning reports, the report card for publicly held companies, held no good news for Merck or its stockholders. Merck released its not overly optimistic guidance for 2009 that forecasted earnings and revenue below that expected by Wall Street analysts. It is never a good to disappoint ‘the street.’ Merck named lower sales of its Vytorin and Zetia cholesterol pills, sold as part of a joint venture with Schering-Plough as one reason for declining profit.

In a statement, Merck CEO Dick Clark blamed “a volatile global economy,” currency exchange rates and “continued challenges” for key products. In response to changing market conditions and generic competition to their high profit meds, Merck is eliminating 7,200 jobs and closing production facilities.

Merck reported the expectation that revenues from Gardasil their HPV vaccine are will remain flat in 2009, as Merck continues to struggle with questions over safety and cost. Sales of Gardasil were down 4% in third quarter,2008 for instance. Merck’s revenue from other vaccines will increase to between $2.8 billion and $3.1 billion, compared with an estimated $2.6 billion to $2.8 billion this year.

Merck continues to have big hopes for their Januvia diabetes pill. Sales are expected to reach between $2.4 billion to $2.7 billion next year. Profits excluding one-time items will be $3.15 to $3.30 a share next year, compared with analyst estimates of $3.52. The declining US dollar will reduce earnings by 6% in 2009. Merck is maintaining its 2008 earnings forecast of $3.28 to $3.32 a share.

Forbes Take on Merck’s Guidance

Forbes.com continues to report  on Merck’s numerous  challenges. When Merck yanked its financial guidance for the year, some fund managers sold out of anger, suspecting Merck was using the SEAS result to cover for the worse-than-expected performance of Singulair and of Gardasil, a vaccine for the human papilloma virus that causes cervical cancer. Merck Chief,  Richard Clark, did acknowledge those issues in his e-mail to employees and on a conference call with analysts.

The Gardasil vaccine, which generates $1.5 billion annually, hit speed bumps. Researchers have raised doubts about the cost-effectiveness of the vaccine, and there have been scattered reports of side effects, but there are bigger problems in the area of distribution.

Pediatricians are used to giving shots, and girls who see them have been getting vaccinated. But Gardasil is approved for women as old as 26, and primary care doctors and obstetrician-gynecologists have less financial incentive to vaccinate. Women ages 18 to 26 have just not been getting Gardasil, and Merck has introduced pilot programs to help docs pay for stocking the vaccine. The FDA also returned, with questions, an application to sell the vaccine for women as old as 46, delaying its approval.

Additionally, Merck has had difficulty manufacturing some of its vaccines, including Zostavax, for shingles. The products are literally on backorder. “You’ve got a product that’s in demand,” says Funtleyder, “and you can’t supply the demand.” Merck says the production problems will be solved and backorders filled by early 2009.

Merck says its manufacturing problems are not the result of its staff reduction, and that it won’t allow job cuts to hurt the quality of its products. The 7,000 jobs cut in 2005 included vacant positions, and the company didn’t stop hiring; total head count is down by about 4,000 to around 57,000. Still, the current round of 7,200 cuts, including a program called “spans and layers” that will result in one-quarter of executives (including many vice-presidents) leaving the company, could certainly lead to a brain drain.

What about research?

No big Merck drugs are expected to hit the market in 2009. For a moment, it appeared Merck’s focus on basic science was helping it get the jump on competitors. Its diabetes drug Januvia made it to market while competitors from Novartis (nyse: NVS – news – people ) and elsewhere failed because of side effects. Gardasil has had the U.S. market to itself because the similar Cervarix, from GlaxoSmithKline (nyse: GSK – news – people ), has been delayed.

But now Merck’s pipeline has been culled by delays and failures. Merck had high hopes for Cordaptive, a new drug to block the side effects of the proven heart medicine niacin. The FDA dashed them, wanting more safety data and, according to people who have been briefed on the agency’s response to Merck, more data comparing the new drug with aspirin, which some doctors prescribe with niacin today.

