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Unformatted text preview: 30 January 2007 Americas/United States Equity Research Major Pharmaceuticals / MARKET WEIGHT Merck & Co. (MRK) Rating NEUTRAL* Price (30 Jan 07) 44.91 (US$) Target price (12M) (from 45.00) 46.00 (US$) 52 week high - low 46.22 - 33.14 Market cap. (US$ m) 97,499.74 Enterprise value (US$ m) 86,301.44 * Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. COMPANY UPDATE Gardasil and Januvia Lead Strong Revenues Merck's 4Q:2006 results were highlighted by impressive revenue performance, at $6.04 Bn vs. our estimate of $5.40 Bn and consensus of $5.38 Bn. However, $238 MM of this $644 MM outperformance was due to "other" revenues, which may be perceived by investors as lower quality as their sustainability is difficult to assess. That said, MRK's key new products, Gardasil and Januvia, posted strong revenues above our expectations. These products are central to the company's growth over the next several years, and their successful uptake is a critical milepost for market confidence in MRK. Certain aspects of MRK's accounting treatment seemed inconsistent, as we have found at times in the past. MRK includes Vioxx and Fosamax reserve charges, but excludes these from guidance, which has the effect of reducing 2005 EPS and boosting `05-`10 EPS CAGR a metric to which MRK frequently refers. We see reserve charges as nonrecurring items and not indicative of operating performance, so we exclude them from adjusted EPS. Our EPS estimates are revised from $2.59 to $2.58 in 2007 and from $2.79 to $2.73 in 2008. Our target price is increased from $45 to $46, as we roll forward our earnings period for valuation purposes from 4Q:07 3Q:08 to FY2008. Our new $46 target price is based on a 17.5x multiple applied to 2008 EPS of $2.73. This multiple assumes a 7.5% premium to the sector. Research Analysts Catherine J. Arnold Mark Wuttke Share price performance Daily Jan 30, 2006 - Jan 29, 2007, 1/30/06 = US$34.46 47 42 37 32 Jan-06 Apr-06 Price Jul-06 Oct-06 Indexed S&P 500 On 01/29/07 the S&P 500 index closed at 1,428.82 Quarterly EPS 2006A 2007E 2008E Q1 0.78 0.57 0.66 Q2 0.73 0.60 0.67 Q3 0.68 0.74 0.79 Q4 0.53 0.68 0.61 IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS AND INFORMATION ON TRADE ALERTS AND ANALYST MODEL PORTFOLIOS ARE IN THE DISCLOSURE APPENDIX. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Credit Suisse in the United States can receive independent, third party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.credit-suisse.com/ir or call 1 877 291 2683 or email equity.research@credit-suisse.com to request a copy of this research. Michael Faerm Financial and valuation metrics Year EPS (CS adj., US$) Prev. EPS (US$) P/E (x) P/E rel. (%) Revenue (US$ m) EBITDA (US$ m) OCFPS (US$) P/OCF (x) EV/EBITDA (current) Net debt (12/06A, US$ m) ROIC Number of shares (m) BV/share (current, US$) Net debt (current, US$ m) Net debt/Total cap. (12/06A) Source: Company data, Credit Suisse estimates 12/06A 2.73 16.4 106.1 22,636.1 10,201.9 -- -- 8.8 -9434.1 -- 2,171.00 8.01 -9,434.1 3.0% 12/07E 2.58 2.59 17.4 122.4 21,864.1 9,562.9 -- -- 9.2 -11198.3 -- IC (current, US$ m) EV/IC (x) Dividend (current, US$) Dividend yield 12/08E 2.73 2.79 16.5 124.1 21,872.2 10,068.7 -- -- 8.4 -14235.4 -- 35,955.73 2.5 1.52 3.3% 30 January 2007 Summary of Model Changes Below (Exhibit 1) is a summary of our model revisions. The complete model follows at the end of this report. Exhibit 1: Summary of Changes to MRK Model US$ in millions, unless otherwise stated FY 2005 Sales Old Revised Change Consensus (as of 1/29/07) Adjusted Sales Old Revised Change Guidance Gross Margin Old Revised