Thursday, February 3, 2011

Merck Writes Off ANOTHER 4% of The Schering-Plough Purchase Price -- $1.7 Billion TRA Impairment Charge

UPDATED | 8:40 AM EST | NASDAQ Pre-Market -- Shares Now Off Over 3.4% -- to $32.65 My overall impression is that the most of the larger stock analysis houses came off as pretty justifiably skeptical -- at least about New Merck's proffered reasons for the withdrawal of its 2012-2013 guidance.

Lowers long term guidance to high-single digits EPS growth; posts a GAAP Q4 2010 loss per share. Vorapaxar is 4 percent; with other 2010 impairments, now nearly 6 percent of Schering-Plough's $41.5 billion purchase price has been written off, as worthless, in 2010 alone.

More in a moment. . . . from the Merck Year End 2010 press release, here:

. . . .Amounts for the fourth quarter and full year of 2010 reflect $2.2 billion and $2.4 billion, respectively, of in-process research and development impairment charges, including a charge of $1.7 billion to write-down the intangible asset related to vorapaxar recorded in conjunction with the merger. The remaining amounts in 2010 and the amounts in 2009 represent expenses for the amortization of intangible assets and amortization of purchase accounting adjustments to inventories recognized as a result of the merger.

Given industry pressures such as greater E.U. austerity measures and the additional impact of U.S. health care reform, as well as developments in its vorapaxar clinical program, the company has withdrawn its previous long-term target of high single-digit non-GAAP EPS compound annual growth rate from 2009 to 2013. . . .


▲ Low to Mid SINGLE DIGIT Sales Growth in 2011 and 2012. Yikes!

▲ And that is ASSUMING Merck wins the J&J arbitration.

▲ Venezuela currencies will be a significant drag on sales in 2011.

▲ Gardasil sales down sequentially, worldwide.

Q&A now. . . .

▲ Q: Chris Schott (JP Morgan) -- Why is 2013 guidance being withdrawn?

▲ A: CEO Ken Frazier -- We are not going to engage in immediate indiscriminate cost cutting; we will make investment in our late stage pipeline -- that leads to longer term growth, but it will take down the 2011-2013 guidance.

▲ Q: Catherine Arnold (Credit Suisse) -- 2013 guidance? Vorapaxar should have been a 2013 drag on earnings, so why would vorapaxar be to blame for the 2013 down? Why aren't your people looking for "share the pain" cost cutting?

▲ A: Ken Frazier -- These costs are fixed, re vorapaxar -- we are decreasing our cardio sales presence. As to sharing the pain -- we do need to get our cost structure in line. We did exceed synergy targets in 2010 -- we shed 50% of our sales force in the US.

That said, we are trying to be thoughtful about our cost cutting.

▲ Q: Jami Rubin (Goldman, Sachs & Co.) -- What about risk mitigation on these large risky trials? And why are you cutting against the approach of Pfizer announced yesterday -- i.e., aggressive cost cutting?

▲ A: Ken Frazier -- We are trying to assess all programs, from a commercial and science standpoint and then work them by ROI targets. . . . we are still optimistic that some markets will emerge for vorapaxar.

We also will honor John Horan's legacy: we have to keep investing in visionary programs, even in a downturn -- like the present environment. . . . [Ken Frazier eulogized John Horan a couple of weeks ago at his funeral.]

▲ Q: Tim Anderson (Sanford Bernstein) -- I hate to say it, but the explanation for 2013 guidance downturn seems to be about things known for months and months now -- at least it sure sounds like it. . .? And when will there be a buyback re-up?

▲ A: Ken Frazier -- We knew about EU pricing pressure, but it is increasing; incremental other pipeline set-backs were "tipped" when vorapaxar made a big difference. We have 20 late stage clinical trials underway, we intend to keep funding the vast majority of them. Launch of boceprevir will be a big cost. . . we have decided not to go for short term cost cutting (as Pfizer just did). It is not that we CAN'T get there -- we are choosing to keep spending. No update on Remicade or Simponi -- won't comment on whether there are negotiations with J&J.

▲ Q: David Risinger (Morgan Stanley) -- Your 2011 sales guidance is above our estimate; EPS is below -- so, are you suggesting that you will be reinvesting the synergies in 2011?

▲ A: Ken Frazier -- Yes, but recall that Venezuela will be $0.06 off the top in 2011. So we are investing in our portfolio -- this is the right time to do this. . . we have no guidance beyond 2011, to be clear. . . .

▲ Q: Seamus Fernandez (Leerink Swann) -- So are we supposed to remove Remicade/Simponi from 2011 through 2013 guidance? What has happened to the $15 billion of operating cash flow over 2011 to 2013?

▲ A: CFO Peter Kellog -- We expect to keep Remicade; it is in our guidance. We are focused on generating cash in 2011-- we are focused on returning to shareholders as well. . . . no other specifics at this point.

[Editor: Call ended at 9:14 AM EST.]


Anonymous said...

First, I'm not defending fast Freddy, he is clearly a criminal and should be in jail with Cox.

Merck is looking to the future by not cutting off one leg to save a finger. Yes, stock owners need to be a bit more calm.

At the end of the day, compare this to Pfizer. They just cut an arm off. What does that say about their future?

MRK will get through this rough patch. The future is bright for them as well as Novartis.

Anonymous said...

This industry is moribund. It is fundamentally based on assuming the risk associated developing therapies of value to "society". Yet, given the combination of merged giants, glacially slow approval processes, and short-sighted (and over-compensated) management it is almost permanently embedded in about the most risk-averse culture imaginable. In these times bigger is always more risk averse and therefore unlikely to be "better". Nobody wants to kill the goose that lays their golden egg but those eggs are getting laid too infrequently. Regulatory over-reaction coupled with (sometimes criminal) corporate obfuscation has created a lose-lose environment for everyone. There is nothing about this industry that suggests net value growth. Its rate of technological advancement is unimpressive. Until something substantially changes this society's model for getting science into patients, it is better to consider pharm as a consumer product industry - albeit with a billion dollar price tag on the next generation happy meal. Unless the business model can consider management of all associated risks its growth prospects are limited to what it will be able to squeeze out governments around the world. Most of these giant companies are mere assemblies of middlemen rather than incubators of medical advancement. How exciting must it be for top technical talent to consider joining such firms, especially when one of the universal bennies is to continually worry about being laid off. 20 years ago the median technical capability at Merck was impressive; today that median capability is depressing.