Markets

With Singulair Threatened, Merck Looks More Like Target Than Acquirer

By Jim Edwards

Updated on: February 20, 2009 / 10:26 AM EST / MoneyWatch

Merck CEO Richard Clark made a few headlines when he said in his Q4 conference call that "I wouldn't rule anything out" when it came to large-scale M&A transactions.

CEOs always say this sort of vague, noncommittal thing, but in Merck's case it is looking as if the company may be increasingly desperate to acquire its way out of the problems it has. Or be acquired.

Teva has challenged Merck's Singulair patent. The companies face off in court on Feb. 23 and a judge is set to rule on whether Teva can begin competing for the market in August.

If this decision goes the wrong way for Merck the company could become a shell of its former self -- 19 percent of its projected annual revenues could be lost. As BNET previously noted, Merck would become even more dependent on Januvia, one of its still-growing products. Januvia could become 12 percent of Merck's entire revenue, instead of the projected 10 percent that it is now (using Merck's conservative 2009 estimates, and assuming a near total-loss of Singulair revenues).

Look at exactly what Clark said in his conference call:

I'm talking about strategic opportunities. As I mentioned over the previous few weeks, we are still very focused on strategic opportunities. Obviously, they would have to have shareholder value as we move forward. So it's not an event, just from an event standpoint. Concerning large scaled transactions, as I said before, I wouldn't rule anything out. I don't think in today's world any CEO can categorically rule out any type of transaction. There are opportunities across the whole spectrum that we look at, and the critical point again is the transaction has (inaudible) financial to deliver a value to our shareholders. So I think we're looking at the entire spectrum and quite frankly, an important part of how we look at them is the importance of the dividend and to make sure we continue to sport a strong dividend which has part of Merck's reputation.
... From an M&A standpoint, as I said before, anything we do must make sense from a shareholder standpoint, and as you've heard me say before, I think there is overcapacity in the industry ... And so there's certainly, in my opinion, if you do that the right way, there's a lost of costs that still need to come out of the system.

That's not so much a throwaway comment -- it's a manifesto. Ironically, if Clark really wanted to create shareholder value and protect the dividend, then he would let Merck be acquired by someone else. That would give shareholders a very nice dividend indeed.