Change Guidance SG&A as % Sales Old Revised Change SG&A Growth Old Revised Change FY 2006 1Q 2007 2Q 2007 3Q 2007 4Q 2007 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 CAGR '05-'10 $22,012 22,012 $0 $22,012 $21,992 22,636 $644 $21,973 $4,825 4,902 $77 $5,018 $5,318 5,364 $45 $5,452 $5,553 5,565 $12 $5,602 $5,693 6,033 $340 $5,622 $21,390 21,864 $474 $21,767 $21,375 21,872 $497 $21,930 $23,183 23,458 $276 $23,170 $25,360 25,568 $208 $23,964 26,038 2.9% 3.0% $24,777 24,777 $0 $25,573 26,265 $692 $5,864 5,960 $96 $6,466 6,493 $27 $6,703 6,763 $60 $6,919 7,292 $372 $25,953 26,508 $555 $26,898 27,415 $516 $30,096 30,389 $293 $32,705 32,967 $261 34,061 5.7% 5.9% 4-6% 77.4% 77.4% 0.0% 76.6% 76.7% 0.2% 74.1% 73.8% (0.3%) 74.3% 73.7% (0.5%) 74.6% 73.9% (0.7%) 75.0% 75.1% 0.1% 74.5% 74.2% (0.3%) 74.9% 74.8% (0.1%) 76.3% 76.0% (0.3%) 76.9% 76.6% (0.3%) 76.5% 74-76% 77-78% after 2008 31.2% 31.2% 0.0% 33.5% 32.9% (0.6%) 36.0% 35.9% (0.1%) 33.2% 33.4% 0.2% 32.6% 33.0% 0.4% 38.4% 35.5% (3.0%) 35.1% 34.4% (0.7%) 34.0% 34.1% 0.0% 32.4% 31.8% (0.6%) 30.5% 29.1% (1.4%) 29.5% 5.8% 5.8% 0.0% 7.1% 8.3% 1.2% 1.2% 2.5% 1.3% 1.8% 3.2% 1.4% 2.1% 3.5% 1.4% 2.4% (3.8%) (6.2%) 1.9% 1.0% (0.9%) (3.0%) (0.9%) 2.1% 3.2% 0.0% (3.2%) 3.2% 0.0% (3.2%) 3.2% Excluding Option Expense Guidance R&D as % Sales Old Revised Change R&D Growth Old Revised Change 17.2% 17.2% 0.0% 0.3% 0.3% 0.0% 3.4% 0-2% increase 18.8% 18.8% 0.1% 9.2% 12.8% 3.6% 18.7% 18.4% (0.3%) 1.8% 1.7% (0.1%) 22.9% 22.7% (0.2%) 3.9% 3.8% (0.1%) 17.8% 17.8% (0.1%) 4.8% 4.7% (0.1%) 20.5% 22.0% 1.4% 4.3% 5.5% 1.2% 20.0% 20.3% 0.3% 3.8% 4.1% 0.3% 21.0% 21.3% 0.3% 5.0% 5.0% 0.0% flat rel. to 2006 20.4% 20.9% 0.5% 5.2% 5.2% (0.0%) 19.6% 20.1% 0.5% 5.2% 5.2% (0.0%) 20.8% 5.2% Excluding Option Expense Guidance Equity Income Old Revised Change Guidance Adjusted Tax Rate Old Revised Change Guidance EPS Old Revised Change Guidance Consensus (as of 1/29/07) $1,717.1 1,717.1 $0.0 0.8% low-mid single digit incr. $2,339.2 2,294.3 ($44.9) $619.9 635.4 $15.5 $763.3 740.4 ($22.9) $745.0 777.5 $32.6 $795.4 810.8 $15.4 $2,923.5 2,964.2 $40.6 $3,434.6 3,413.6 ($21.0) $4,263.3 4,240.1 ($23.1) $4,508.9 4,519.4 $10.5 4,936.0 21.3% 21.4% $2.6-2.9bn 28.8% 28.8% 0.0% 24.9% 28.4% 3.5% 24.0% 25.3% 1.3% 24.0% 25.3% 1.3% 24.0% 25.0% 1.0% 24.0% 25.1% 1.1% 24.0% 25.2% 1.2% 24-26% 27.0% 27.0% 0.0% 27.0% 0.0% (27.0%) 27.0% 0.0% (27.0%) 0.0% $2.66 2.66 $0.00 $2.66 $2.72 2.73 $0.01 $2.52 $0.57 0.57 ($0.00) $0.58 $0.63 0.60 ($0.03) $0.67 $0.76 0.74 ($0.02) $0.71 $0.63 0.68 $0.05 $0.65 $2.59 2.58 ($0.01) $2.79 2.73 ($0.06) $2.74 $3.60 3.54 ($0.06) $3.18 $4.25 4.25 $0.00 $3.51 4.46 9.8% 9.9% >10% $2.51-2.59 $2.60 Source: Company data, Credit Suisse estimates Merck & Co. (MRK) 2 30 January 2007 Below (Exhibit 2) is our variance analysis comparing 4Q:2006 results to Credit Suisse forecast and prior period results. Exhibit 2: MRK 4Q:2006 Variance Analysis US$ in millions, unless otherwise stated 4Q 2005 Actual Revenue Zocor US ROW Zetia US ROW Vytorin Cozaar/Hyzaar Primaxin Cancidas Proquad - US only RotaTeq - US only ZostaVax - US only Gardasil - US only Other Vaccines Trusopt/Cosopt Fosamax Singulair Maxalt Other Total Revenue Cost of Sales R&D SG&A Total Expenses EBIT Equity Income Nonoperating, Net Pretax Income Tax PF Net Income $1,074 819 255 $392 297 95 368 782 191 157 0 0 0 0 111 167 789 819 94 1,582 $5,766 $1,302 1,042 1,844 $4,188 $1,578 587 126 $2,291 643 $1,648 22.6% 18.1% 32.0% 72.6% 27.4% CS Forecast Growth YoY QoQ (11%) (18%) (7%) 5% 3% 10% 11% 3% (0%) 8% (5%) 14% 240% 54% 19% (8%) (4%) 11% (8%) (7%) (0%) 4Q 2006 Reported Growth YoY QoQ 2% 6% (0%) 7% 4% 16% 7% 6% 0% 5% 6% 11% 170% 121% 38% (6%) 2% 10% 6% 19% 12% VARIANCE