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Financial Analysis of Merck and Company

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Netra Shetty
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Financial Analysis of Merck and Company - February 12th, 2011

Merck & Co., Inc. (NYSE: MRK), also known as Merck Sharp & Dohme or MSD outside the United States and Canada, is one of the largest pharmaceutical companies in the world. The headquarters of the company is located in Whitehouse Station, New Jersey, an unincorporated area in Readington Township. The company was established in 1891 as the United States subsidiary of the German company now known as Merck KGaA. In common with many other German assets in the United States, Merck & Co. was confiscated in 1917 during World War I and then set up as an independent company. Currently, it is one of the seven largest pharmaceutical companies in the world both by market capitalization and revenue.

Merck & Co. or MSD describes itself as a "a global research-driven pharmaceutical 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." The Merck Company Foundation has distributed over $480 million to educational and non-profit organizations since it was founded in 1957.[3]

Merck publishes The Merck Manuals, a series of medical reference books. These include the Merck Manual of Diagnosis and Therapy, the world's best-selling medical textbook, and the Merck Index, a collection of information about chemical compounds.

Merck & Co. (NYSE:MRK) is one of the largest pharmaceutical companies in the world with 2009 sales of $27.4 billion. While Merck produces a wide assortment of medications, a few blockbuster drugs bring in the bulk of its revenue. Currently Merck's four most profitable drugs account for more than half of total sales.

Merck faces many of the challenges that face all pharmaceutical companies, including issues surrounding patent expiration and FDA approval. Patent expiration may affect 30% of sales through 2008. In addition, there is growing pressure in the US and abroad to lower the price of medication. [1]
Corporate Overview
Company History

Merck & Co. was initially formed in 1891 as a United States subsidiary of the German chemicals and pharmaceutical company Merck KGaA. During World War I, it was established as an independent company from confiscated assets. Since then, it has grown to become one of the top seven largest pharmaceutical and biotech companies worldwide. Merck KGaA continues to operate to this day, and is not related to Merck & Co.
Business Metrics

In Q3 of 2010, Merck reported net income of $372 million, a loss of 89% from the previous years quarter, reflecting merger charges and a charge for setting aside a $950 million Vioxx legal reserve.[2] Despite growing generic competition for Cozaar and Hyzaar, its diabetes drugs Januvia and Janumet boosted sales 28 percent, and HIV drug Isentress rose 41 percent to $278 million. The company believes it will reach $3.31 to $3.39 earnings per share.[3]
Contents

* 1 Corporate Overview
o 1.1 Company History
o 1.2 Business Metrics
o 1.3 Recent News
+ 1.3.1 Vioxx
o 1.4 Recent Acquitions
* 2 Business Segments
o 2.1 Cholesterol
o 2.2 Hypertension
o 2.3 Osteoporosis
o 2.4 Asthma and Allergies
o 2.5 Vaccines
o 2.6 Diabetes
o 2.7 Arthritis
o 2.8 Infectious Diseases
+ 2.8.1 Hepatitis
+ 2.8.2 AIDS Research
o 2.9 Consumer Health Care
o 2.10 Government-sponsored Healthcare
* 3 Research and Development
o 3.1 Product Pipeline
* 4 Trends and Forces
o 4.1 Merck BioVentures
o 4.2 Lack of Product Diversity
o 4.3 Patent expirations
o 4.4 Tightening FDA Regulations
o 4.5 Litigation
* 5 Comparison to Competitors
* 6 References

In Q2 of 2010, Merck reported net income of $754.2 million, a loss of 51% from $1.56 billion due to higher merger and restructuring costs. However, excluding items such as purchase accounting adjustments, merger-related expenses, restructuring costs Merck's earnings rose to 86 cents a share, from 83 cents a share for Q2 of 2009. [4] Income jumped 92% to $11.35 billion, from $5.9 billion, as these quarter's results included the addition of Schering-Plough's income, which was purchased last year for $49.6 billion. Excluding special items, the company nearly missed Wall street expectations of earnings of 83 cents a share and revenue of $11.45 billion.[5]

