I've told the story several times. But at the risk of being repetitive, I'll tell it again...
Back in the 1999 to 2000, I was listening to an investor conference call in which Merck's (NYSE:MRK) chief executive, Raymond Gilmartin was speaking.
After running through a litany of reasons why he thought that Merck was well-positioned to grow in the future, an analyst asked whether the company was planning to merge, combine or otherwise acquire another large drug maker.
The question was particularly relevant as a number of high-profile pharmaceutical firms had recently combined forces or were planning large-scale combinations.
Gilmartin nixed the idea right off the bat, essentially saying (and this is my interpretation of his response) that Merck didn't need to combine forces because the company was No. 1.
Perhaps not surprisingly, Gilmartin ended up eating a big slice of humble pie as Merck's drug pipeline languished, and its earnings paled in comparison to those at some of the other big pharmas.
What i found really disturbing about the whole event was that by so readily dismissing the idea of combining forces with another big player, Gilmartin essentially took a potential stock-driving (or supporting) catalyst right off the table. Soon after those comments were made Merck's stock was relegated to the doghouse - between 2001 and 2005 the company saw its stock price almost cut in half.
Merck Hasn't Learned
Earlier this week, I was perusing the news and I came across an article in which Merck's president for Europe, the Middle East, Africa and Canada, Stefan Oschmann, said that he thought that the U.S. drug maker might be interested in bulking up its pipeline by purchasing biotech firms - particularly those with late-stage drugs in the hopper. This seemed good.
However, in conjunction with these comments he also indicated that a large-scale mega merger probably wasn't in the cards. Specifically Oschmann said, "Mega mergers have in most cases not delivered what they had promised ... We don't necessarily think that a mega merger is the right thing."
I just don't get it. The company has the obligation to tell the truth, particularly to its shareholders. However, to taking that potential catalyst off the table again is just a questionable move.
Merck's stock has made a nice comeback over the last year, and is now pretty valuable currency. Plus Merck's reputation seems to be on the mend. You'd think that it would want to keep the momentum going by aggressively scooping up smaller companies or keeping its options open and at least kicking the tires of possible pharma targets?
The Bottom Line
As I mentioned in my last piece on MRK, I think the shares are a 'buy', and I still stick by that. (To read the entire article, see Two Big Names With Big Upside (PG, MRK) .)
However, I am really put off by Oschmann's comments. Going forward, I hope that management learns to keep its options open, and to remember that a few simple words can have a big impact on the share price.
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