Why Merck & Co., Inc. (MRK) Is Still A Top Notch Drug Company

Merck & Co., Inc. (NYSE:MRK) was down over 5% following disapproval of its latest cholesterol-related drug. The weakness is related to safety concerns surrounding a recent trial of its Tredaptive medicine, which increases HDL (good) cholesterol. Merck now plans to abandon seeking regulatory approval in the U.S. for the drug. We believe investors can now find value in a solid dividend payer amongst the selloff. Merck is one of the top ten pharma stocks loved by hedge funds (see all 10 here).

Merck had Tredaptive sales of about $13 million for the first three quarters of 2012 in the 40 countries where it is already sold. Estimates put global sales for the drug as high as $300 million by 2016 if it had been successfully approved for U.S. distribution. Merck also saw weakness earlier this year when its key drug Singulair – accounting for 11% of 2011 sales – went off patent protection. The recent Schering merger will help mitigate patent expiration weakness, especially since there is also little product overlap, which will help boost cross-selling and synergies related to sales, marketing and research.

We believe that Merck’s restructuring program – with the long-term annual savings goal of $4 billion – will eventually alleviate it of its less than stellar return on sales (14%) and low multiples. Part of the multiples pressure is related to merger restructuring and margin pressures. Cost reduction will also spur margin expansion, as Merck plans to reduce its workforce by 12% through 2015.

The other positive for the drug company is its robust pipeline. Despite the near-term pressures related to patent expirations, Merck has multiple drugs targeting various diseases and more than fifteen drug candidates in phase III development.

One of the key areas that might help Merck blow through analysts’ estimates is the drug company’s initiative to increase its presence in emerging markets. For 2011, 17% of sales were from emerging markets, with China being a key market driver. China remains one of the biggest potential growth machines for drug demand due to its rapidly increasing population and prosperity.

Merck has one of the largest pharmaceutical sales forces in China, having upped it by almost 100% over the last few years. One of the key initiatives for China’s growth is Merck’s plan to commercialize pediatric and adult vaccines in China. With these grandiose plans and positioning in key markets, we find the 3% expected 5-year earnings growth to be a bit unfair.

Continue reading to see how Merck stacks up against other major drug companies…