Merck's sales were supplemented by legacy sales from its acquisition of Schering-Plough in 2009. The combined revenues of the two companies in Q1 of 2009 was $10.7 billion. Using these non-GAAP numbers, the combined entity grew 6.9% on the quarter. Growth was driven by strong sales increases from the blockbuster Januvia (32%) and Singulair (10%) franchises. Merck reported net income of $299 million for the quarter, a decrease of 79% for the quarter. Earnings were negatively affected by costs related to the acquisition of Schering-Plough.[6]

In Q1 of 2010, Merck reported sales of $11.4 billion, more than double its sales in the same quarter of 2009. However, Merck's sales were supplemented by legacy sales from its acquisition of Schering-Plough in 2009. The combined revenues of the two companies in Q1 of 2009 was $10.7 billion. Using these non-GAAP numbers, the combined entity grew 6.9% on the quarter. Growth was driven by strong sales increases from the blockbuster Januvia (32%) and Singulair (10%) franchises. Merck reported net income of $299 million for the quarter, a decrease of 79% for the quarter. Earnings were negatively affected by costs related to the acquisition of Schering-Plough.[7]

For Q4 2009, Merck reported sales of $10.1 billion with a net income of $6.5 billion. For the 2009 fiscal year, Merck reported sales of $27.4 billion with a net income of $12.9 billion. As non-GAAP measures, Merck reported that revenue of the company combined with Schering-Plough (as it would have been had the merger closed in Jan of 2009) amounted to $46 billion for the year and $12.2 billion for the quarter. Merck also realized a $3.2 billion gain from the sale of its animal division, Merial.[8] Merck's revenue beat analyst estimates of $9.7 billion, pushing shares up on the results.[9]

In Q3 of 2009, Merck reported sales of $6.0 billion, an increase of 2% from the same quarter of the previous year. Key drivers of Merck's sales growth include growth from Januvia, Janumet, Isentress, and Singulair. Merck reported net income of $3.42 billion, increased from $1.09 billion he previous year. This large increase was largely due to the sale of Merck's animal care division, Merial, as well as lower costs from Merck's corporate restructuring initiatives.[10] In all, Merck's earnings per share of $0.90 for Q3, a 13% increase over the previous year, beat the $0.82 per share predicted by analysts.[11] Schering-Plough, which Merck officially merged with on November 3, 2009, reported Q3 revenue of $4.5 billion for a net income of $477 million. Combined, the companies posted sales of $10.5 billion and a net income $3.9 billion.[12]

Merck reported that Q2 2009 earnings were down from a year before. Revenues fell 2.5% to $5.9B, and quarterly profit fell 12% to $1.56B from $1.77B in Q2 2008. One reason cited for weak numbers is adverse foreign exchange movements, and another reason cited is weakness in sales of Gardasil, as well as cholesterol drugs the company makes as partners with other big pharmaceutical firms.[13]
Recent News
Vioxx

In 1999, the United States Food and Drug Administration ("FDA") approved Vioxx (known generically as rofecoxib), a Merck product that became widely used for treating arthritis. Vioxx was stronger than existing medications, while easier on the stomach than established anti-inflammatory drugs such as naproxen. Vioxx became one of the most prescribed drugs in history.

Thereafter, studies by Merck and by others found an increased risk of heart attack associated with Vioxx use when compared with naproxen. There was no indication of this risk in the original placebo-controlled safety trials, and it was possible that the effect was more related to naproxen decreasing the risk of heart attacks than one of Vioxx increasing the risk. Nonetheless, in 2002 Merck adjusted the labeling of Vioxx to reflect possible cardiovascular risks.