Consensus 3Q 2006 Actual $329 125 204 $525 401 124 573 835 181 138 80 70 34 108 115 175 737 965 97 1,536 $5,400 $1,397 1,121 2,137 $4,655 $745 629 121 $1,496 366 $1,129 (69%) (85%) (20%) 34% 35% 30% 56% 7% (5%) (12%) NM NM NM NM 4% 5% (7%) 18% 3% (3%) (6%) 25.9% 20.8% 39.6% 86.2% 13.8% $379 161 218 $535 405 130 554 865 182 133 89 69 27 155 134 180 789 959 111 1,972 $6,044 $1,505 1,255 2,223 $4,983 $1,061 584 77 $1,723 559 $1,164 (65%) (80%) (15%) 36% 36% 37% 51% 11% (5%) (15%) NM NM NM NM 21% 8% 0% 17% 18% 25% 5% 24.9% 20.8% 36.8% 82.4% 17.6% $50 36 14 $10 4 7 (19) 30 1 (5) 9 (1) (7) 47 19 5 52 (6) 14 437 $644 $108 135 86 $328 $316 (45) (44) $227 192 $35 $371 152 219 $501 389 112 517 814 182 127 84 62 10 70 97 191 771 868 105 1,658 $5,410 $1,345 945 1,773 $4,063 $1,348 595 135 $2,078 587 $1,491 24.9% 17.5% 32.8% 75.1% 24.9% As of (1/29/07) $5,539 High $5,376 Mean $5,200 Low 39.7% 28.1% 28.6% 27.7% 24.5% 20.9% 28.5% 32.4% 19.3% 38.4% 28.2% 27.6% As of (1/29/07) $0.55 High $0.50 Mean $0.46 Low PF Diluted EPS Diluted EPS Diluted Shares $0.75 $0.51 2,189 $0.52 $0.45 2,180 (31.2%) $0.53 $0.22 2,185 (29.2%) $0.01 ($0.23) 5 $0.68 $0.43 2,186 Source: Company data, Credit Suisse estimates Merck & Co. (MRK) 3 30 January 2007 Company Financial Statements Exhibit 3: Summary of MRK Product Revenues US$ in millions, unless otherwise stated FY 2004 Pharmaceuticals - Marketed Cardiovascular Zocor FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 $5,198.0 $1,052.0 131.0 720.0 2,824.0 84.0 $8,826.0 $1,981.0 230.0 $2,211.0 $640.0 $62.0 429.0 $1,131.0 $3,160.0 734.0 0.0 $3,894.0 $0.0 0.0 0.0 0.0 1,035.0 $1,035.0 $716.0 271.0 2,623.0 311.0 255.0 47.0 629.2 $4,852.2 $21,949.2 $1,481.0 $4,381.0 $1,397.0 1,012.0 623.0 3,038.0 88.0 $8,130.0 $0.0 218.0 $218.0 $740.0 $93.0 569.0 $1,402.0 $3,191.0 741.0 0.0 $3,932.0 $0.0 0.0 0.0 0.0 1,103.0 $1,103.0 $758.0 292.0 2,977.0 348.0 347.0 88.0 760.8 $5,570.8 $20,355.8 $1,656.0 $2,803.0 $1,925.0 1,933.0 546.0 3,164.0 86.0 $6,599.0 $0.0 265.0 $265.0 $705.0 $139.0 531.0 $1,375.0 $3,135.0 619.0 42.0 $3,796.0 $236.0 164.0 38.0 235.0 1,212.0 $1,885.0 $825.0 351.0 3,577.0 406.0 328.0 131.0 1,289.1 $6,907.1 $20,827.1 $1,808.0 $833.3 $2,287.3 2,727.2 480.5 3,290.6 87.7 $4,692.1 $0.0 278.3 $288.3 $669.8 $167.9 557.3 $1,395.0 $2,772.2 433.6 329.3 $3,535.0 $410.0 255.2 239.9 806.5 1,265.5 $2,977.2 $839.5 364.4 3,844.7 416.8 307.7 150.5 1,172.3 $7,095.9 $19,983.4 $1,695.9 $667.3 $2,564.3 3,506.9 432.4 3,422.2 89.5 $4,611.4 $0.0 382.2 $382.2 $645.6 $186.1 581.7 $1,413.5 $1,141.6 365.7 1,058.9 $2,566.2 $440.0 215.5 333.7 911.1 1,277.5 $3,177.7 $837.3 376.9 4,120.1 425.1 276.9 163.4 1,066.6 $7,266.2 $19,417.1 $1,889.5 $541.3 $2,768.2 4,125.5 389.2 3,524.8 91.3 $4,546.6 $0.0 423.8 $423.8 $626.3 $198.1 600.6 $1,424.9 $919.2 329.1 1,598.5 $2,846.8 $460.0 199.0 504.6 1,041.5 1,289.8 $3,494.9 $654.0 389.7 4,345.3 433.6 250.2 173.9 970.8 $7,217.6 $19,954.5 $1,871.1 $466.8 $2,910.0 4,658.6 350.3 3,397.7 93.1 $4,307.9 $0.0 453.6 $453.6 $607.5 $208.0 611.3 $1,426.7 $834.0 296.2 2,061.3 $3,191.5 $480.0 180.0 637.0 1,332.1 1,303.4 $3,932.4 $595.9 403.1 4,507.7 442.3 226.2 181.6 884.1 $7,240.8 $20,552.9 $1,990.1 $420.3 $2,986.2 5,208.6 315.2 2,142.7 95.0 $2,973.3 $0.0 479.8 $479.8 $589.2 $218.4 622.8 $1,430.4 $771.1 267.2 2,238.0 $3,276.3 $500.0 189.9 520.8 1,294.4 1,318.2 $3,823.3 $576.5 416.9 4,642.9 451.1 208.6 188.4 819.3 $7,303.7 $19,286.9 $2,049.0 Zetia - Not Consolidated Vytorin - Not Consolidated Vasotec Cozaar/Hyzaar Aggrastat Total Cardiovascular Anti-inflammatory Vioxx Arcoxia Total Anti-inflammatory Antibiotics Primaxin Invanz Cancidas Total Antibiotics Endocrinology Fosamax Proscar Januvia Total Endocrinlogy Vaccines ProQuad - US