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Merck & Co. Inc. Message Board

  • germantrader71 germantrader71 Aug 10, 2009 4:50 AM Flag

    Goldman ups Merck to Buy / Conviction Buy List, Target 38 USD

    August 9, 2009
    Merck & Co., Inc. (MRK)
    Return Potential: 26%

    SGP provides potential to claim former outperformance; CL Buy

    Source of opportunity
    We remove the Not Rated designation and rate Merck Buy, adding it to our
    Conviction List. In our view, MRK’s valuation (30% discount to the market,
    FCF yield of >20%) sets the shares up for substantial outperformance over
    the next 12 months on the back of the potential for cost-driven earnings
    acceleration. Further upside is possible given the potential for meaningful
    revenue upside driven by the expanded pipeline and top-line synergies,
    both largely out of analysts’ expectations. This creates the opportunity for
    significant operating leverage and could prepare MRK for several years of
    earnings upside: a recurrence of the upswing following Vioxx in late 2005.

    Reported synergies of $3.5 bn alone drive our projected EPS five-year
    CAGR (2010-2015E) of 7%, vs slight negative growth for the sector.
    Moreover, the significant contraction in industry multiples has lowered the
    bar to create shareholder return on the deal premium paid and we project
    significant improvement in MRK’s ROIC over time. We believe that what
    sets MRK apart is the pipeline opportunity from SGP, coupled with its own
    pipeline, which provides the potential to yield another $5-6 bn revenues by
    2015, driving a far higher degree of operating leverage. We expect Saphris
    to be approved soon; Simponi to be launched next year in the EU and we
    anticipate Phase III clinical data release on boceprevir in 2010 and TRA late
    in 2010 or more realistically, in 2011.
    Our 12-month price target of $38 is based on a blend of P/E (10x 2010E
    EPS) and DCF. On a DCF basis, MRK is worth $40, the highest upside on
    this valuation measure compared to its peers.
    Key risks
    The key risk is the potential to lose to JNJ in arbitration over rights to
    Simponi and Remicade, results of IMPROVE-IT, and Phase III data for TRA.
    Americas Buy List
    Americas Conviction Buy List
    Coverage View: Attractive
    United States:

    (212) 357-7536 | Goldman, Sachs & Co.
    Florence Tsang, CFA
    (212) 357-3567 | Goldman, Sachs & Co.
    Sebastian Paquette
    (212) 902-5306 | Goldman, Sachs & Co.
    Nishant Baranwal
    (212) 934-6648 | Goldman Sachs India SPL

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