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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
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
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.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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