Net income was $1.51 billion, or $0.49 in earnings per share; on an adjusted basis the figures were $2.98 billion in income and $0.97 EPS.  We had estimates of $0.95 EPS for the adjusted figure.  Revenue was up 1.6% to $12.29 billion and that was a bit shy of the $12.52 billion expected.  Merck’s total pharmaceutical sales were up about 3% to $10.76 billion

As far as guidance, Merck gave a projected 2012 earnings range of $3.75 to $3.85 in earnings per share and the consensus estimate is $3.83 per share.

The only real driving force today is the higher dividend, which jumped to $0.42 at the last payment.  That was the first such dividend hike since all the way back to 2004.

Maybe investors are pleased that generics are not killing brand drugs as much as feared.  The stock is actually up 1.4% at $39.18 in the pre-market and investors need to remember that the 52-week high is $39.43 right now.

JON C. OGG

As far as 2012 is concerned, Pfizer is targeting $2.20 to $2.30 earnings per share, which is slightly under prior targets and is currently compared to a Thomson Reuters consensus of $2.28 EPS.  The new 2012 guidance for sales is $60.5 billion to $62.5 billion versus a prior range of $62.7 billion to $64.7 billion.  The Thomson Reuters consensus is $2.30 EPS for this coming year.

The company noted:

• Its Primary Care unit revenues were favorably impacted primarily by foreign exchange;  growth from Celebrex, Lyrica, Pristiq and Spiriva, among others; and the addition of $93 million, or 2%, from legacy King products…
• Negatively impacted by the loss of exclusivity of Lipitor and Caduet in Nov-2011 and Aricept in Nov-2010; Together, those losses reduced Primary Care unit revenues by $775 million, or 13%, versus fourth-quarter 2010.
• Emerging Markets unit revenues were negatively impacted by foreign exchange and increased pricing pressures.
• Animal Health unit revenues rose 13% due to the addition of legacy King products as well as strong performance in the global livestock portfolio.

Pfizer has been trading up and down in the early hours of the pre-market and shares are up 0.3% at $21.65 on last look against a 52-week range of $16.63 to $22.17.

JON C. OGG

It makes you wonder how far behind a potential blockage of the Medco Health Solutions Inc. (NYSE: MHS) and Express Scripts Inc. (NASDAQ: ESRX) merger is.  Express Scripts is the would-be acquirer and the deal has been heavily criticized by many watch groups and we have noted how wide the merger-arbitrage spread is.  The blocked AT&T Inc. (NYSE: T) acquisition of T-Mobile started (or added to) much of the blocking concerns from investors.

The FTC issued a complaint to block the hostile acquisition of the rival long-term care pharmacy provider alleging that this combination of the two largest U.S. long-term care pharmacies would harm competition and also because the merger would allow Omnicare to raise the price of drugs for Medicare Part D consumers and others.  As noted (full release):

“If Omnicare is allowed to purchase its biggest and only national competitor, it will diminish competition and raise health care costs – leaving taxpayers and patients to foot the bill,” said Richard Feinstein, Director of the FTC’s Bureau of Competition. “The Bureau will continue to be vigilant in our efforts to prevent these sorts of anticompetitive deals.”

JON C. OGG

The Micromet deal is valued at $11.00 per share.  This was a 33% premium to the prior close and shares closed up 32% at $10.94.  The prior 52-week range was $4.13 to $8.90.  Unfortunately for M&A arbitrage players, this deal offers no real upside in an arb-spread and it seems unlikely that a higher bid is coming based upon its share price never having gone above $11.00 today.  That buyout is on the heels of a deal signed last year where Amgen agreed to an upfront payment for a discovery and development deal.  Amgen is indicated around $69 after turning in 3% sales growth after the close.

Avila Therapeutics is a developer of covalent drugs in cancer and this $925 million buyout from Celgene is a cash and stock deal with $350 million of the total coming in cash.  This company has AVL-292 as a inhibitor now in Phase I studies.  Celgene shares are around $72.65 and are also with striking distance of a 52-week high ($75.11).

