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Merck Enters into Strategic Deal

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In an attempt to boost shareholders’ value, Merck & Co. Inc. (MRK) – the N.J. based major drug manufacturer – entered into an agreement with The Goldman Sachs Group, Inc. (GS) to repurchase $5 billion of its shares. The deal comes under the $15 billion share buyback program approved by the company’s board of directors earlier in May.

According to the pact, Merck will initially repurchase about 99.5 million shares from Goldman at current market prices. The remaining shares will be repurchased by Nov 25 based on its volume-weighted average stock price. The company plans to repurchase approximately $7.5 billion worth shares through the next 12 months.

We believe that the aforementioned deal was an effort by the pharmaceutical major to appease investors, given the falling stock prices in the recent years. Further, a dismal outlook for 2013 was a headwind.

Of late, Merck has been struggling to enhance profit levels, as its asthma medicine Singulair was under pressure from generic competitors in the U.S., following its patent expiry in Aug 2012. In first-quarter 2013, sales of Singulair were $337 million, down 75% from the year-ago period. Singulair also lost exclusivity in the EU in Feb 2013 and is experiencing sharp sales reduction in that zone too.

Singulair was Merck's flagship product, with annual sales of $4 billion in 2012, before generics with cheaper selling prices flooded the U.S. market. These companies include Endo Pharmaceuticals – a unit of Endo Health Solutions Inc. (ENDP) – and Mylan, Inc. (MYL). Further, Merck has deferred the launch of new products. Moreover, its migraine medicine Maxalt reported a drop in sales, after patent expiry and its brain cancer medicine Temodar will likely be under generic competition in the near term.

However, we remain optimistic about Merck’s new product pipeline, which is expected to offset decreasing revenues.

Merck currently carries a Zacks Rank #3 (Hold), whereas Goldman carries a Zacks Rank #2 (Buy).

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