On September 23, 2004, Merck received information about results from a clinical trial it was conducting that included findings of increased risk of heart attacks among Vioxx users who had been using the medication for over eighteen months.[14] On September 28, 2004, Merck notified the FDA that it was voluntarily withdrawing Vioxx from the market, and it publicly announced the withdrawal on September 30. The FDA has since recommended that Vioxx be put back on the market, but with a more prominent warning regarding cardiovascular risks on its label.

On November 5, 2004 the medical journal The Lancet published the results of its analysis of the available studies. It concluded that "the unacceptable cardiovascular risks of Vioxx (rofecoxib) were evident as early as 2000..."[15] The journal's editors criticized Merck for having kept the drug on the market as long as it did before withdrawing it, and also criticized the FDA for its failure of regulatory oversight.

About 50,000 people have sued Merck claiming that they or their family members have suffered medical problems such as heart attacks or strokes after taking Vioxx. In 2005, Merck was found liable in the first case that went to trial and the plaintiff was awarded $253.4 million in damages; however, the judgment was subsequently reduced to $20 million and then, upon appeal, the verdict was reversed in 2008.[16] In November 2007, Merck proposed to pay $4.85 billion to settle most of the pending Vioxx lawsuits. The settlement will require that claimants provide medical proof of having suffered a heart attack or a stroke and show they received at least 30 Vioxx pills. This proposed settlement is generally viewed by industry analysts and investors as a victory for Merck, considering that original estimates of Merck's liability reached as high as $50 billion. As of mid-2008, plaintiffs have prevailed in only three of the twenty cases that have reached juries, all with relatively small awards.[17]

On May 20, 2008, Merck was found liable for using deceptive marketing tactics to promote Vioxx and 30 states will split the $58 million settlement. The amount is the largest multi-state settlement against a pharmaceutical company.[18] All its new television pain-killer advertisements must be vetted by the Food and Drug Adminstration and changed or delayed upon request until 2018.[19]
Recent Acquitions

The company's decision to acquire rival Schering-Plough (SGP) will be a major expansion, though, as the two companies' combined 2008 revenues were $47 billion. [20] The deal officially closed on November 3, 2009.[21] On March 9, 2009, Merck announced plans to acquire rival drug maker Schering-Plough (SGP) for approximately $41 billion in cash and stock. The merger's aim is to strengthen Merck's pipeline, doubling the company's number of late stage drugs to 18. Further, annual cost savings of $3.5 billion are expected after 2011. Part of this savings will come from Merck's decision to cut 15% of the combined company's 106,000 employees. [22]

On July 27,2010, Merck announced a deal with Sinopharm Group Co Ltd to market Merck's cervical cancer vaccine and other vaccines in China. The terms for this agreement were not announced and is the first such deal struck by Merck to expand its presence in China. The company projects that more than 25% of its pharmaceuticals and vaccines sales would be from emerging markets by 2013, an increase of 17% from current numbers. [23]
Business Segments

Significant research and money-making drugs are related to long-term ailments such as cardiac disease, osteoporosis, and asthma. The following are some notable trends in drug development and how Merck's most important drugs fit in.
Cholesterol

The public is generally aware of "good" (HDL) and "bad" (LDL) cholesterols and its consequences on long-term cardiovascular health. The development of a class of effective cholesterol lowering drugs known as "statins" is relatively recent. Statins currently on the market work to decrease LDL with similar efficacy.

Merck's Zocor constitutes 20% of the market. Its main competitors are Lipitor by Pfizer and Crestor by AstraZeneca. Currently, there are no effective medications for increasing HDL cholesterol. Merck had been developing an experimental drug called Cordaptive that would increase HDL, but the FDA rejected the application on April 29, 2008.