only RotaTeq - US only ZostaVax - US only Gardasil - US only Other Vaccines Total Vaccines Other Opthalmologicals Propecia Singulair Maxalt HIV Franchise (Crixivan/Stocrin) EMEND Other Total Other Total Marketed Products Product Sales to AZN Source: Company data, Credit Suisse estimates Merck & Co. (MRK) 4 30 January 2007 Exhibit 3: Summary of MRK Product Revenues (continued) US$ in millions, unless otherwise stated Pipeline FY 2004 MK-0524A 0.0 MK-0524B 0.0 Gaboxadol 0.0 Zolinza (vorinostat) 0.0 MK-0517 (for CINV) 0.0 MK-0518 (for HIV) 0.0 MK-0364 (CB-1 antagonist) 0.0 Total Pipeline $0.0 Total Sales $23,430.2 $0.0 0.0 0.0 0.0 $0.0 FY 2005 0.0 0.0 0.0 0.0 0.0 0.0 0.0 $0.0 $22,011.8 $0.0 0.0 0.0 0.0 $0.0 FY 2006 0.0 0.0 0.0 1.0 0.0 0.0 0.0 $1.0 $22,636.1 $32.8 5.8 0.0 20.0 $58.6 FY 2007 0.0 0.0 0.0 75.0 40.0 69.8 0.0 $184.8 $21,864.1 $294.4 39.7 0.0 475.3 $809.5 FY 2008 46.3 0.0 36.6 140.0 95.0 247.7 0.0 $565.6 $21,872.2 $348.0 110.1 203.4 733.0 $1,394.5 FY 2009 134.4 369.2 348.3 200.0 165.0 415.8 0.0 $1,632.8 $23,458.3 $352.0 212.7 552.5 2,086.9 $3,204.2 FY 2010 252.5 983.1 717.0 250.0 210.0 487.0 125.0 $3,024.6 $25,567.5 $368.0 297.6 680.3 1,980.2 $3,326.1 FY 2011 379.6 1,824.5 850.0 300.0 255.0 792.7 300.0 $4,701.7 $26,037.6 $384.0 358.5 763.5 2,296.6 $3,802.6 Not Consolidated - OUS vaccines ProQuad - OUS only RotaTeq - OUS only ZostaVax - OUS only Gardasil - OUS only Total Source: Company data, Credit Suisse estimates Merck & Co. (MRK) 5 Merck & Co. (MRK) Exhibit 4: MRK Projected Income Statement US$ in millions, unless otherwise stated Mar-07 1QE $4,902.4 1,282.5 3,620.0 1,757.8 901.9 $960.3 (85.0) 158.0 (30.0) 0.0 635.4 20.0 698.5 $1,658.8 420.1 $1,238.7 2,178.5 $0.57 FY 2004 Total Sales Cost of Revenues Gross Profit SG&A Research & Development Operating income/EBIT Interest Expense Interest Income Exchange Gains/(Losses) Minority Interests Amortization of Intangibles Equity in Income of Affilaites Other Total other income (expense) Pretax income Provision for income taxes Net Income Average shares Earnings per share Margin Analysis Gross margin SG&A % sales R&D % sales Operating margin Other income % sales Pre-tax margin Tax rate Net margin Year/Year Changes Sales Gross profit SG&A R&D Net income Earnings per share 4.2% 2.5% 4.8% 18.5% 3.6% 4.7% 79.5% 27.7% 16.1% 35.7% 4.7% 40.5% 26.9% 29.6% $23,430.2 4,801.7 18,628.5 6,495.9 3,765.2 $8,367.4 (293.8) 300.1 18.4 (154.3) (83.5) 1,008.2 315.1 1,110.2 $9,477.6 2,545.4 $6,932.2 2,228.8 $3.11 FY 2005 $22,011.8 4,972.6 17,039.2 6,873.9 3,778.0 $6,387.3 (385.4) 480.8 (121.8) 0.0 1,717.1 120.8 1,827.6 $8,214.9 2,363.5 $5,851.4 2,200.4 $2.66 FY 2006 $22,636.1 5,264.7 17,371.4 7,444.4 4,259.8 $5,667.2 (375.0) 764.3 (120.5) 0.0 2,294.3 88.7 2,676.8 $8,344.0 2,369.3 $5,974.7 2,187.7 $2.73 Jun-07 2QE 2007 Sep-07 3QE $5,564.8 1,451.9 4,112.9 1,833.9 990.0 $1,289.0 (80.0) 157.9 (30.0) 0.0 777.5 20.0 845.4 $2,134.4 534.3 $1,600.2 2,166.5 $0.74 Dec-07 4QE $6,033.2 1,499.6 4,533.6 2,139.0 1,324.3 $1,070.2 (80.0) 160.1 (30.0) 0.0 810.8 20.0 880.8 $1,951.0 490.3 $1,460.8 2,160.6 $0.68 FY 2007 $21,864.1 5,641.9 16,222.1 7,519.8 4,432.9 $4,269.4 (325.1) 625.8 (120.0) 0.0 2,964.2 80.0 3,224.8 $7,494.3 1,886.6 $5,607.6 2,169.5 $2.58 FY 2008 $21,872.2 5,505.3 16,366.9 7,449.8 4,655.7 $4,261.4 (321.1) 711.2 (120.0) 0.0 3,413.6 80.0 3,763.7 $8,025.1 2,166.8 $5,858.3 2,146.3 $2.73 FY 2009 $23,458.3 5,629.4 17,828.9 7,449.8 4,896.7 $5,482.3 (249.1) 748.4 0.0 0.0 4,240.1 80.0 4,819.5 $10,301.8 2,781.5 $7,520.3 2,124.5 $3.54 FY 2010 $25,567.5 5,978.8 19,588.7 7,449.8 5,149.8 $6,989.1 (231.0) 902.2 0.0 0.0 4,519.4 80.0 5,270.7 $12,259.8 3,310.1 $8,949.6 2,103.9 $4.25 FY 2011 $26,037.6 6,106.4 19,931.2 