Monday, November 8, 2010

New Merck: Increased Exposure To EU Sovereign Debt Crises

New Merck's SEC filing of this morning indicates that Merck is owed over $250 million, in receivables, from governmental and public healthcare payors in Greece, at September 30, 2010. There is real risk of that number being non-collectible, and of that number increasing by year end 2010. The SEC Form 10-Q also contained a more general update on Whitehouse Station's guesses about the continuing impact of the weaker EU economies more broadly on Merck's overall results of operation, and financial condition, thus (at page 16):

. . . .Concentrations of Credit Risk

On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.

The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and credit worthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business, taking into consideration the global economic downturn and the sovereign debt crisis in certain European countries. The Company believes the credit and economic conditions within Greece, Spain, Italy and Portugal, among other members of the European Union, have deteriorated through the first nine months of 2010. These conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect on the accounts receivable outstanding in these countries. As of September 30, 2010, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $1.5 billion of which hospital and public sector receivables in Greece were approximately 16%. . . .

This whole situation -- in the weaker EU countries' economies -- will likely get uglier before it gets prettier.


Parag said...

Greece's debt didn't suddenly magically appear as a result of a recession. It was already there, it just became fatal when the economy went south. The problem for the EU isn't just an economic downturn. If that was the only problem, some stimulus spending could arguably be the answer. The problem for the EU is debt combined with a flat economy.
European countries debt

condor said...


But the it is the fact that the public healthcare payor system in Greece cannot afford to pay Merck for medicines that is of greatest concern to Merck's financial results.

A default on sovereign debt, or even a default on Merck's receivables from Greece, would impact Merck's stock price.

Namaste -- do stop back.