Merck is in a joint venture with Schering-Plough to market Vytorin, which combines Zocor and a new drug called Zetia. As a combination drug, Vytorin enjoys patent protection. However, the drug has faced controversy over its advertising and has been proven to be no more effective than Zocor alone. See Vytorin under |Litigation.
Hypertension

High blood pressure is another predictor of cardiovascular disease. There is an enormous array of drugs that lowers blood pressure by varying means. Merck's Cozaar is a drug used primarily to treat hypertension, but is also used to treat renal disease caused by diabetes. It is usually a second-line drug, meaning doctors usually prescribe other medications before resorting to Cozaar, since lower cost alternatives exist for most patients. Cozaar belongs to a class of anti-hypertensive drugs known as angiotensin II receptor antagonists that now includes competitor Diovan by Novartis.
Osteoporosis

Osteoporosis, the reduction in bone density and increase in risk of fracture, affects 1 in 3 woman over the age of 50. Fosamax is currently one of the most prescribed drugs for osteoporosis. While it is a major money-maker for Merck, the US patent expired in February 2008. Generic competition cut sales by 49% in 2008, to $1.55 billion. Although the generics have entered the US market, the EU patent office has recently reinstated the Fosamax patent through 2018.

Forteo is an injected osteoporosis drug by competitor Eli Lilly. A recent research study financed by Eli Lilly indicated that after 18 months, patients taking Forteo had a 1 percent risk of developing a spine fracture, while those taking the competitor drug Fosamax had a 6 percent risk. However, the risks of other types of fractures were similar. While it is not yet clear how significant the results of this study may be, it may put Forteo in a better competitive position in the future.
Asthma and Allergies

The oral drug Singulair is Merck's most profitable product, with global sales of $4.7 billion in 2009. It is used to maintain asthma symptoms and relieve seasonal allergies. It is not useful in treating acute asthma attacks, for which an inhaler is needed. [24]

Merck gained two major prescription products for allergy treatment from the Schering-Plough acquisition, Nasonex, an inhaled steroid, and Clarinex, a once-a-day pill. Nasonex has an enormous share of the inhaled steroid market (47%), and has actually increased its hold by 5% since last year, earning $1.16 billion in 2008. It also has the broadest set of indications of any nasal steroid. In addition, Schering-Plough has several versions of Claritin, an over-the-counter medication similar to Clarinex. Sales of these medications are highest during peak allergy seasons, the spring and fall, and so increases in company revenue occur during these times.
Vaccines

Merck's Gardasil is a vaccine for the human papillomavirus (HPV) that causes most cervical cancers and genital warts. The target market for this vaccine is approximately 118 million girls and women in the U.S., EU, and other developed countries. Texas mandated the vaccine beginning in 2008, with more than 20 other states considering similar legislation.

Initial implementation in the U.S. reveals a very low rate of adverse reactions and an extremely low rate of serious adverse reactions. After 23 million doses have been administered, fewer than 1% of patients had adverse reactions, and only 6.2% of those adverse reactions were severe. Gardasil is still being monitored by federal officials, including potentially indicating the vaccine for boys, but the next area of focus is the drug's risk/benefit ratio. Because regular pap smears can catch cervical cancer very early, it is unclear whether the benefits of the vaccine justify the costs. [25]

However, 2008 sales indicate that there was no significant increase in government purchases of the vaccine, suggesting that sales are leveling off to the demand of the market. Whereas previously Gardasil use was evenly distributed from 9 to 26-year-olds, Merck is currently pushing the vaccine to the 12 to 18 year-old and college age ranges.

2008 sales totaled $1.4 billion. In the international market, the drug has been approved in 86 countries and about to launch in 72 countries.

Two other vaccines are Zostavax, for shingles, and Rotateq, for rotavirus, and entered the market in 2008. A recent study showed Rotateq to reduce hospitalization and emergency department visits by nearly 100%. Rotateq will be in direct competition with GlaxoSmithKline's Rotarix, which is also a rotavirus vaccine in late clinical trials.

