Merck's merger with Schering-Plough at the beginning of 2010 should help the company in multiple ways, says Croft, including adding significant assets to the pipeline, strengthening its international presence, enabling cost savings of roughly $3.5 billion annually by 2012 and, most importantly, diluting the effect of the patent cliff over the next few years to which the company was previously much more exposed. The pipeline seems under-appreciated in Croft's view, with a significant number of Phase III assets that boast large addressable market potential. The company has about 20 Phase III projects, 45% of which came from Schering-Plough.
As for valuation, Merck currently trades at 11 times 2010 earnings and less than 10 times forward earnings, with a 4.1% dividend yield. Croft expects the company to grow its earnings in the mid-to-high single digits with a lot of help from its emerging-market operations.
"Merck has the fifth-largest footprint in emerging markets of all pharmaceutical players, but still only 3% market share. And 20% of sales come from these markets currently, and the company expects this to grow to 25% by 2013," says Croft.