It is interesting that with two deals already having been announced in the last 24-hours that the iShares Nasdaq Biotechnology (NASDAQ: IBB) ETF was down by almost 1% at $114.71 on a day when there were two deals on the heels of another large premium acquisition this week.

JON C. OGG

Because we have covered this merger and because we cover financial news, we receive many emails on this topic.  While we have received little to no great emails on how the merger will benefit the public, we have received ample emails from industry watch groups and public outreach groups which have stated their opposition to this merger.  Take a look at the headline summaries from MergerInvesting.com and you can see just how much opposition there is compared to support.

The merger arbitrage spread in this deal today is right at 13% when other normal mergers carry traditional merger arbitrage spreads of 1% to 4%.  Part of the arbitrage is because Express Scripts has offered to buy Medco in cash and stock, but there is a serious degree of approval uncertainty priced in here. 

With a deal that is not expected to receive approvals until the first or second quarter (if then), it sure seems as though the merger-arb community is not overly convinced that this merger will go through.  If the deal does go through, there could be many divestitures or asset sales which are required.

One institutional broker who covers some merger-arbitrage and index-arbitrage accounts gave a bit of a funny quote here when we asked for feedback.  His answer, from one of his clients, about whether or not the merger would be allowed was simply “Give me one second, there is no easy answer.”

The Department of Justice noted as far back as September of 2011 that this merger was going to face an extended review period.  Medco holders will own about 41% of the combined interest after this merger, if it is approved.

The company with the highest degree of flux before and after this deal could be Catalyst Health Solutions, Inc (NASDAQ: CHSI) with a market cap of under $3 billion.  Much of the public (and investing public) is not even aware of it under the name Catalyst Rx.

There is one interesting merger ETF to consider in arbitrage.  It is the IQ Merger Arbitrage ETF (NYSE: MNA).  Unfortunately, it is very thin trading volume.

Keep in mind that there are no assurances that the DOJ, the FTC, nor other agencies will actually try to block this acquisition.  There are no assurances of approval either.  A chart of the spreads from Bloomberg has been shown below.

JON C. OGG

The companies we’ve included are Pfizer Inc. (NYSE: PFE), Merck & Co Inc. (NYSE: MRK), Bristol-Myers Squibb Co. (NYSE: BMY), Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA), Amgen Inc. (NASDAQ: AMGN), and GlaxoSmithKline plc (NYSE: GSK).

Pfizer Inc. (NYSE: PFE) trades around $22.00 and the 52-week range is $16.63 to $22.00. With a $168 billion market cap, this one trades at about 15-times expected earnings and 9.5-times expected 2012 earnings. Thomson Reuters has a mean price target objective of $23.76, indicating implied upside of 8%.

Merck & Co Inc. (NYSE: MRK) trades near $38 and the 52-week range is $29.47-$39.00. With a $117 billion market cap, Merck trades at about 28-times expected earnings and 10-times expected 2012 earnings. The mean price target objective is $39.85, indicating a potential upside of 4.9%.

Bristol-Myers Squibb Co. (NYSE: BMY) trades near $34 and the 52-week range is $24.97-$35.44. With a market cap of about $58 billion, this one trades at about 17-times expected earnings and 17-times forward earnings. The mean price target objective is $32.91, indicating that shares are fully valued and upside potential has gone missing.

Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA) trades at about $44 and the 52-week range is $35.00-$57.08. With a market cap of $39 billion, Teva trades at about 13-times earnings and 8-times forward earnings. The mean price target objective is $53.15, indicating an implied upside of nearly 21%. The company has also seen gains since disclosing a new CEO.

Amgen Inc. (NASDAQ: AMGN) trades at about $66 and the 52-week range is $47.66-$65.70. With a market cap of $58 billion, this one trades at about 16-times earnings and 11-times forward earnings. The mean price target objective is $65.45, and, like Bristol-Myers, Amgen is fully valued and there is no implied gain at the current price.

