Merck & Co.

Merck & Co. (MRK)

$47.08 Closing price 4/16/04

EPS (FY end Dec.) EPS Growth Revenue

2003 Actual 2004 Est. 2005 Est. 2004 2005 2004 2005

1Q 0.68 0.72 5.88% $5.775Bil

2Q 0.79 0.77 -2.53% 5.700Bil

3Q 0.83 0.83 0.00% 6.000Bil

4Q 0.62 0.80 29.03% 6.000Bil

Year $2.92 $3.13 $3.38 7.19% 7.99% $23.48 Bil. $24.74 Bil.

P/E 15.4 14.4 13.3

Source: Zacks Investment Research

Market Data Key Ratios

Price $47.08 Debt/Total Equity 43.63%

52 Wk Range 40.57 - 63.50 Price/Sales (TTM) 4.48

Market Cap $100.81 Bil. Book Value $7.02

Shares Out $2.22 Bil. Price/Book 6.41

Dividend $1.48 ROE 43.80%

Yield 3.29% Current Ratio 1.205

Beta 0.36 Profit Margin 30.38%

Source: Yahoo Finance

Executive Summary

• The drug industry is positioned for continued growth due to converging macroeconomic, demographic and technological trends.

• Merck faces uncertain revenue growth due to patent expirations in June 2006 on Zocor and late 2007 for Fosamax, their top two selling drugs accounting for $7.7 billion in revenue for 2003.

• Merck has partnered with several other drug manufacturers to more efficiently develop and sell new drugs.

• The drug industry is under pricing pressure from generic manufacturers, health benefit managers, and political scrutiny.

• Developing or acquiring new blockbuster drugs is the key to driving revenue growth in the future for Merck.

Investment Conclusion: Hold

Based on analysis of Merck’s dividend growth rate the stock is priced above its valuation. However, due to concerns about Merck’s drug pipeline, revenue growth, and generic competition already being reflected in its current stock price, the stock is rated a hold. Further, Merck’s low P/E and attractive yield relative to the industry and S&P 500 provide investors with a margin of safety while waiting for an improvement in the drug pipeline.

Business Description

Merck is the third largest manufacturer of human healthcare pharmaceuticals. Merck sells its products to drug wholesalers, retailers, hospitals, government agencies, and managed care providers. The company’s products address drug therapies to treat atherosclerosis (Zocor), hypertension / heart failure (Cozaar, Hyzaar, and Vasotec), anti-inflammatory / analgesics (Vioxx, Arcoxia), osteoporosis (Fosamax), asthma / allergy (Singulair), pediatric vaccines, anti-bacterial / anti-fungal, and HIV. Merck’s dedication to research is stated in its mission statement and demonstrated in 2003’s $3.18 billion investment. Merck currently sells 23 drugs developed through their R&D efforts.

Source: Merck Annual Report

Revenues for the year ended December 2003 totaled $22.5 billion. Gross operating margins were 59.75%, with net income of $6.83 billion and net profit margins of 30.38%. Merck’s leading products are Zocor with sales of $5.0 billion, a decline of 8% from 2002; Fosamax with sales of $2.7 billion, an increase of 19% from 2002; and Cozaar / Hysaar with sales of $2.5 billion a 14% increase over 2002.

Merck & Co. Sales By Product Category

($ in millions) 2003 2002 2001

Atherosclerosis (Zocor) $5,077.9 $5,552.1 $5,433.3

Hypertension/Heart Failure (Cozaar/Hyzaar) 3,421.6 3,477.8 3,584.3

Anti-inflammatory/Analgesics (Vioxx) 2,677.3 2,587.2 2,391.1

Osteoporosis (Fosamax) 2,676.6 2,243.1 1,629.7

Respiratory (Singulair) 2,009.4 1,489.8 1,260.3

Vaccines/Biologicals 1,056.1 1,028.3 1,022.5

Anti-bacterial/Anti-fungal 1,028.5 821.0 750.4

Opthalmologicals 675.1 621.5 644.5

Urology 605.5 547.3 545.4

Human immunodeficiency virus 290.6 294.3 380.8

Other 2,967.3 2,783.4 3,556.7

Total $22,485.9 $21,445.8 $21,199.0

source: Merck & Co. annual report 2003

History

Merck was started in 1887 when German chemist Theodore Weicker came to the U.S. to set up a branch of E. Merck AG of Germany. In 1891 George Merck, (grandson of the German company’s founder) formed a partnership with Weicker. At first the firm imported and sold drugs and chemicals from Germany, but in 1903 it opened a plant in Rahway, New Jersey, to make alkaloids. Weicker sold out to Merck the next year and bought a controlling interest in competitor Squibb. During WWI, Merck gave the U.S. government 80% of the company stock owned by the family in Germany (George kept his shares). After the war, the stock was sold to the public setting the foundation for today’s company.

Timeline of Important Milestones

1927 - The firm merged with Powers-Weightman-Rosengarten of Philadelphia, a producer of antimalarial quinine.

1933 - Merck opened its first research lab.

1944 - Scientists at Merck develop Cortisone (first steroid).

1953 - Merck merged with drug maker Sharp & Dhome of Philadelphia