On April 30, 2008, the FDA sent a warning letter to Merck concerning violations at its main vaccine plant. Both the FDA and Merck have stated since that the issues should not affect the safety of the company's vaccines.
Diabetes

The U.S. diabetes market is estimated to be $20 billion and growing, fueled by the increase in obesity and poor lifestyle habits in the population. Januvia is a new diabetes drug developed by Merck and recently approved by the FDA. Sales totalled $1.4B in 2008, up 109% from 2007. The drug has received insurance reimbursement coverage in approximately 80% of its target market, which will benefit further sales. On September 25, 2009, the FDA issued a notice that Januvia may be linked to pancreatitis, a condition in which the pancreas becomes inflamed. However, incidence of pancreatitis is elevated in diabetes patients, and it is unclear how much use of Januvia is directly associated with the condtion.[26]

Januvia's nearest competitor, Galvus by Novartis, entered the market until 2008. Januvia also competes directly with Amylin's Byetta.
Arthritis

Recently acquired subsidiary, Schering-Plough, owns the international rights to Johnson and Johnson's Remicade, an autoimmune drug used to treat conditions such as rheumatoid arthritis, psoriatic arthritis, ulcerative colitis and moderate to severe Crohn’s Disease. Though Schering-Plough does not have the rights to sell Remicade in the US, Remicade is prescribed to nearly 1 million people outside of the US, annually. In 2008, Remicade brought in $2.12 billion in revenue.[27] An aging population could boost sales of the drug in two senses. First, arthritis and other autoimmune disorders are likely to develop later in life. Secondly, as Remicade does not cure these disorders but merely reduces inflammation, longer-living patients will use the medication for a longer period of time.
Infectious Diseases
Hepatitis

PEG-Intron is a hepatitis therapy acquired in the purchase of Schering-Plough. PEG-Intron has seen growth over the last year in the US and Europe but a slight decline in Japanese sales. PEG-Intron was approved for treatment of hepatitis B in China in April, and so the product could launch there within the next several months. This expanded market provides many new opportunities for sales. In 2008, PEG-Intron brought in $914 million in revenue.[28]
AIDS Research

Merck has been testing an experimental AIDS vaccine in several countries in Africa, North and South America. In September of 2007, after several international trials showed that the vaccine did not prevent HIV infection, Merck decided to stop further trials. However, the company released concerns that the vaccine may actually increase the risk of infection. As a result, all volunteers are being notified of whether they received a vaccine or placebo shot. While financial expectations were not particularly high for Merck's AIDS vaccines, it does represent a large setback for the medical community in finding a cure for one of the largest epidemics.
Consumer Health Care

In its acquisition of Schering-Plough, Merck inherited a $1.3 billion consumer health products. One of the most well known is the Coppertone line of products, a variety of sun-block and insect repellent creams and sprays. Schering-Plough also marketed the Dr. Scholl's line of foot care products, including shoe inserts, wart remover, and odor neutralizers for shoes. Consumer health care sales have remained relatively stable over the past several years; there are no stellar products slated to appear in the next few years, and there is no reason why demand for sunscreen would change drastically in the near future as well.
Government-sponsored Healthcare

Merck has been one of the most vocal pharmaceutical companies in speaking out against a government sponsored healthcare plan. Among the issues the company takes with the plan is the issue of suddenly giving coverage to a swath of previously uninsured individuals. [29] While it is unclear as of June 2009 how a government healthcare plan would affect big pharmaceutical companies like Merck, the company's opposition to the idea is an important indicator.
Research and Development
Product Pipeline

Merck currently has 25 products past preliminary clinical trials (Phase II and III), meaning that there should be a steady stream of new releases in the coming years. In 2009, Merck spent $4.8 billion on research and development.