GlaxoSmithKline plc (NYSE: GSK) trades at about $44 and the 52-week range is $36.28-$46.50. With a market cap of $221 billion, this one trades at about 44-times earnings and 13-times forward earnings. The mean price target objective is $49.58, indicating an implied upside of 12.7%.

Only Teva and GlaxoSmithKline have double-digit upside potential percentage gains. Of the two, Teva’s upside potential is greater, largely because it just lost a patent dispute (which pushed the share price down) and gained a new CEO, an industry veteran from Bristol-Myers (which pushed the share price back up). The downside on the company is that it is trading down about -18% over the past 12 months, the only one of these six companies to show a loss for the period.

Glaxo is preparing a regulatory filing in the US with a replacement for the company’s Adair asthma drug which loses patent protection next year. Late-stage trials have been promising, and the stock could get a nice boost if the FDA grants approval. Glaxo also received three new drug approvals from the FDA in 2011,

Paul Ausick

Life Tech noted that the Ion Proton™ Sequencer is designed to decode a human genome in one day for $1,000.00 and it is being exhibited now through this Friday.

As a reminder, Life Technologies was created by the combination of Invitrogen Corporation and Applied Biosystems, Inc.  The company’s website for this product description notes:

Powered by Ion Torrent™ semiconductor chip technology, the Ion Proton™ Sequencer is the first benchtop next-generation sequencer to offer fast, affordable human genome and human exome sequencing. Powered by the next generation of semiconductor sequencing technology and offering a similar single-day workflow to the Ion PGM™ Sequencer, the Ion Proton™ Sequencer promises to change the way scientists look at genomics.

Now for the big question… Why do they have to tack on all the extra years on the backside of life?  This news does not bring about the cure for cancer, but it is one step closer to personalized medicine and treating each patient individually rather than just based upon a broader protocol.

JON C. OGG

Amgen’s current dividend is 2.3%, which is rather high for a biotech stock. It also should be noted that the $64.00 price is above the stock’s old former rangebound levels of $50.00 to $60.00. Pfizer currently yields 3.7%, but that is about to rise to closer to 4%, and Merck yields about 4.50% after its dividend hike.

The question for 2012 is simple: Which biotech stocks will be among the second waves to initiate paying a dividend? By our count, these are the biotech outfits that might entertain following Amgen’s dividend path: Biogen Idec Inc. (NASDAQ: BIIB), Celgene Corporation (NASDAQ: CELG), Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN), Cubist Pharmaceuticals Inc. (NASDAQ: CBST), PDL BioPharma, Inc. (NASDAQ: PDLI), Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN), and Vertex Pharmaceuticals Inc. (NASDAQ: VRTX).

We would have evaluated the chances of Gilead Sciences Inc. (NASDAQ: GILD) initiating a dividend, but this $11 billion proposed buyout of Pharmasset, Inc. (NASDAQ: VRUS) is likely to keep Gilead tied up for quite some time.

Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) is close to all-time highs above $70 and is now worth a whopping $13.2 billion. Estimates are $1.30 EPS for 2011 and $1.66 EPS for 2012, making this one have a much higher valuation while it is still rapidly growing. Some investors may expect that it could start paying out a dividend, but it is too soon by our take today, even with a $445 million balance of cash and liquidity with almost no long-term debt.

Biogen Idec Inc. (NASDAQ: BIIB) has estimates of $5.89 EPS in 2011 and $6.31 EPS in 2012. The company had only about $3 billion in cash and investments at the end of September versus a current market cap of about $27 billion. 2011 was the year that investors decided to give up on worrying about the very rare PML cases in TYSABRI, and that allowed Biogen shares to rise almost 60% in 2011. If Biogen decides to get off the no-dividend bandwagon soon, we would only look for an initial payout of $1.00 on an annualized basis for a while.

Celgene Corporation (NASDAQ: CELG) may still be too new of an earnings story to start expecting a dividend. The earnings estimates are $3.80 EPS in 2011 and $4.51 EPS in 2012. With almost $2.6 billion in cash and investments, its market cap is larger than Biogen’s at $30 billion.

