Is New Merck A “Show Me” Stock — As To Future EPS Growth? A Dividend Stock?

Given that Goldman Sachs is leading the effort to auction off Bausch + Lomb, for Warburg Pincus (and thus “Fast” Fred Hassan), I fully expected Jami Rubin’s bit of fencing with Mr. Frazier about the Merck Consumer Health businesses — and whether Merck would be looking at “strategic” scenarios — in the M&A space.

That is to say, since Fred Hassan leads Bausch + Lomb, and he was the Ex-CEO of legacy Schering-Plough, and he’s hired Ms. Rubin’s bank to shop B+L, AND because thus far, Whitehouse Station hasn’t shown any public interest in those consumer health assets at B+L — it was a near certainty that Ms. Rubin would hint at the topic.

Mr. Frazier said that he would look at everything, but at the moment felt consumer health was a good contributor, as is. No sale. Dead end, for Goldman — at least in public discussions.

Equally interesting was the conclusion of the talk — when Ms. Rubin asked about the future, and Mr. Frazier expressed frustration that most models show a negative growth value for Merck, in perpetuity, if Merck is presently fairly priced on the NYSE. Here is the exchange (see it all as a PDF on Merck’s investors webpage):

. . . .Jami Rubin – Goldman Sachs – Analyst

We only have a minute. And I just want to ask sort of a longer-term question because I think your comments earlier about how decisions are made 15 years ago that are affecting the Company today such as the Tredaptive situation. And under your leadership you have made some very important R&D decisions in the last three or four years.
What are going to be the two or three drugs to transform this Company five to 10 years out? What is the market missing in terms of pipeline development that you think we should be paying more attention to today?

Ken Frazier – Merck & Co. – Chairman, President & CEO

Well, I’m tempted to say that if you look at our stock price and you decompose it and you look at the fact that the terminal value growth rate is essentially negative, I am tempted to say that people are missing everything — right now.

. . .[B]ut to answer your question, I would say that we are very excited by a few compounds that we think could be pivotal, odanacatib is one of them. I would say — behind that I would say anacetrapib is another great opportunity for us. I would say the anti-PD1, which again Merck doesn’t tend to be beat its chest about things, but it is actually a very competitive molecule out there, it’s another one.
I would say 3102 for our once weekly DPP-4 inhibitor is another one. I would say the BACE program, which is higher risk because you are testing not only the molecule but you are testing the amyloid hypothesis at the same time, those are all big opportunities for Merck.

At the same time we’ve filled in around it with lots of opportunities because you can’t go for a home run every time, you have got to be able to get some singles and doubles and triples. And I think what we have is a balancing approach in Biologics where a few years ago we were nowhere, now we are starting to come out with Biologics. I look at our vaccines. They continue to do well.

So my key is just let’s make sure that we are balanced geographically, let’s make sure that we are balanced therapeutically. And coming back to your question about are you satisfied, I would never say I am satisfied. But I think things are moving in the right direction for Merck, notwithstanding this latest stumble with Tredaptive, and we are going to continue to be committed to R&D because that is what the Company has done best. . . .

So, there you have it. I think the takeaway is that Mr. Frazier feels the NYSE price undervalues the new Merck. And I think the market sees Merck as a dividend play at the moment — over 4 percent, annually (with equally safe interest-bearing instruments paying closer to a single percent or less). And I think this market will only pay for the steak — not the sizzle (think Vorapaxar, Tredaptive, Vytorin, Bridion and on and on and on).

What do you think? Tell me in comments.


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