You also own Merck, which has come a long way since its legal troubles involving the recall of the painkiller Vioxx. But does it have a lot of growth ahead of it?
They had ongoing problems with Vioxx [recalled because of heart-related risks]. They had definite patent issues with names like Zocor and Fosamat, so there was a pipeline issue. From 2003 to 2006, operating margins declined from 38% to 22%. Having said all that, from a legal standpoint they've demonstrated they can defend themselves on Vioxx. Margins have started to come back. They put up a solid quarter recently, posting 75 cents a share in earnings, versus an estimated 69 cents. The quarter before that they earned 82 cents versus expectations of 72 cents, and the quarter before that was flat with expectations.
That doesn't sound like huge growth.
These aren't going to be the robust type of revisions to the upside that we talked about with RIMM or Amazon, but they are solid. Operating margins bottomed around 22%-23%, and they could, by the end of the decade, trend back up into the 31% area. That's down from 38%, but still, if they generate 30% operating margins on a $25 billion revenue base, the multiple is going to expand. They could probably command a 20 multiple if not higher. They've got a new vaccine against sexually transmitted disease in Gardasil and a drug to help control Type 2 diabetes in Januvia. It's a fairly strong pipeline at the same time operating margins are expanding. This is one of those nice quiet names with great international exposure at a time when the dollar is weak.
Do you own any biotechs?
There is Gilead Sciences [GILD], a big biotech company that has the best HIV franchise out there and great operating leverage. This is a name that generates 50% operating margins, and we've seen estimates go from $1.60 to $1.85 for '08. The Street is really underestimating 2008, we think, and we expect them to earn $2.26 a share. It's a company growing at 20%-25% that generates 50% operating margins, and so it could certainly sell at a 25 multiple.