Cubist Pharmaceuticals Inc. (NASDAQ: CBST) managed an incredible breakout year as its drugs treat hospital-borne infections, with nearly a 100% share price gain in 2011. The market cap is now about $2.45 billion, and it had nearly $1 billion in cash and liquidity before a recent $221 million acquisition versus about $450 million in long-term debt. Cubist probably could start to pay a dividend if it wants to, but the company has decided to be an acquirer rather than hoarding cash or going defensive. Chances are that it may need to hold on to its cash while it absorbs Adolor and anything else it is considering.

PDL BioPharma, Inc. (NASDAQ: PDLI) has been a dividend payer from its patent royalties, but some payments have been one-time payments until its most recent $0.15 payout for each of the past four quarters. The company also recently forecast a 5% revenue drop and investors are already braced for lower royalty payments. The company recently lost its CFO after only about three years on the job and we really do not like to see CFOs leave biohealth companies. Estimates are $1.18 EPS for 2011 and $1.38 EPS in 2012, but it has about $225 million in cash and liquidity versus a market cap of $867 million. The company may just stick with its current payout structure’s high yield as is until (or if) it can secure another large patent license.

Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN) is worth some $5.1 billion or so in market capitalization and is fresh off the news that it settled with Genentech over U.S. opthalmic sales of the eye drug EYLEA with a patent case still brewing, but with Regeneron agreeing to pay out $60 million if sales reach $400 million and it will pay royalties out as well. With cash and liquidity of near $500 million at then end of September we think it is a bit premature to ask this one to start shelling out its cash to shareholders yet, considering it is still expected to have a wide loss in 2012.

Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) is so far off of highs now that it seems unlikely investors are expecting much on the dividend front. The company is back on the path of growth after some changes and stumbles, and now its market cap is almost $7 billion. With this one it just feels too soon to expect any dividends in reality. We could analyze all we want, but its new revenue growth is challenged by a cash balance of just over $800 million versus $400 million in long-term debt. What is interesting is that Vertex’s $0.30 EPS expected for 2011 is expected to be $4.55 EPS in 2012. It had a loss of $3.77 EPS in 2010. Maybe after another year or so we can evaluate its future dividend strategy.

After reviewing the great biotech sector’s larger components, it sure does not sound like many other than Biogen Idec Inc. (NASDAQ: BIIB) are really new prime-time dividend candidates for 2012, other than the high payout of PDL BioPharma, Inc. (NASDAQ: PDLI).

JON C. OGG

Our screen process did not limit the scope to positive earnings, but we did use a minimum market valuation of $1 billion to avoid the smaller and even more speculative names in an already speculative sector.  The companies are all expected to rise 20% more and include the following stocks tied to biotech and the biohealth sectors: ARIAD Pharmaceuticals, Inc. (NASDAQ: ARIA); Dendreon Corporation (NASDAQ: DNDN); Gilead Sciences, Inc. (NASDAQ: GILD); Human Genome Sciences, Inc. (NASDAQ: HGSI); Illumina, Inc. (NASDAQ: ILMN); Incyte Corporation (NASDAQ: INCY); Jazz Pharmaceuticals, Inc. (NASDAQ: JAZZ); Life Technologies Corporation (NASDAQ: LIFE); and Theravance, Inc. (NASDAQ: THRX).

Unfortunately, some of these are biotech implosions where companies have run into problems. Others are pre-revenue and could be tomorrow’s drug giants in cancer and other indicated treatments.  Some may even be acquired.  We have included the current share price and recent price history, as well as based the implied upside upon the consensus price target objective from Thomson Reuters.  Recent fundamental data and color has been added on each if applicable.

There are also the ETF products via the iShares Nasdaq Biotechnology (NASDAQ: IBB) and the SPDR S&P Biotech (NYSE: XBI).  The iShares variation trades at $104.30 and its 52-week range is $83.96 to $110.02.  Gilead (and Pharmasset) would be the largest implied holding of the iShares ETF with almost 16% weighting combined.  The SPDR variation trades at $66.48 and its 52-week range is $47.01 to $75.17. The SPDR also only contains ARIAD (and Pharmasset) of the biotechs with the most implied upside below. 

