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Yale(merc) sample valuation
Merck & Co., Inc.
Recommendation: Buy
Target Price
Current Price
Difference

$ 37.09
$ 26.18
41.7%↑

Market Cap.
52 Wk High
52 Wk Low

$ 57.48B
$ 36.26
$ 25.50

Shrs. Out.

2,217.6M

As of October 21, 2005

• Market reaction to Vioxx lawsuits too extreme
• Cash flow for company strong enough to absorb potential legal or competitive challenges
• Potential blockbuster drugs in the pipeline • A stable of existing drugs to continue driving growth
• Aging and growing population
• Medicare Modernization Act of
2003 a boon to drug companies

Bryan Heller and Peter Lavallee, student analysts
Yale School of Management
MGT 948 – Securities Analysis and Valuation

Please see Important Disclaimer at the end of this report

Table of Contents

Investment Thesis………………………………………………….…………………….1
Company Overview…………………………………………………………….………..2
Important Revenue Producing Drugs…...……………………………………………..3
Drugs in the Pipeline……………………………………………………….....................6
Demographic Changes………………………………………………………………….10
Growing Population
Aging Population
Medicare Prescription Drug, Improvement,
& Modernization Act of 2003…………………………………………………..11
Partnerships and Joint Ventures………………………………………………………12
Vioxx Litigation………………………………………………………………………...12
Discounted Cash Flow Analysis………………………………………………………..13
Important Disclaimer …………………………………………………………................18

ii

Investment Thesis
We are initiating our coverage of Merck & Co., Inc. (Merck) with a Buy recommendation, based on an estimated value of $37.09 per share, which is 41.7% above the current price of $26.18. We believe the market is currently undervaluing Merck, primarily due to the existing Vioxx litigation. On September 30, 2004, the day of the announced recall of Vioxx, Merck’s stock dropped $11.48, from $42.84 to $31.36. With diluted shares outstanding of 2.226bn, that indicated a market assumption of earnings and litigation losses of $25.6bn. The market cap of
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