As a research-driven drugmaker, significant resources are devoted to continue to produce new drugs. Notably, there are high expectations for HPV vaccine Gardasil and diabetes drug Januvia. As of the end of 2008, there are 16 products in Phase II clinical trials and 9 in Phase III trials that may be marketed in the next five years. [30]
Trends and Forces

The main drivers in the pharmaceutical industry include product pipeline (new products in development), patent expiration (products becoming generic), and product diversification. The combination of these factors determine profits and forecasts, and are therefore very important in making investment decisions.
Merck BioVentures

BioVentures is the biologics manufacturing division of Merck established in 2008.[31] Currently, BioVentures is focused on creating generic versions of popular biologics such as Amgen's Enbrel and Roche's Avastin and Herceptin. Merck owns a key advantage in this strategy from a technology that it bought in 2006, known as glycoengineering, which enables the company to grow biologics in yeast cells, thereby circumventing certain production patents from Amgen and Roche, which grow their drugs in mammalian cells.[32] While the generic drugs that Merck will produce in its BioVentures division will require substantial clinical trials, it is likely that the trials will be reduced compared to those of a novel biologic therapy. In addition, the added certainty of success -- both from a development and a market perspective -- for these follow-on drugs compared to novel biologic therapies add to the appeal of Merck's strategy.

In February of 2009, Merck BioVentures announced that it would acquire Insmed, a protein manufacturing company with drugs in development as follow-on biologics, for $130 million.[33] In December of 2009, Merck announced that it would acquire British protein manufacturer, Avecia Biologics, for a deal worth under $1 billion. Merck executives have said that they expect BioVentures to invest $1.5 billion in research by 2015 and launch at least six generic biologic therapies between 2012 and 2016.[34]
Lack of Product Diversity

Although Merck has a wide assortment of drugs and vaccines, it depends on a small number of highly successful blockbuster drugs. For example, in 2008 the five most profitable drugs brought in more than half of the company's revenue. Thus, the success of each of its blockbuster drugs has a large impact on the overall health of the company. The future success of these five drugs will also depend on patent expiration dates. For more information on specific drugs, see the following section, Major Drugs and Industry Trends.
Patent expirations

For a detailed discussion of brand name vs generic medication, see also Brand name vs Generic medications.

Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper than brand medication, and the lower cost is often a strong incentive for consumers to choose generic over brands. In addition, the presence of a generic alternative may prompt a decrease in the brand name medication price.

30% of Merck's sales through 2008 may be affected by generics due to patent expirations. The patent for the cholesterol drug Zocor expired during 2006, and Merck experienced a significant decline in sales. Merck will have major setbacks in patent expiration in the coming years, including the very profitable osteoporosis drug Fosamax, for which the US patent will expire in 2008. However, the Europe patent office has extended the Fosamax patent through 2018.

Merck must also defend its patented drugs even before they expire. In August 2009, the company was successful in stopping Israeli generic drugs producer Teva Pharmaceutical Industries (TEVA) from selling a generic copy of Singulair, Merck's best selling drug, in the United States. Domestic sales of the drug grew 6% in the first half of 2009 to reach $1.5B in the US and $2.3B worldwide. [35]
Tightening FDA Regulations

When FDA commissioner Margaret Hamburg began her tenure in 2009, she announced that the FDA would toughen it's enforcement efforts to protect public health.[36] As the FDA has drawn criticisms for its failures in preventing deaths caused by drugs such as Vioxx, Hamburg has come in with several fixes that include stricter monitoring of drug adverse events, more funding for the agency, stronger ability to force product recalls, and more scientific expertise within the agency.[37] On May 19, 2010, the FDA announced 21 proposals aimed at increasing transparency to the public regarding regulatory information.[38]

Such information will increase the amount of information accessible to the public with regard to companies' pipeline drugs and manufacturing facilities that might otherwise not have been disclosed. While the tightened regulations and increased transparency will eventually improve the overall quality of pharmaceutical products, there will be growing pains as companies adjust to the stricter standards and stronger enforcement. Merck's ability to adjust to these new standards will impact its valuation and financial success.
Litigation

Pharmaceuticals can face significant liabilities if a medication is later found to be defective or produce adverse reactions. Even though such adverse reactions are previously unknown and impossible to predict, damages claimed in such lawsuits are usually substantial. Depending on jurisdiction, the legal system may limit allowable damages.