Merck Vice President Richard Pasternak says the aspirin issue was minor and that Merck is now collecting more data. Obesity drug Taranabant was killed because it caused depression and psychiatric side effects; similar medicines from Pfizer (nyse: PFE – news – people ) and Sanofi-Aventis (nyse: SNY – news – people ) were also nixed.

Merck does have a few gems. Its HIV drug Isentress is the only one of its kind, and it holds great promise. The experimental rolofylline, for acute heart failure, could be a blockbuster if it works. Merck’s basic science research in cancer is fascinating and could lead to important drugs if the company pays enough for clinical trials.

But many are sick of waiting for Merck to deliver. Deutsche Bank analyst Barbara Ryan thinks the company should just bite the bullet and make a big acquisition. She suggests Gilead Sciences (nasdaq: GILD – news – people ), a maker of HIV drugs and perhaps biotech’s biggest star.

On an October conference call with analysts, Clark was unbowed. “I have full confidence in the fundamentals of Merck’s business, our strong balance sheet and cash flow, our product portfolio, our deep strength in research and development, our great people and an excellent management team across the globe,” he said.

Editorial Note:

Readers have often asked why I include Big Pharma financial analysis as part my Inconvenient Woman Blog.  For those of us who feel Gardasil is just bad science that is endangering our girls, I feel financial analysis offers a helpful data point. When some one we love becomes chronically ill or dies from a drug interaction, it is profoundly emotional. But to the Companies like Merck, and their stockholders, it’s all about an earnings ratio and the dividend.

One way to measure the effectiveness of our fight against Merck’s HPV-vaccine is seeing what impact we Inconvenient Women are having on their bottom-line. Merck will never stop producing a drug because it is the right thing to do. Gardasil will be pulled from the market because it is no longer profitable or the FDA has finally forced a recall and issued a order to stop sales and the CDC withdraws its support of the HPV-vaccine process.

That is why it is so important that Moms and daughters continue to contact their Federal, State and local officials with their concerns and personal experience with Gardasil. Every interview, article, YOUTUBE video is important. Wherever two or more are gathered, talk about Gardasil. Use MeetUp to schedule meetings to increase public awareness. Use Social Networking sites to get the word out, educate before you vaccinate. We are already seeing cracks in the Merck juggernaut. Lets hope that 2009 is the year to get CDC and the FDA to listen to the voices of the women and girls who are suffering in the name of earnings share.

©2012 An Inconvenient Woman. All Rights Reserved.

Has Merck‘s comeback turned into a wipeout?

Under chief Richard Clark, an unassuming company lifer, Merck (nyse: MRK – news – people ) staged a seemingly amazing turnabout from the dark days of 2004, when it had to stop selling the painkiller Vioxx after its own studies linked the drug to an increased risk of heart attack and plaintiffs’ lawyers swarmed the company.

But though Merck’s share price surged to pre-Vioxx highs early this year as Clark settled the litigation for just $5 billion and got eight drugs approved in two years, the stock now sits at a Vioxx-era $26, down 50% in 11 months. Don’t just blame the financial crisis–that’s the worst performance of any big pharmaceutical company this year.

An earnings guidance call Thursday and a meeting with analysts at company headquarters Dec. 9 will give Clark a chance to soothe Wall Street. The problem will be making analysts feel they haven’t heard it all before.

One of Clark’s first moves, in 2005, was to cut 7,000 jobs; Merck just announced it would cut 7,200 more. He’s promised “fundamental changes” to the company’s business model. But really getting Wall Street’s attention will require unveiling a truly impressive research surprise or announcing a big acquisition.

“I want to like Merck, but they keep not succeeding,” says Les Funtleyder, health care strategist at Miller Tabak. “They have some decent people and a very good research structure, but we have to go with the facts and the fact is success has been elusive.”

