The New Jersey-based pharmaceutical firm is seeking big biotechs that can contribute both late-stage drugs and revenue to its financial statements; speculative start-ups need not apply. While CEO Richard Clark didn't specify the size of the companies under consideration, he noted that Merck has $15 billion in cash and $5 billion in annual free cash flows to fund any acquisition.
Last month, Merck announced that it would focus its business on nine core areas, including Alzheimer's, atherosclerosis, and cancer. In 2004, the company partnered with Celera Genomics
Zocor has been Merck's big-money atherosclerosis drug, bringing in some $4.5 billion annually. But it will lose patent protection later this year, allowing generics to move in and slash Zocor revenues by an estimated 50%. Merck has a partnership with Schering-Plough
Using such tweaked drugs has allowed some companies to extend their patents. GlaxoSmithKline
Either approach could help Merck maintain its edge, or regain it; the company still expects earnings to grow at double-digit rates through 2010. While Merck doesn't expect that growth to begin until 2007, those lofty goals have still raised some eyebrows, given the dearth of drugs in the company's pipeline. Acquisitions and partnerships could be the engine to drive that growth, while also preserving Merck's 4.6% dividend.
Even with its cash hoard, Merck faces a tough battle. It has thousands of lawsuits over Vioxx before it, and the company insists it will fight each one. The case under way in Texas says a patient died seven weeks after starting to take the drug, but three weeks after ceasing to take it. Merck contends that the risk for a heart attack does not escalate until a patient has been on Vioxx for 18 months. While no company should have to cave before the legal feeding frenzy of trial lawyers looking to capitalize on the drug's alleged problems, investors also can't overlook the litigation costs that will continue to eat into Merck's cash reserves and free cash flow.
A company can't buy everything, but then, it doesn't have to. A few key acquisitions that contribute late-stage drugs and significant revenue might be all Merck needs to keep its pipeline open.
Fool contributor Rich Duprey owns shares in Merck and Eisai. He does not have a financial interest in any of the other companies mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.