7,684.6 5,415.5 $6,831.0 (230.6) 1,124.4 0.0 0.0 4,936.0 80.0 5,909.7 $12,740.8 3,440.0 $9,300.8 2,084.1 $4.46 CAGR '06-'11 2.8% 3.0% 2.8% 0.6% 4.9% 3.8% $5,363.7 1,408.0 3,955.7 1,789.1 1,216.7 $949.9 (80.1) 149.8 (30.0) 0.0 740.4 20.0 800.1 $1,750.0 442.0 $1,308.0 2,172.5 $0.60 8.8% 9.3% 10.3% 77.4% 31.2% 17.2% 29.0% 8.3% 37.3% 28.8% 26.6% 76.7% 32.9% 18.8% 25.0% 11.8% 36.9% 28.7% 26.4% 73.8% 35.9% 18.4% 19.6% 14.2% 33.8% 24.0% 25.3% 73.7% 33.4% 22.7% 17.7% 14.9% 32.6% 24.0% 24.4% 73.9% 33.0% 17.8% 23.2% 15.2% 38.4% 24.0% 28.8% 75.1% 35.5% 22.0% 17.7% 14.6% 32.3% 24.0% 24.2% 74.2% 34.4% 20.3% 19.5% 14.7% 34.3% 24.0% 25.6% 74.8% 34.1% 21.3% 19.5% 17.2% 36.7% 27.0% 26.8% 76.0% 31.8% 20.9% 23.4% 20.5% 43.9% 27.0% 32.1% 76.6% 29.1% 20.1% 27.3% 20.6% 48.0% 27.0% 35.0% 76.5% 29.5% 20.8% 26.2% 22.7% 48.9% 27.0% 35.7% (6.1%) (8.5%) 5.8% 0.3% (15.6%) (14.5%) 2.8% 1.9% 8.3% 12.8% 2.1% 2.7% (9.4%) (15.3%) 2.5% 1.7% (27.9%) (27.5%) (7.1%) (12.0%) 3.2% 3.8% (18.3%) (17.8%) 2.9% 1.2% 3.5% 4.7% 7.3% 8.3% (0.2%) (0.1%) (3.8%) 5.5% 25.5% 26.9% (3.4%) (6.6%) 1.0% 4.1% (6.1%) (5.4%) 0.0% 0.9% (0.9%) 5.0% 4.5% 5.6% 7.3% 8.9% 0.0% 5.2% 28.4% 29.7% 9.0% 9.9% 0.0% 5.2% 19.0% 20.2% 1.8% 1.7% 3.2% 5.2% 3.9% 4.9% 30 January 2007 Source: Company data, Credit Suisse estimates 6 Merck & Co. (MRK) Exhibit 5: MRK Projected Balance Sheet US$ in millions, unless otherwise stated 2007 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 Mar-07 1QE Jun-07 2QE Sep-07 3QE Dec-07 4QE FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Current assets Cash and Cash Equivalents Short Term Investments Accounts Receivable Inventories Prepaid Expense and Other Current Assets Total current assets Long-term assets Long-Term Investments Property and Equipment, net Intangible Assets Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt Accounts Payable Accrued Expenses & Other Current Liabilities Income Taxes Payable Dividends Payable Total current liabilities Long-term liabilities Long-term debt Deferred Tax Liability & Other Liabilities Minority Interests Total Long-term liabilities Shareholders' equity Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accum.comp. expenses and treasury stock Total Shareholders' Equity Total Liabilities and Shareholders' Equity $2,243.0 2,728.2 5,423.4 2,964.3 1,027.5 $14,386.4 $1,201.0 2,972.0 4,023.6 2,554.7 775.9 $11,527.2 $2,878.8 4,211.1 3,627.7 1,898.7 858.9 $13,475.2 $9,585.3 6,052.3 2,927.3 1,658.1 826.3 $21,049.3 $6,110.8 2,864.9 3,719.5 2,006.4 967.1 $15,668.6 $5,301.3 2,864.9 3,016.9 1,768.9 784.4 $13,736.4 $6,098.6 2,864.9 3,300.7 1,942.0 858.2 $15,064.4 $6,306.9 2,864.9 3,424.5 2,002.6 890.4 $15,489.2 $7,523.3 2,864.9 3,712.7 2,068.4 965.3 $17,134.6 $7,523.3 2,864.9 3,712.7 2,068.4 965.3 $17,134.6 $9,160.4 2,864.9 3,572.3 2,021.9 928.8 $18,548.3 $12,956.4 2,864.9 3,831.4 2,067.5 996.2 $22,716.3 $18,438.3 2,864.9 4,175.9 2,195.9 1,085.7 $28,760.6 $24,850.2 2,864.9 4,252.6 2,242.7 1,105.7 $35,316.1 7,255.1 14,195.6 7,241.0 4,483.1 $47,561.2 7,941.2 14,169.0 1,949.4 5,000.7 $40,587.5 6,727.1 14,713.7 1,764.9 5,891.9 $42,572.8 1,107.9 14,398.2 1,604.4 6,686.0 $44,845.8 6,443.7 13,404.9 2,315.7 7,494.8 $45,327.7 6,443.7 12,997.8 2,281.5 6,079.0 $41,538.5 6,443.7 12,743.9 2,247.4 6,650.9 $43,150.3 6,443.7 12,448.6 2,213.2 6,900.4 $43,495.1 6,443.7 12,446.0 2,179.1 7,481.1 $45,684.5 6,443.7 12,446.0 2,179.1 7,481.1 $45,684.5 6,443.7 11,362.8 2,093.5 7,198.2 $45,646.5 6,443.7 10,312.4 2,057.6 7,720.2 $49,250.2 6,443.7 9,263.0 2,023.9 8,414.4 $54,905.5 6,443.7 8,116.8 1,990.2 8,569.1 $60,435.9 $3,669.8 2,413.3 3,365.6 2,118.1 808.4 $12,375.2 $1,700.0 735.2 3,772.8 2,538.9 822.7 $9,569.6 $2,181.2 421.4 5,288.1 3,012.3 841.1 $11,744.1 $2,972.0 471.1 5,381.2 3,649.2 830.0 $13,303.5 $1,195.8 463.0 6,378.1 3,787.0 828.8 $12,652.7 $1,195.8 394.6 5,045.9 2,996.0 828.8 $10,461.1 $1,195.8 433.2 5,649.6 3,354.5 828.8 $11,461.9 $1,195.8 446.7 5,473.0 3,249.6 828.8 $11,194.0 $1,195.8 461.4 6,352.5 3,771.8 828.8 $12,610.4 $1,195.8 461.4 6,352.5 3,771.8 828.8 $12,610.4 $1,195.8 451.0 6,394.7 3,796.9 828.8 $12,667.2 $1,195.8 461.2 6,527.3 3,875.6 828.8 $12,888.7 $1,195.8 489.8 6,746.0 4,005.5 828.8 $13,266.0 $1,195.8 500.3 6,974.1 4,140.9 828.8 $13,639.9 4,879.0 7,178.2 4,928.3 16,985.5 5,096.0 6,430.3 3,915.2 15,441.5 4,691.5 6,442.1 2,406.9 13,540.5 5,125.6 6,092.9 2,407.2 13,625.7 4,789.5 6,769.5 2,437.0 13,996.0 4,444.3 5,490.7 2,437.0 12,372.0 4,442.2 6,007.2 2,437.0 12,886.4 4,440.0 6,232.6 2,437.0 13,109.5 4,437.8 6,757.1 2,437.0 13,631.9 4,437.8 6,757.1 2,437.0 13,631.9 3,037.8 6,501.6 2,437.0 11,976.4 2,730.3 6,973.1 2,437.0 12,140.4 2,724.9 7,600.1 2,437.0 12,762.0 2,724.9 7,739.8 2,437.0 12,901.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 6,943.7 6,956.6 6,869.8 6,900.0 7,105.9 7,105.9 7,105.9 7,105.9 7,105.9 7,105.9 7,105.9 7,105.9 7,105.9 7,105.9 35,434.9 34,142.0 36,626.3 37,918.9 39,091.4 39,367.6 39,714.3 40,353.9 40,854.6 40,854.6 43,415.2 47,633.4 53,289.9 59,306.5 (24,207.9) (25,552.0) (26,237.7) (26,932.1) (27,548.0) (27,798.0) (28,048.0) (28,298.0) (28,548.0) (28,548.0) (29,548.0) (30,548.0) (31,548.0) (32,548.0) $18,200.5 $15,576.4 $17,288.2 $17,916.6 $18,679.1 $18,705.3 $18,802.0 $19,191.6 $19,442.3 $19,442.3 $21,002.9 $24,221.1 $28,877.6 $33,894.2 $47,561.2 $40,587.5 $42,572.8 $44,845.8 $45,327.7 $41,538.5 $43,150.3 $43,495.1 $45,684.5 $45,684.5 $45,646.5 $49,250.2 $54,905.5 $60,435.9 Source: Company data, Credit Suisse estimates 30 January 2007 7 Merck & Co. (MRK) Exhibit 6: MRK Projected Cash Flow Statement US$ in millions, unless otherwise stated 2007 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 Mar-07 1QE Jun-07 2QE Sep-07 3QE Dec-07 4QE FY 2007 FY 2007 FY 2009 FY 2010 FY 2011 Statement of Cash Flows Net Income Adjustments to Net Income Depreciation and amortization Deferred Taxes In Process R&D Other Increase In Accounts Receivable Increase In Prepaid Expenses Increase in Inventories Decrease in Accounts Payable Decrease in Accrued Expenses/Other Current Liabs. Decrease in Taxes Payable Decrease in Non-Current Liabilities Other Working Capital Net Cash From Operations Cash From Investing Activities Investments Additions to PPE Acquisitions Other Cash From Investing Activities Free Cash Flow Cash From Financing Activities Proceeds from/(payments to) revolver Proceeds from/(payments to) long-term debt Issuance of/(repurchase of) common stock Issuance of/(repurchase of) preferred stock Dividends paid Other Changes in SE Net Cash From Financing Activities Discontinued Operations Effect of Exchange Rates $6,794.8 1,231.2 387.5 (116.9) 130.2 (41.5) 325.4 97.0 459.9 (359.9) (197.1) $8,710.6 $6,589.6 1,314.2 131.7 101.8 (199.9) 320.9 (435.3) (21.6) 505.4 494.1 (255.3) (119.1) $8,426.5 $5,813.4 1,450.7 48.9 (35.4) 173.1 (83.0) 331.9 (323.8) 1,382.3 453.9 (445.4) 32.5 $8,799.1 $4,631.3 1,708.1 9.0 79.6 345.9 32.6 125.6 63.6 238.2 663.2 (412.2) 123.6 $7,608.5 $4,433.8 2,240.4 240.1 296.3 (303.2) (792.2) (140.8) (348.3) (8.1) 1,135.7 675.4 100.3 $7,529.3 $1,108.7 644.8 $1,178.0 559.4 $1,470.2 587.7 $1,330.8 537.5 $5,087.6 2,329.3 $5,858.3 2,393.7 $7,520.3 2,400.0 $8,949.6 2,514.8 $9,300.8 2,638.0 702.6 182.7 237.5 (68.4) (2,123.2) (1,278.8) 1,415.8 $821.7 (283.8) (73.8) (173.1) 38.6 962.2 516.6 (571.9) $2,152.1 (123.8) (32.2) (60.6) 13.5 (281.4) 225.3 (249.4) $1,549.2 (288.2) (74.9) (65.8) 14.7 1,401.7 524.5 (580.7) $2,799.5 6.8 1.8 (62.0) (1.6) (40.8) (12.4) 13.7 $7,322.5 140.4 36.5 46.5 (10.4) 67.2 (255.5) 282.9 $8,559.6 (259.1) (67.4) (45.6) 10.2 211.3 (344.5) (89.6) (128.3) 28.6 348.6 (76.8) (20.0) (46.9) 10.5 363.5 471.5 627.0 139.7 (522.0) (694.1) (154.7) $9,719.3 $11,212.2 $12,154.2 (1,636.2) (2,128.1) 0.0 (3.7) ($3,768.0) $4,942.6 (763.5) (1,915.9) (1,527.8) (25.0) ($4,232.2) $4,194.3 107.4 (1,726.1) (12.8) (6.6) ($1,638.1) $7,161.0 3,673.0 (1,402.7) 0.0 (3.1) $2,267.2 $9,875.7 (2,503.2) (1,156.1) (1,100.0) ($4,760.8) $2,768.5 0.0 (203.6) 0.0 ($203.6) $618.1 0.0 (271.3) 0.0 ($271.3) $1,880.7 0.0 (258.2) 0.0 ($258.2) $1,291.0 0.0 (500.8) 0.0 ($500.8) $2,298.7 0.0 (1,233.9) 0.0 ($1,233.9) $6,088.6 0.0 (1,224.8) 0.0 ($1,224.8) $7,334.8 0.0 (1,313.7) 0.0 ($1,313.7) $8,405.6 0.0 (1,431.8) 0.0 0.0 (1,458.1) 1.0 ($1,431.8) ($1,458.1) $9,780.4 $10,696.1 Increase/(decrease) in cash and cash equivalents Beginning cash balance Ending cash balance (508.4) 113.6 (2,091.3) 0.0 (3,191.6) 145.8 ($5,531.9) 575.1 113.2 $99.0 $2,144.0 $2,243.0 Average cash balance (2,347.2) 564.1 (2,034.1) 0.0 (3,250.4) 239.7 ($6,827.9) 1,435.9 155.7 ($1,042.0) $2,243.0 $1,201.0 2,279.6 (252.4) 367.8 (974.6) (1,500.0) (3,310.7) 78.5 ($5,591.4) 108.2 $1,677.8 $1,201.0 $2,878.8 2,017.2 1,296.2 (14.9) (1,015.3) 0.0 (3,349.8) 43.4 ($3,040.4) (128.8) $6,706.5 $2,878.8 $9,585.3 3,364.3 (1,606.6) (500.5) (1,001.0) 0.0 (3,324.1) 168.3 ($6,263.9) 20.9 ($3,474.5) $9,585.3 $6,110.8 8,117.7 0.0 (345.2) (250.0) 0.0 (832.4) 0.0 ($1,427.6) 0.0 (2.2) (250.0) 0.0 (831.3) 0.0 ($1,083.5) 0.0 (2.2) (250.0) 0.0 (830.6) 0.0 ($1,082.7) 0.0 (2.2) (250.0) 0.0 (830.1) 0.0 ($1,082.3) 0.0 (351.7) (1,000.0) 0.0 (3,324.4) 0.0 ($4,676.1) 0.0 $1,412.5 $6,110.8 $7,523.3 6,130.9 0.0 (1,400.0) (1,000.0) 0.0 (3,297.7) 0.0 ($5,697.7) 0.0 $1,637.1 $7,523.3 $9,160.4 8,242.3 0.0 (307.5) (1,000.0) 0.0 (3,302.1) 0.0 ($4,609.6) 0.0 (5.4) (1,000.0) 0.0 (3,293.1) 0.0 ($4,298.5) 0.0 0.0 (1,000.0) 0.0 (3,284.1) 0.0 ($4,284.1) ($809.4) $6,110.8 $5,301.3 5,706.0 $797.2 $5,301.3 $6,098.6 5,700.0 $208.3 $6,098.6 $6,306.9 6,202.7 $1,216.4 $6,306.9 $7,523.3 6,915.1 $3,796.0 $9,160.4 $12,956.4 11,058.4 $5,481.9 $12,956.4 $18,438.3 15,697.3 $6,411.9 $18,438.3 $24,850.2 21,644.2 Source: Company data, Credit Suisse estimates 30 January 2007 8 30 January 2007 Companies Mentioned (Price as of 30 Jan 07) Merck & Co. (MRK, $44.91, NEUTRAL, TP $46.00, MARKET WEIGHT) Disclosure Appendix Important Global Disclosures I, Catherine J. Arnold, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for MRK 48 45 43 38 33 28 23 USD 07-Dec-04 23 27.5 28 27.5 N 30 30 28.5 28.5 38 4 4 4 4 4 9/3 0/0 Closing Price O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered MRK Date 9/30/04 12/7/04 2/22/05 3/18/05 8/22/05 12/16/05 1/6/06 1/9/06 1/17/06 10/27/06 Closing Price Price (US$) 33 27.89 31.21 32.04 27.89 30.01 33.12 33.66 33.21 46.09 The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts' stock ratings are defined as follows***: Outperform: The stock's total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral: The stock's total return is expected to be in line with the industry average* (range of 10%) over the next 12 months. Underperform**: The stock's total return is expected to underperform the industry average* by 10-15% or more over the next 12 months. *The industry average refers to the average total return of the analyst's industry coverage universe (except with respect to Asia/Pacific, Latin America and Emerging Markets, where stock ratings are /04 1/3 1/0 5 3/3 1/0 5 5/3 1/0 5 7/3 1/0 5 9/3 0/0 5 11 /30 /05 1/3 1/0 6 3/3 1/0 6 5/3 1/0 6 7/3 1/0 6 9/3 0/0 6 11 /30 /06 Target Price Initiation/Assumption Rating 1/3 1/0 3/3 1/0 5/3 1/0 7/3 1/0 11 /30 Target Price Price (US$) 38 23 27.5 28 27.5 28.5 30 28.5 30 45 Rating Initiation/ Assumption X NEUTRAL Merck & Co. (MRK) 9 30 January 2007 relative to the relevant country index, and Credit Suisse Small and Mid-Cap Advisor stocks, where stock ratings are relative to the regional Credit Suisse Small and Mid-Cap Advisor investment universe. **In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions. ***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions, with a required equity return overlay applied. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. All Credit Suisse Small and Mid-Cap Advisor stocks are automatically rated volatile. All IPO stocks are automatically rated volatile within the first 12 months of trading. Analysts' coverage universe weightings* are distinct from analysts' stock ratings and are based on the expected performance of an analyst's coverage universe** versus the relevant broad market benchmark***: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *Credit Suisse Small and Mid-Cap Advisor stocks do not have coverage universe weightings. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. ***The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 39% (61% banking clients) Neutral/Hold* 43% (56% banking clients) Underperform/Sell* 16% (51% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. 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See the Companies Mentioned section for full company names. Price Target: (12 months) for (MRK) Method: We set our $46 12-month price target for MRK using a next 12 months (NTM) price-to-forward earnings (P/FE) multiple 12 months forward. Looking forward from end of 2007, we forecast NTM (2008) EPS of $2.73, and we apply a 17.5x P/FE multiple. Our multiple is based on a 15.5x P/FE multiple for the S&P 500, a 5% premium of the U.S. Major Pharmaceutical group to the S&P, and a 7.5% premium for MRK relative to the group. We subtract our estimate of the after-tax present value of MRK's Vioxxrelated tort liability of $4.9 billion, or $2 per share. We reference our target price against a discounted cash flow valuation of $44 per share (Credit Suisse HOLT [see "Important Credit Suisse HOLT Merck & Co. (MRK) 10 30 January 2007 Disclosures" below]). For a more detailed description of our target price setting mechanism, please refer to our most recent sector valuation note. Risks: Key risks to the achievement of our forecast and $46 target price for MRK are: (1) the evolution and total cost for the resolution of MRK's Vioxx liability; (2) greater or lesser than expected achievement of restructuring benefits; and (3) unanticipated pipeline developments. See the Companies Mentioned section for full company names. The subject company (MRK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (MRK) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (MRK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (MRK) within the past 12 months. 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Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating. The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti. For disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 . Disclaimers continue on next page. Merck & Co. (MRK) 11 30 January 2007 Americas/United States Equity Research This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse, the Swiss bank, or its subsidiaries or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. 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This note was uploaded on 05/02/2008 for the course HIST 212 taught by Professor Tester during the Spring '08 term at A.T. Still University.

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