Merck’s total sales will drop 1% to $23.9 billion next year, according to analyst John Boris at Citigroup. He’s bullish because the stock is so cheap, but in a recent report, he laid out the challenge Merck will face in 2009: Sales of top-seller Singulair, for allergies and asthma, will barely grow because of safety worries, and generics maker Teva Pharmaceuticals (nasdaq: TEVA – news – people ) could launch a copycat ahead of schedule. The company’s vaccines division has stumbled due to manufacturing and marketing issues that executives need to fix–fast.

Source: Matthew Herper, Forbes.com

©2012 An Inconvenient Woman. All Rights Reserved.

Is it still a buy?

NEW YORK (CNNMoney.com) — Merck has enjoyed a strong comeback since the messy Vioxx blowout nearly three years ago. But you might be surprised by how well Merck has done since it pulled its arthritis drug from the market.

Merck & Co., Inc. (up $0.10 to $50.02, Charts, Fortune 500) bears little resemblance to the battered drug company it was three years ago. The stock is up 12 percent from its pre-Vioxx withdrawal levels.

And shares are up 16 percent year-to-date, making it the second-best performing Big Pharma company in the S&P 500, behind only Schering-Plough (down $0.05 to $30.10, Charts, Fortune 500), and leaving competitors like Pfizer Inc., (down $0.09 to $24.58, Charts, Fortune 500) Eli Lilly & Co. (up $0.38 to $56.70, Charts, Fortune 500) and Bristol-Myers Squibb (down $0.15 to $28.86, Charts, Fortune 500) in the dust.

Merck has come a long way since Sept. 30, 2004, when it pulled Vioxx off the market after a study linked the anti-inflammatory drug to increased risk of heart attack and stroke. Merck bid farewell to its $2.5 billion-a-year blockbuster, and opened the doors for tens of thousands of lawsuits from former Vioxx patients and their families.

Merck instantly became the poster child for Big Pharma’s woes. The stock plunged 40 percent within a couple weeks. The company then suffered through a volatile 2005 — the year that Richard Clark succeeded Raymond Gilmartin as chief executive – before beginning its comeback last year.

Loyal investors who held Merck’s stock through its darkest days are now better off than they were before the Vioxx withdrawal. Gutsy investors who bought Merck stock near its post-Vioxx bottom in November 2004 have doubled their money.

“Everyone now is in great spirits, [while] right after the Vioxx withdrawal, things were looking pretty bleak,” said Jon LeCroy, analyst for Natixis Bleichroeder.

But can Merck continue to deliver now that the worst seems to be behind it?

‘Brilliant’ legal strategy

When the Vioxx lawsuits started piling up, analysts projected, on average, some $30 billion in potential legal liabilities. But three years later, Merck hasn’t paid a penny to anyone blaming Vioxx for their heart attacks.

The company has won 10 of the 15 lawsuits filed against it and has appealed all the cases it lost.

“They’re winning 65 percent of the cases,” said Joseph Tooley, analyst for A.G. Edwards. “When it’s all said and done, I think the ultimate liability is going to be a much more manageable number than was originally anticipated.”

But Merck still faces nearly 27,000 more cases. That hardly seems like cause for celebration.

Nonetheless, Ken Frazier, the company’s lead counsel throughout the Vioxx debacle, has forged a simple legal strategy that analysts say has helped Merck escape major damage. He has refused, from the beginning, to consider any kind of mass settlement and has instead vowed to fight the cases one at a time.

“Their strategy in fighting every case and being very clear about it, and telling the whole world they were going to fight every case, was a brilliant strategy. Merck is, of course, in a much better position to defend itself than individual plaintiffs trying to take on this organized effort,” said Bryan Liang, professor of health law studies at the California Western School of Law in San Diego.

Drugs a hard global sell for Big Pharma

Analysts believe this case-by-case strategy prevented some lawsuits from opportunists looking for an easy cash-out to ever make it to trial. So far, 4,650 plaintiffs have been dismissed, according to Kent Jarrell, the spokesman for Merck’s outside counsel.