ARIAD Pharmaceuticals, Inc. (NASDAQ: ARIA) currently trades around $12.50, has a market cap of about $1.65 billion, and the Thomson Reuters consensus price target of $15.91 leaves an implied upside of about 27%.  Its 52-week trading range is $5.04 to $13.50 and 2011 has been a year where the company’s share price has come close to challenging the prior highs from 1999 to 2000. It is still pre-revenue for the most part and losses are expected to continue at least through 2012.  ARIAD is focused around oncology and its shares are up from a $10.42 per share offering of almost 25 million shares that raised nearly $250 million for the company.  This was one of the good secondary offerings that allows the company to raise development and commercialization funds without becoming dependent solely upon a single partner.

Dendreon Corporation (NASDAQ: DNDN) is another implosion story due to lower adoption rates of PROVENGE for prostate cancer, although some are hoping and expecting that the new reimbursement rates (and physician clarity) may help the company regain some of its lost footing.  At $7.58, the market cap is barely $1.1 billion and the $11.05 Thomson Reuters price target leaves an implied upside of over 45%.  To show just how bad this one has gone, the 52-week trading range is $6.46 to $43.96.

Also Read: Small Caps With 50% Upside in 2012

Gilead Sciences, Inc. (NASDAQ: GILD) recently traded at $39.88 and it is one of the biotech giants with a market cap of about $30 billion. THe 52-week trading range is $34.45 to $43.49 and the Thomson Reuters consensus price target of $48.86 leaves an implied upside of 22.5%. The last time Gilead was above $50.00 was in early 2009.  Gilead is somewhat surprising to see on the list considering its controversial $11 billion acquisition of Pharmasset when that target acquisition is not expected to generate sales for at least another year.  The company has new HIV medication that is helping to boost the value but the company is diversifying to include more target markets.

For all practical purposes, ARIAD is in the pre-revenue stage of operations.  As far as the full details of the funding, the capital raise will allow ARIAD to “continue treatment and follow-up of patients in the pivotal PACE trial of its investigational pan BCR-ABL inhibitor, ponatinib, in patients with chronic myeloid leukemia (CML) or Philadelphia-positive acute lymphoblastic leukemia (Ph+ALL) and, subject to further patient follow-up and data analysis in this trial, to file for marketing approval of ponatinib in the United States and Europe in the middle of 2012.”

An additional note on the funding is tha the money will allow ARIAD to continue its efforts for the commercialization of ponatinib in the United States and Europe.  The new funds should also allow for additional clinical trials of ponatinib, including a Phase 3 clinical trial in newly diagnosed CML patients, clinical trials of ponatinib in Japan, completion of the Phase I/II trial of its investigational dual inhibitor of anaplastic lymphoma kinase and epidermal growth factor receptor called AP26113.  Another potentiality is the funding (dependent upon the outcome of the trials) of a pivotal trial of AP26113 in patients with non-small cell lung cancer.

J.P. Morgan Securities, Cowen & Co., and Jefferies are the joint book-running managers; co-managers are listed as BMO Capital Markets, Leerink Swann, Oppenheimer & Co., and also Rodman & Renshaw.  These underwriters will be granted a 30-day option to purchase up to an additional 3.225 million shares as an overallotment option. 

ARIAD shares are actually up 3.45% at $10.78 and the 52-week trading range is $4.45 to $13.50.  Usually shares fall on secondary offerings hurt stocks, but this one had already been discounted.  This $10.42 price is down from as high as $11.75 just as recently as last week.  Before the effects of the offering, ARIAD’s market capitalization is $1.4 billion.

If ARIAD shares remain higher like this, it is almost certain that the overallotment will be exercised by the underwriters.  If so, then the gross proceeds before underwriting fees will be more than $257 million in new capital raised.  As of September 30, 2011, the company had a mere $86.3 million in cash on the books and its total liabilities were $73.9 million.

JON C. OGG