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Rating Action:

MOODY'S CONFIRMS MERCK'S Aaa RATINGS; REVISES RATING OUTLOOK TO NEGATIVE

08 Jan 2004
MOODY'S CONFIRMS MERCK'S Aaa RATINGS; REVISES RATING OUTLOOK TO NEGATIVE

Approximately $7 Billion of Securities Affected.

New York, January 08, 2004 -- Moody's Investors Service confirmed the ratings of Merck & Co., Inc., including its Aaa senior unsecured rating. At the same time, Moody's revised the outlook on Merck's ratings to negative from stable.

The change in rating outlook to negative reflects Moody's opinion that: (1) relative to other Aaa-credits in both the pharmaceutical industry and other sectors, Merck's ability to deliver growth over the long term has become less clear as a result of various operating risks and industry factors, and (2) Merck's franchise and industry positions have eroded, as rival pharmaceutical firms have merged and as the weakness in Merck's late-stage pharmaceutical pipeline has become more apparent. Continuation of these concerns could lead to a rating downgrade in the intermediate term.

Nonetheless, the confirmation of Merck's Aaa ratings recognizes the company's strong profit margins and cash flow, its conservative financial profile, and its excellent liquidity. In particular, Moody's notes the company's deliberate reduction in share repurchase activity as it faces the prospects of slower growth, which has allowed Merck to enhance its net cash position.

Among industrial and financial corporations that Moody's rates Aaa, key factors typically supporting the rating include an excellent franchise, a pre-eminent competitive position and reputation, strong business and geographic diversification, robust and consistent operating performance, and superior financial flexibility. Moody's believes that relative to other Aaa-rated companies, Merck is less diverse from a product standpoint and geographically, and that its earnings are more variable because of the impact of patent expirations on product life cycles. As a result, Moody's places emphasis on Merck's ability to deliver strong operating performance, relative to Aaa-rated companies that are more dominant in their markets, more diversified, or that exhibit less earnings variability. Moody's believes that within the pharmaceutical sector, Merck's franchise and industry position are eroding, following the consolidation of several large industry players, recent failures of several of Merck's Phase III product candidates, and contraction of the firm's market capitalization.

Moody's notes that Merck continues to maintain an exceptional financial profile, with a very strong balance sheet and cash flow generation. Recent reductions in the pace of share repurchases have helped the company expand its large net cash position. In addition, Moody's acknowledges Merck's excellent record with respect to regulatory compliance and product safety, which have harmed many pharmaceutical companies.

Regarding prospects for Merck's operating performance, Moody's notes that the company generated double-digit revenue and earnings growth in most years during the 1990s. Since 2001, however, earnings growth from Merck's core pharmaceutical business has stagnated, resulting largely from patent expirations on key products, and higher investments in both R&D and sales and marketing.

Moody's assumed that Merck's growth would begin to rebound in 2003 as a result of new product launches, and strong growth in products including Zocor, Singulair, Fosamax, Cozaar/Hyzaar and Vioxx. Now, based on factors including intensifying competition and pipeline disappointments, Moody's believes that Merck's ability to restore comparably robust earnings over the next several years is become more questionable. Performance will depend on successful new products launches, including the ezetimibe/simvastatin combination and the U.S. launch of Arcoxia, both of which have been filed for approval with the FDA; Moody's believes it is too early to determine the growth trajectories of these products. Longer term, Moody's believes that Merck's prospective earnings growth also remains less certain, given the risks of pharmaceutical product development, and the large U.S. Zocor patent expiration in June 2006. Moody's notes intensifying external factors, including pricing pressure, consolidation of managed care companies and pharmacy benefit managers (PBMs), and growing importance of rebate and formulary strategies; Merck has cited such factors in relation to its 4,400 position headcount reduction -- the largest in its history -- announced in late 2003. Merck has also announced a renewed emphasis on seeking external product collaborations, although many of the recent transactions have involved earlier stage technologies not likely to generate growth in the intermediate term.

Over the next 12 to 18 months, Moody's will continue to assess Merck's operating performance, and its response to slower and less certain growth rates. If concerns about Merck's ability to restore healthier growth persist, or if Moody's believes that Merck's competitive position has further eroded, a rating downgrade could result. Factors that could lead to a rating downgrade before this time period include any unanticipated weakening of sales results, or additional setbacks in the clinical pipeline that could dampen earnings and free cash flow. On the other hand, Merck's rating outlook could return to stable if Moody's becomes more confident in Merck's ability to sustain longer term growth rates through the advancement of promising products through the pharmaceutical pipeline.

Ratings confirmed

Merck & Co., Inc. --

Aaa issuer rating, notes, medium-term notes, Euronotes, Eurobonds, debentures, and industrial revenue bonds; (P)Aaa shelf rating

Prime-1 rating for commercial paper;

VMIG 1 industrial revenue bonds

Puerto Rico Industrial Incentives Fund, Inc. --

Aaa trust certificates

Headquartered in Whitehouse Station, New Jersey, USA, Merck & Co., Inc. [NYSE: MRK] is a worldwide research-intensive company that discovers, develops, produces, and markets human and animal health products and services. Through the first nine months of 2003, Merck reported net pharmaceutical sales of approximately $17 billion.

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael Levesque
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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