Merck's Chinese Interest

China continues to attract the interest of big pharmaceutical companies that are looking towards emerging markets to drive growth. Merck & Co., Inc. (MRK - Analyst Report) recently announced its intention to invest $1.5 billion on research and development efforts in China over the next five years.

A part of these funds will be used by Merck to set up an Asia Research & Development (R&D) headquarters in Beijing for the discovery and development of drugs.

Merck expects to complete the first phase of construction by 2014. The completion of the first phase of construction will provide employment to about 600 people who will work on drug discovery, translational research, clinical development, regulatory affairs and external scientific research programs.

China has been a focus area for Merck. On its third quarter earnings call, the company had reported 50% year-over-year growth in China. Merck said that it expects sales growth in China to exceed 30% in 2011.

We note that Merck is not the only company to express an interest in expanding in China. Earlier this year, Pfizer (PFE - Analyst Report) had entered into an agreement with Chinese company Zhejiang Hisun Pharmaceuticals for the establishment of a joint venture.

Other deals include Merck KGaA’s (MKGAF) acquisition of Beijing Skywing Technology Co., Ltd. and Novartis’ (NVS - Snapshot Report) acquisition of a majority stake in Chinese vaccines company Zhejiang Tianyuan Bio-Pharmaceutical Co., Ltd.

Neutral on Merck

We currently have a Neutral recommendation on Merck, which carries a Zacks #3 Rank (short-term Hold rating). Merck is currently facing issues such as patent expirations of key drugs, EU pricing pressure, US health care reform, and pipeline setbacks. We believe the company will continue resorting to cost-cutting initiatives to drive the bottom-line. Meanwhile, some of the company's recent launches should start contributing significantly to the top line in the forthcoming quarters.

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