Vioxx is an anti-arthritis drug that gained widespread adoption for treating chronic pain. Up to 80 million patients were prescribed with Vioxx. Soon after approval, several studies indicated that Vioxx increased the risk of heart attack over the placebo. Merck recalled the drug, but has faced several thousand lawsuits from patients who took the drug. On November 9, 2007 Merck agreed to pay $4.85 billion to settle 27,000 claims that Vioxx caused heart attacks and strokes in thousands of users. [39] While the settlement is one of the largest in history, it is significantly smaller than analysts' initial liability estimates of $10 to $25 billion.

Vytorin is a cholesterol drug jointly developed with Schering-Plough that is a combination of Merck's best-selling Zocor, which had lost patent protection in 2006, and Zetia, a newer drug. Vytorin has faced controversy over its comparative efficacy, forcing sales of the once $5 billion drug down to $2.5 billion in 2009.[40] As a combination drug, Vytorin enjoys patent protection, which allows Merck and Schering-Plough to charge significantly higher prices than its Zocor counterpart. However, the two companies recently released the results of a study that showed Vytorin may not be any more effective than Zocor alone. While the clinical trial was completed in April 2006, the two companies did not release the results of the study until January 2008. During that time, Merck and Schering-Plough had aggressively advertised Vytorin as a better alternative to Zocor. Merck and Schering-Plough are currently defendants in about 50 civil suits related to Vytorin's potentially misleading marketing.[41]
Comparison to Competitors

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Merck’s competitors by each drug market.

Major competitors to Merck include Novartis, Pfizer, and Bristol-Myers Squibb. All three are pharmaceutical powerhouses, some with compatible drugs. For example, Pfizer produces Lipitor, which is in direct competition with Zocor, and Novartis produces Diovan, which is in direct competition with Cozaar.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Merck's competitors by each drug market (See section on Major Drugs and Industry Trends).

The table below displays competitive operating metrics for competitors within the pharmaceutical industry. Note that the total revenue for Merck and Pfizer was influenced by revenue inherited from their acquisitions of Schering-Plough and Wyeth, respectively. In addition, net income for Merck was bolstered by $3.2 billion from the sale of its animal division [42], while Bristol-Meyers Squibb's net income saw a one-time $7.2 billion increase from the sale of its nutrition division.[43]


Pharmaceutical and Biotech Industry — Competitive Operating Metrics (2009)




Johnson & Johnson (JNJ)


Pfizer (PFE)


Novartis (NVS)


Abbott Laboratories (ABT)


Merck (MRK)


Bristol-Meyers Squibb (BMY)


Eli Lilly (LLY)


Amgen (AMGN)


Gilead (GILD)


AstraZeneca (AZN)


Roche (RHHBY)

Revenue (in billions of USD)

Total Revenue


$61.9


$50.0


$44.3


$30.8


$27.4


$18.8


$21.8


$14.6


$7.0


$32.8


$49.1

Gross Profit


$43.5


$41.1


$32.1


$17.6


$18.4


$13.7


$17.6


$12.6


$5.4


$27.2


$34.4

Revenue Growth from 2008


-2.9%


3.5%


4.0%


4.2%


15.0%


6.2%


7.2%


-2.4%


31.4%


3.8%


7.5%

Income

Net Income


$12.3


$8.6


$8.4


$5.8


$12.9


$10.6


$4.3


$4.6


$2.6


$7.5


$7.8

Net Profit Margin


19.8%


17.3%


19.0%


18.7%


47.0%


56.4%


19.8


31.5%


37.6%


22.9%


15.9%

Operating Income


$15.8


$10.8


$10.0


$6.2


$15.3


$5.6


$5.4


$5.5


$3.5


-$11.5


$11.9

Diluted EPS Growth from 2008


-3.7%


2.5%


3.7%


21.8%


55.6%


20.7%


NA


19.6%


36.9%


23.6%


-11.8%

Other

R&D Spending


$7.0


$7.8


$7.5


$2.7


$5.9


$5.1


$4.3


$2.9


$0.9


$4.4


$9.9
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