“Our core strategy has been examining individual cases,” said Jarrell. “The approach is working. We’ve seen thousands of cases dismissed because the cases, on closer examination, weren’t backed by facts.”

The next Vioxx trial is scheduled for Sept. 17 in Florida Circuit Court in Hillsborough County.

Investors want a new drug

But Vioxx isn’t the only problem for Merck The company has also had to deal with patent expirations on potent blockbusters like Zocor, which peaked at more than $5 billion in annual sales before generic pressure started to erode revenues in 2005.

The patent on Fosamax, the $3 billion-a-year treatment for osteoporosis, will also expire next year. Once a drugmaker loses exclusive control over a name-brand drug, revenues typically drop 80 percent.

Clark answered the loss of multi-billion dollar products with a multi-billion dollar cost cutting, shutting down several manufacturing plants and eliminating 7,000 jobs. Tooley estimates that the cost-cutting could reach $5 billion, eclipsing the sales vacuum left by Zocor.

But that doesn’t make up for the impending loss of Fosamax. LeCroy expects Clark to launch another round of fat-trimming in 2007, when the osteoporosis patent fades into thin air.

Report: Indian drug market to reach $20B

“I expect next year for [Clark] to implement more cost-cutting, because next year they lose their patent on Fosamax,” said LeCroy.

But investors with an eye on the future aren’t satisfied with cost cutting. They want to see growth, which means that Merck has to produce profitable new products.

And analysts say much of Merck’s recent stock market prowess stems from the success of fast-growing, newly-launched products like the diabetes drug Januvia and the cervical cancer vaccine Gardasil.

Merck launched those products in 2006 and both are expected to eventually reach billion-dollar blockbuster levels. Gardasil has been approved in 80 countries and is being reviewed in 40 more.

“[The patent loss of] Zocor is being made up with cost-cutting, [while] Januvia and Gardasil alone more than make up for Vioxx and Fosamax,” said Tooley, who projects annual sales in 2011 of $3.2 billion for Gardasil and $3.1 billion for Januvia.

In addition, Merck has a late-stage pipeline that analysts say is loaded with potential big-dollar drugs, including experimental cholesterol treatment Cordaptive — which LeCroy predicts could generate $1 billion in an annual sales — and experimental AIDS drug Isentress (also known as raltegravir).

FDA blamed for dip in new drugs

On Sept. 5, the FDA will hold an advisory meeting to vote on whether Isentress merits approval. Merck experts the FDA to make its final decision in mid-October. Tooley projects that Isentress annual sales will reach $750 million by 2011.

Merck still looks like a bargain

With all this in mind, Tooley said Merck could now actually meet the long-term goals the company set prior to the Vioxx withdrawal, most notably an earnings per share target of $4 in 2010. Analysts currently expect Merck to earn $3.11 in 2007 and $3.24 in 2008.

“We think ultimately they’ll get to their long-term guidance, which they gave five years ago, and which everybody thought was too high,” said Tooley.

Despite its gains this year, Merck trades at less than 16 times 2007 earnings estimates. That’s in line with the industry average and is lower than the valuations for other Big Pharma stocks with similar growth rate projections such as Abbott Laboratories (Charts, Fortune 500), Bristol-Myers Squibb and Watson Pharmaceuticals (Charts).

As such, analysts are bullish on the company’s stock. Tooley has a 12-month price target of $54 for Merck, while LeCroy of Natixis Bleichroeder has a target of $58, compared to its Aug. 29 close of $49.92.

“We continue to think there’s upside from current levels for Merck shares,” said Tooley, who believes that the cost-cutting and new product sales will continue to drive the stock.

So for all those investors who are kicking themselves for not buying Merck when it was left for dead three years ago, there still may be a chance to take part in the company’s comeback.

The analysts interviewed for this story do not own Merck shares, but A.G. Edwards has received compensation from the company for non-investment banking services in the last 12 months.

By Aaron Smith, CNNMoney.com staff writer

©2012 An Inconvenient Woman. All Rights Reserved.