What Does Merck’s Recent $10 Billion Share Buyback Program Indicate?

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Merck (NYSE:MRK) recently announced additional $10 billion share buyback program, taking the total authorized share repurchase amount to $11.7 billion. [1] What does this mean for investors? This practice is routinely followed by companies to return capital to shareholders, apart from distributing dividends. Share buyback programs have gained popularity over the last two decades as they signal management’s confidence in the company’s future growth. Could it be the same in case of Merck? Considering the events in the last couple of years, and our expectation for 2015, we believe the share buyback program is aimed at supporting the stock price appreciation as topline and overall profits continue to decline. Merck substantially increased its share repurchase expenditure in 2013 when its revenues fell by the highest percentage (~7%) seen in recent years. We expect the company’s sales to further decline in 2015, following which a revival is likely.

We expect Merck to streamline its research and development expenses and execute in key growth markets. The company’s focus has shifted to immuno-oncology and Hepatitis C segments. Over the next few years, we expect revenues from new launches to more than compensate for the decline in legacy drug sales.

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Substantial increase in share repurchase authorization could also signal that Merck’s management expects to get back on growth track soon. We previously wrote about plausible events that can push the stock price higher (read: These Two Catalysts Can Move Merck’s Stock Up) More specifically we believe that a competitive HCV (i.e., hepatitis C virus) drug launch and potential new approvals for immuno-oncology drug Keytruda can catalyze Merck’s stock price movement. In fact, the company recently concluded a study for Keytruda citing clinical success. Management’s confidence in potential expansion of drugs to new categories may be increasing.

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Notes:
  1. Merck increases share buyback program by $10 billion, Reuters, Mar 24 2015 []