Merck & Co., Inc. (MRK), Pfizer Inc. (PFE): Looking to Return Capital to Shareholders Via Debt-Fueled Share Buyback

Pharmaceutical giant Merck & Co., Inc. (NYSE:MRK) recently announced plans to mount a massive $15 billion share buyback program that would result in the cancellation of up to 10 percent of its total share float. Although many large companies have recently announced plans to return capital to their shareholders via similar buybacks, this stands as one of the largest such moves to date. In a measure of its import, Merck & Co., Inc. (NYSE:MRK) has notified its shareholders that it intends to borrow as much as $6.5 billion to fund the buyback program.

These buybacks will occur over the course of a couple of years and involve several third-party players. Although the deal presents some obvious advantages for current and future Merck & Co., Inc. (NYSE:MRK) shareholders, it is not without its drawbacks. Investors who wish to take advantage of this major move should begin by comparing Merck & Co., Inc. (NYSE:MRK) to its competitors and evaluating Merck & Co., Inc. (NYSE:MRK)’s recent financial statements for signs of weakness.

How Does Merck Stack up Against the Competition?

As a multinational drug manufacturer that markets a number of blockbuster medications, Merck & Co., Inc. (NYSE:MRK) competes with the industry’s most recognizable companies. These names include New York-based Pfizer Inc. (NYSE:PFE) and London-based AstraZeneca plc (ADR) (NYSE:AZN). All three of these firms have immediately recognizable drugs in their portfolios. Moreover, these firms have all mounted significant R&D campaigns or executed significant restructuring plans within the past few years.

Pfizer Inc. (NYSE:PFE) is clearly the largest of the three firms. With a market capitalization of about $200 billion, it towers over Merck’s $142 billion valuation and dwarfs AstraZeneca plc (ADR) (NYSE:AZN)’s $64 billion market cap. Pfizer Inc. (NYSE:PFE) also has the widest profit margin. At over 26 percent, its margin is significantly better than AstraZeneca plc (ADR) (NYSE:AZN)’s 21 percent buffer and Merck’s 13 percent final margin. Surprisingly, this has not materially affected the company’s price-to-book ratio. Pfizer Inc. (NYSE:PFE)’s ratio of 2.4 is slightly lower than Merck’s 2.7 measurement and considerably lower than AstraZeneca plc (ADR) (NYSE:AZN)’s 2.9 metric. This may be due to widespread perceptions that Pfizer Inc. (NYSE:PFE) has a rather weak drug pipeline.

Given Merck’s insistence on funding part of its anticipated buyout program with debt issues, these companies’ balance sheets bear close scrutiny. For its part, Merck has nearly $21 billion in debt and just under $17 billion in cash on hand. Its operating cash flow exceeds $10 billion by a narrow margin. This compares to a debt load of $10.2 billion and a cash hoard of about $8 billion for AstraZeneca plc (ADR) (NYSE:AZN). Meanwhile, Pfizer Inc. (NYSE:PFE)’s debt pile totals $40.4 billion and exceeds the value of its cash reserves by about $5 billion. Both AstraZeneca plc (ADR) (NYSE:AZN) and Pfizer have solid cash flows.