2012 Preview: Merck

With 2011 finally in the books, it's time to reflect on what has transpired this year and which companies could be facing business-altering decisions in 2012. On the plate today , we have the pharmaceutical giant and Dow component, Merck (NYSE: MRK  ) . 

But before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot of how 2011 treated Merck shareholders:

Year-to-Date Stock Return

9.6%

Price-to-Earnings (ttm)

28.1

Price-to-Sales (ttm)

2.5

Cash/Debt

$15.6 billion / $18.2 billion

Projected 5-Year Growth Rate

4.6%

Forward P/E

10.0

Source: Yahoo! Finance, ttm = trailing 12 months

For the most part, shareholders of Merck had a lot to be thankful for last year. Their stock outperformed the Dow Jones Industrial Average and operating cash flow is at a decade-long high. But these results are in the past. Let’s look ahead and see what could be driving Merck's stock price in 2012.

What to expect
The biggest question mark facing the pharmaceutical behemoth in 2012 is just how badly it will be affected by losing patent-exclusivity rights on its biggest drug, Singulair. Used as an oral treatment for asthma and allergies, Singulair accounted for nearly $5 billion in worldwide sales in 2010 and has already topped $4 billion in sales through the first three quarters of fiscal 2011. Responsible for 11% of Merck's total revenue in in 2010, it's possible that Merck could be looking at its first year-over-year sales decline since 2008.

If the recent loss of patent exclusivity on blood pressure drug Cozaar/Hyzaar is any indication, then Singulair sales could be in for a rough ride through 2013. In 2010, Cozaar/Hyzaar sales plummeted 41% and they’re down another 27% through three-quarters of 2011.

What drugs look poised to make up the difference? I'd say the company's line of diabetes drugs could step up to the plate. Januvia, Merck's blockbuster diabetes drug, has shown 38% growth of the year-ago period through the third quarter while Janumet has grown by an even more impressive 47%. These two drugs have accounted for 9% of Merck’s sales in fiscal 2011 and I'd expect that number to expand in 2012.

Acquisitions are always on the horizon as well. With a healthy cash position and record operating cash flow last year, Merck CEO Kenneth Frazier hinted just last week that the company is still looking to acquire late-stage drugs to add into its pipeline. Whether that's a positive or a jab at the ineffectiveness of its current pipeline remains to be seen.

Foolish roundup
Merck may not be super exciting, but it is favorably positioned relative to its Big Pharma competitors and boasts a solid 4.4% dividend yield. Pfizer's (NYSE: PFE  ) still has to overcome the recent loss of patent exclusivity on Lipitor and Xalatan and its slated to lose Geodon and Detrol this year as well. AstraZeneca (NYSE: AZN  ) is facing similar issues, with Symbicort scheduled to lose its exclusivity in 2012, but the company’s strong balance sheet could help it replenish its pipeline. GlaxoSmithKline (NYSE: GSK  ) could be in the worst shape of all, with Seretide and Avandia coming off patent this year — especially if biosimilar competition for Advair shows up.

I like how Merck stacks up against that trio, which is why I crowned it in August as one of six companies you could buy right now and I'm sticking to that assertion in 2012 in my CAPS account.

What are your thoughts on Merck heading into 2012? Share them in the comments section below and consider adding Merck to your free and personalized watchlist to keep track of the latest news with the company.

Also, if you’re looking for one more great idea heading into the new year, consider downloading a copy of our latest special report, "The Motley Fool’s Top Stock for 2012," in which our top-notch team of analysts highlight a company dubbed the "Costco of Latin America." The best part is that the report is completely free!

Fool contributor Sean Williams has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that believes there's no expiration on transparency.


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