Investors these days often grouse about long-term holdings in big pharma, such as Pfizer
Germany's Merck KGaA, whose motto is "The Best of Both Worlds," has managed to post impressive longer-term returns while larger drug and chemical companies flounder.
Over the past five years, Merck KGaA has outperformed the Amex Pharmaceutical Index -- made up of large U.S. and European drugmakers -- as well as Dow Chemical
Of course, Merck KGaA hasn't been immune from the recent market dive; it's off 25% over the past 12 months. But it's held up better than many big chemical or big pharma companies.
Germany's Merck is a vestige of Old Europe. Founded in 1668, it remains one of those rare corporations to combine drugs and chemicals under one roof. Despite the similar name, the company is independent of the U.S. drugmaker Merck
Growing drug dependence
Despite Merck KGaA's insistence on a two-pronged strategy, investors are probably more interested in the prospects for its drugs. In the company's just-announced fourth-quarter results, a weak economy depressed some of its specialty chemical offerings -- components for consumer electronic LCDs, for instance. Merck KGaA declined to provide guidance for 2009, given the current economic and financial climate.
Still, the company produced a 7% revenue gain in 2008, to 7.56 billion euros. The pharmaceutical division accounted for 72% of corporate sales and 54% of operating profit. The chemical division's contribution to operating profit dropped to 46%, from 60% in 2007.
The growing role of pharmaceuticals owes partly to Merck's January 2007 purchase of the Swiss biotechnology company Serono. The acquisition brought along one big drug, Rebif for multiple sclerosis, and big hopes for several experimental compounds. Rebif's sales rose 9% in 2008, to 1.3 billion euros.
The other star performer for the company is Erbitux, a treatment for colon, head, and neck cancer. It was developed by ImClone Systems, which is now part of Eli Lilly
Investors are likely expecting Rebif and Erbitux to sustain their momentum, accompanied by new products born from the Serono acquisition.
In April, Merck KGaA is scheduled to present at a medical conference details of a late-stage clinical trial for cladribine tablets, which could be the first pill to treat relapsing-remitting multiple sclerosis. In January, the company reported preliminary results from a two-year study, in which patients taking the drug showed a significant reduction in the rate of relapses compared to patients taking a placebo. Merck KGaA plans to seek regulatory approval for the drug in Europe and the U.S. by mid-year.
Assuming cladribine is as safe and effective as injectable MS drugs, Merck KGaA would have a strong marketing edge. Novartis
Another Serono contribution is an experimental treatment for Parkinson's disease, being developed under license with the Italian company Newron Pharmaceuticals. In early February, Merck said the results of a late-state clinical trial achieved its goal as a complementary therapy for patients taking a standard treatment.
However, one source of gloom is the psoriasis drug Raptiva, licensed from Genentech
Merck is cooperating with health authorities in the European Union and in other countries where Merck sells the drug. Losing sales from Raptiva won't be a major hit -- it contributed just 93 million euros to sales last year -- but it is disconcerting. Merck took a write-off on the drug's technology assets.
Merck KGaA's stock is traded on the Frankfurt Exchange. U.S. investors can contact a broker who offers cross-border transaction services for the company, or a broker approved by the Frankfurt Stock Exchange, to trade its shares.
The company isn't seeking to establish American Depositary shares. "The cost versus the benefit ... is not justified at this time," a spokesman told me. However, there are a number of U.S. mutual funds that invest in Merck KGaA, including several in the American Funds, MFS, AIM, and Templeton families.
However, investors shouldn't expect to exert much influence if they buy stock here. The public float of some 64.6 million shares represents about 30% of the company's voting power. The rest is controlled by entities affiliated with the Merck family.
Keeping chemicals and drugs under the supervision of a single corporate parent was once quite common. Dow Chemical and Monsanto were once in the pharmaceutical business, for instance. And although Germany's Bayer still incorporates pharmaceuticals and chemistry, the strategy lost popularity as companies decided that the sum of the parts could be greater than the whole -- at least to investors.
Merck KGaA had a chance to become a pure-play drug company after its Serono acquisition. Instead, it sold its large generic-drug division to Mylan, keeping the dual-business philosophy.
However, if the economy remains poor, the cyclical chemicals business remains in a down cycle, and the drug business takes off, Merck KGaA may face another strategic decision. If it chooses to sell or spin off its chemical business, Old Europe could give way to a whole new Merck.
A double-headed dose of further Foolishness:
Fool contributor Robert Steyer doesn't own shares of any companies mentioned in this article. Pfizer is an Inside Value recommendation and a former Income Investor selection. The Fool has a disclosure policy.