Saturday, October 18, 2008

JP Morgan's "Franchise 16" -- One "Sweet 16 Dance" to which Schering was "Not Invited" -- While Merck was.


Overnight, JP Morgan-Chase's analysts put out a "go to" list of investments -- per Bloomberg -- a list of the "Sweet 16", or Franchise Stocks you should own, in this recessionary environment. Only a few are health-care names, at all. Among the health-care names on the list, though, there aren't any surprises. Baxter, Gilead Sciences and Merck made the cut. Low debt-loads, high profitability, high cash-generation, and return to shareholders, along with strong franchises -- were the primary metrics by which JP Morgan selected these names. The omissions however, were rather revealing -- no JNJ, no ABT, no PFE and yet. . . .

What tickled me most was that Merck was named as among these 16 best, yet Schering-Plough was not. Significantly, recall that JP Morgan did underwrite almost $800 million of Schering-Plough securities early last fall (August-September 2007), so it would seem to have a very-significant incentive to name Schering, and create some pull-through cushion for Tuseday's Q3 earnings release. In point of fact, Merck hasn't needed to raise equity capital in the markets in many years (it is not likely to need to, in the near term, either -- as it last issued some, indirectly, in the Rosetta transaction in 2001 -- excluding of course, the regular employee benefit plan stock issuances). [On the other hand, JP Morgan also structured, then abandoned, a bearish index-linked note offering, on Schering-Plough in June of 2008. So, go figure.]

The third quarter earnings release call is going to be very contentious. The analysts ought to grill CEO Hassan and CFO Bertolini about where Schering will find sustainable net income -- as opposed to simply where sales revenue is flowing. In any event, by Wednesday, when Merck resets its 2008 to 2010 guidance, we will all know just how deep the swoon in Vytorin/Zetia is likely to be, given that we'll hear from people inside the situation rooms. And in the process, Dick Clark's new glasnost initiative or "transparency" efforts at Merck will inevitably put some pock-marks on Schering's public relations spin-machines. Mark my words.

Here's a snippet from the Bloomberg item:

. . . .The requirements are low debt levels, return of cash to investors in the form of dividends or buybacks, and profitability. In addition, they're viewed by the bank's analysts as having the ability to prosper in a global slowdown. . . . The Franchise 16 list is distinct from JP Morgan's U.S. Analyst Focus List of researchers' favorite companies among the 1,200 they cover. The new list includes 16 companies because only that many met the criteria established for it. . . .

The companies are: 3M Co., Baxter International Inc., Colgate-Palmolive Co., CA Inc., Devon Energy Corp., General Mills Inc., Gilead Sciences Inc., Google Inc., Hewlett-Packard Co., McDonald's Corp., Merck & Co., Monsanto Co., Nucor Corp., Philip Morris International Inc., Union Pacific Corp., and Visa Inc. . . .

It is time to tell the whole truth, Mr. Hassan -- without any material ommission -- without spin. More and more, I am becoming convinced that your company's very survival is going to depend on it. I say so, because too much more of this nonsense, too-many more meaningless quarterly non-informational calls, and Schering will not even be a credible candidate for buy-out -- it will become only a candidate for a "bust-up" -- or a "for firewood" sale. And the animal health businesses -- with Kohan suddenly back in the driver's seat, there -- may be the first bundle of kindling. We'll see.

4 comments:

Anonymous said...

Regarding sustainable net income take a look at http://www.pharmalot.com/2008/10/fda-pharma-whats-a-deadline-among-friends/#comments.

Anonymous said...

Regarding sustainable net income take a look at http://www.pharmalot.com/2008/10/fda-pharma-whats-a-deadline-among-friends/#comments.

Anonymous said...

How about a graph that starts at zero, instead of 11% - to make the share look worse than it is? Classic BS marketing --

Condor said...

Um, Okay. . . like it would matter.

Here's a[nother] great idea -- howz'bout I start from September 2007 -- when US market share was in the 25 percent range?

That is, before the world knew what Fred Hassan and Carrie Cox likely ALREADY knew -- at that point?

The company's market capitalization has been cut literally in HALF, and you fuss because I set a bar for market share at 11 percent?

Denial "ain't just a river in Egypt, pal!

Now, put more charitably -- the ENTIRELY NON-BS marketing point here is that when Vytorin/Zetia market share reaches single digits -- perhpas next month in the US -- there will be little to defend the vast sums Schering and Merck are spending to keep the franchise afloat.

Thus Merck's renewed Cordaptive ploy.

Cheers!