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Strategic Environment & Corporate Culture w/refs

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Strategic Environment & Corporate Culture

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Merck & Co., Inc.
Asset Composition

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Biogen might be Merck's next acquisition, but at a premium.  One analyst suggests a next move that fits with his interpretation of Merck's strategy.

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Rumor has it that Biogen is in play -- with interest from and Allergan.

But if that rumor comes true, the acquirer will have to pay more than Biogen's current value -- perhaps 29% more.

Should you buy Biogen now? Maybe. It depends on the calculations resulting from a complex decision tree.

(I have no financial interest in the securities of Biogen, Merck or Allergan).

On August 2, the Wall Street Journal, reported on rumors that Merck and Allergan had sounded out Biogen -- whose CEO George Scangos announced in July that he would leave once a successor is found -- for a possible takeover.

But on August 3, reported that Biogen has not received any formal expressions of interest nor is it actively seeking an acquirer.

For Merck and Allergan -- with market capitalizations of $162 billion and $101 billion respectively -- buying Biogen would be expensive and would boost current and potential revenues and profits significantly.

7,350-employee Biogen -- with $10.8 billion in 2015 revenue, up at a three year annual rate of 25% with a whopping 34% net profit margin -- dominates the $20 billion market for multiple sclerosis drugs and has a promising pipeline of research targeting the Alzheimer's market -- which was expected to grow at a 10.5% annual rate from $4.9 billion in 2013 to $13.3 billion by 2023, according to research and consulting firm GlobalData.

Biogen is on a roll. Its second quarter revenues popped 12% to $2.9 billion with sales of its biggest drug, MS treatment Tecfidera, at an annualized $4 billion; with 18% growth for Interferon, and hemophilia treatments -- [which Scangos planned to spin off from Biogen] -- Eloctate (up 68%), and Alprolix (up 47%), according to SeekingAlpha.

Merck seems desperately in need of growth. $39.5 billion (2015) revenues Merck suffered a -5.8% three year average revenue decline and its net profit margin of 11.7% lags the industry's 14.2%.

By contrast, $15.1 billion Allergan enjoyed a 33.6% average annual increase in revenue over the last three years and sports a whopping 27% net margin -- so it may not feel as urgent a need for the growth it would get from acquiring Biogen.

Merck -- like most large pharmaceutical companies -- is trying to restock its fallow drug pipeline. To that end, in 2015 it acquired Cubist Pharmaceuticals for about $8 billion and Afferent Pharmaceuticals for about $500 million, according to the Journal.

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Will Merck Pay A 29% Premium for Biogen?

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Rumor has it that Biogen is in play -- with interest from Merck and Allergan. But if that rumor comes true, the acquirer will have to pay more than Biogen's current value -- perhaps 29% more. Should you buy Biogen now? Maybe. It depends on the calculations resulting from a complex decision [...]

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Competitor failure is good news for Merck, stock prices rise.  Merck's Keytruda is a direct competitor to the BMS product.

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Shares of Bristol-Myers Squibb plunged more than 17 percent in morning trading Friday after its important cancer drug failed to meet targets in a late-stage study.

Shares of Bristol-Myers' competitors who have their own versions of the cancer therapy rose on the news. Bristol-Myers' shares ended the day down nearly 16 percent, while shares of Merck surged more than 10 percent.

Bristol-Myers' drug Opdivo, which is already approved to treat some types of cancer, before Friday was seen as a treatment that could significantly boost the company's growth.

In the study known as CheckMate -026, the company was trying to see if Opvido would be successful in treating "a broad patient population" of people with advanced non-small cell lung cancer, which accounts for the vast share of lung cancers. Up to 200,000 people in the United States are annually diagnosed with non-small lung cancer, which is often fatal.

Bristol-Myers CEO Giovanni Caforio said in a release that he was "disappointed" with the result but management remains "committed to improving patient outcomes through our comprehensive development program." Caforio also pointed to another ongoing trial, called CheckMate -227, of Opdivo in combination with the therapy Yervoy, as well as Obdivo combined with chemotherapy.

"We believe that combination therapy may provide an important opportunity to address the needs of every patient with first-line lung cancer," the company said.

Opdivo had sales of $840 million in the recently ended quarter, which was $718 million more than in the same quarter in 2015.

Dr. Mark Schoenebaum, a biotech and pharmaceuticals analyst at Evercore ISI, in a note called the Opdvio trial results "a major surprise - possibly the biggest clinical surprise of my career."

"Investors had high expectations for this trial." Schoenebaum wrote, noting that there was a consensus view that Opdivo would have sales for all kinds of treatments of around $12 billion by 2021, "with perhaps" $7 billion to $8 billion of that coming from the drug being used to treat non-small cell lung cancers either by itself, or in conjunction with other therapies."

If the 17-percent drop is sustained Friday, it would represent the second-biggest daily percentage loss for Bristol-Myers shares, and lop off $21 billion in market cap. The company's stock fell by 22.4 percent on April 19, 2000, when Bristol-Myers withdrew an application for a hypertension treatment from the federal Food and Drug Administration after the agency expressed safety concerns about the drug.

As of intraday trade, shares were more than 8 percent lower for the year so far.

Shares of Dow component Merck, which offers a competing drug called Keytruda, surged more than 6 percent in morning trade after the news about Opdivo. Analysts have said Keytruda - which recently met its target in its own late-stage study - could dramatically increase Merck's sales over the next decade.

"Both of them have had good trials in the past. Now one of the trials for the drugs shows it might not be as effective," said Jonathan Wexler, chief sales officer at BioShares.

AstraZeneca, which also offers a competing drug, saw its shares rise more than 1 percent in morning trade.

He said the stock reaction was an "extremely significant move" and the news will be watched for impact to balance sheets.

"This is an extraordinarily fortunate outcome for Merck's Keytruda," said BMO Capital Markets analyst Alex Arfaei. "This is a seismic event in terms of market share implications."

In a statement, a Merck spokeswoman declined to comment on Bristol-Myers' study.

"We cannot comment on their findings as the full results have not yet been disclosed," she told CNBC in a statement.

Bristol-Myers shares were downgraded to "neutral" from "buy" by SunTrust Robinson Humphrey on the news, with the firm saying it was lowering its price target for the stock from $86 per share to $68.

Jefferies likewise revised its outlook on the company, saying, "We see Bristol-Myers down $7-$10/share in this scenario."

But Jefferies also said, "The CheckMate -227 study for Opdivo/Yervoy presents another shot on goal."

Damien Conover, equity analyst at Morningstar, went farther that that.

He said that Bristol-Myers will be set back for one to two years, but is bullish on its potential in the immuno-oncology market.

"We still think Opdivo gets the lion's share of the market but ... right now immuno-oncology drugs [have] a lot less side effects, and for some patients [they were] remarkably effective," Conover. "Going forward, I think you need more combination assets to treat those sort of folks, but I don't think this really changes the outlook for immuno-oncology drugs. We still have strong conviction in these drugs."

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Bristol-Myers clobbered-shares drop 17%-after failed drug test

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Shares of Bristol-Myers Squibb plunged more than 17 percent in morning trading Friday after its important cancer drug failed to meet targets in a late-stage study. Shares of Bristol-Myers' competitors who have their own versions of the cancer therapy rose on the news.

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Final Presentation

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Executive Summary

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Financial Ratio Spreadsheet

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www.merck.com

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We at Merck are committed to improving health and well-being around the world. From developing new therapies that treat and prevent disease to helping people in need, we are guided by a rich legacy and inspired by a shared vision.

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2015 10-K