CS First Boston Cuts Merck to Hold from Buy

Analyst Ken Kulju sees gross margin erosion stemming from the loss of patent protection on Prilosec and Prinivil, along with other factors

Shares of Merck & Co. (MRK ) fell after CS First Boston downgraded the drug company to hold from buy. During intraday trading on Tuesday, Merck forecasted 2002 EPS growth to be at same level as in 2001.

Analyst Ken Kulju notes Merck significantly lowered EPS guidance (the second time in six months), largely tied to continuing signs of gross margin erosion in its core pharmaceuticals business. Kulju notes the loss of patent protection on Prilosec, Prinivil, and adverse Merck-Medco revenue mix effects are expected to drive gross margin down an additional 2% in 2002 to about 37%.

He adds this adjustment largely is responsible for the sharp $0.39 drop in his 2002 EPS forecast to $3.07. The analyst also cut his $3.81 2003 EPS estimate to $3.43, and his $80 stock price target to $67.

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