• Merck, a leading global pharmaceutical company that produces a range of medicines, vaccines, and animal healthcare products, is now a $258 billion (by market cap) healthcare behemoth.
• The US is the company’s largest market, accounting for approximately 47% of worldwide sales.
• Merck has started showing signs of sustained growth starting from right about FY 2020, as Keytruda is growing way faster than 5% annually.
• Merck moved its revenue from $42.2 billion in FY 2014 to $60.1 billion in FY 2023, a compound annual growth rate of 4%.

Merck & Co., Inc. (NYSE:MRK) is a leading global pharmaceutical company that produces a range of medicines, vaccines, and animal healthcare products. Founded in 1891, Merck is now a $258 billion (by market cap) healthcare behemoth that employs more than 70,000 people.

The company operates across two reportable segments: Pharmaceutical, 89% of FY 2023 sales; and Animal Health, 9%. Insignificant sales occur as Other Revenue. Their core areas of focus are: diabetes, infectious diseases, oncology, vaccines, and animal health.

The US is the company’s largest market, accounting for approximately 47% of worldwide sales. Some of the company’s key drugs include Keytruda, Januvia, Gardasil, and ProQuad.

Keytruda, their triumphant cancer drug, is the company’s most important product and by far the top-selling drug across the portfolio. This single drug comprised roughly 42% of the company’s worldwide sales for FY 2023. That’s up from nearly 30% of company revenues for FY 2020, despite Merck’s overall revenue being up significantly since then. Keytruda has become a larger piece of a growing pie and now dominates the firm’s sales.

With over $25 billion in sales for FY 2023, Keytruda is the best-selling drug in the world. However, this is a double-edged sword. Merck has been able to ride Keytruda to incredible heights, but the ride won’t last forever. Once Keytruda starts rolling over its patent protection, competition will come on strong and eat away at the drug’s sales (and, thus, Merck’s sales).

Notably, this drug is on patent through 2028 in the US and EU, so Merck does have time to prepare for what will almost certainly be slowing/reversing growth as we enter the 2030s. Merck continues to extend Keytruda’s runway by pursuing new clinical trials and treatment pathways for different types of cancers.

The company is also busy developing new compounds, with 60+ programs in Phase 2 and 30+ programs in Phase 3. Merck has plenty of opportunities for growth ahead, even with a Keytruda that starts to become a victim of its own success.

Being at the front line of cutting-edge medication places the company in a very exciting area of the global economy, as global demographics (the world continues to grow larger, older, and wealthier) portends rising demand for high-quality healthcare. Merck has all the tools it needs to do well over the coming years, all while Keytruda is still in its prime, setting up shareholders to benefit from growing revenue, profit, and dividends.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Already, Merck has increased its dividend for 14 consecutive years. The 10-year dividend growth rate is a decent 5.4%, but the five-year dividend growth rate of 8.7% looks even better.

While Merck is decidedly not some high-growth machine (nor should one expect a mature pharmaceutical company to be one), the stock’s market-beating yield of 3.2% offers plenty of current income and offsets the adequate (but not amazing) dividend growth. This yield, by the way, is 30 basis points higher than its own five-year average. The stock tends to offer a nice yield, but the yield right now is especially nice.

A payout ratio of 41.8%, based on midpoint guidance for this year’s adjusted EPS, shows us a healthy dividend poised for more growth ahead. This is a very balanced dividend profile. Merck doesn’t “wow” me in any one area; instead, there’s a great mix of yield, growth, and safety here.

Revenue and Earnings Growth

As great as this might be, though, many of these metrics are based on what’s happened in the past. However, investors must always be looking out into the future, as today’s capital gets risked for tomorrow’s rewards. Thus, I’ll now build out a forward-looking growth trajectory for the business, which will come in handy when the time comes later to estimate fair value.

I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth. I’ll then reveal a professional prognostication for near-term profit growth. Blending the proven past with a future forecast in this way should give us the information necessary to make an educated judgment call on where the business may be going from here.

Merck moved its revenue from $42.2 billion in FY 2014 to $60.1 billion in FY 2023. That’s a compound annual growth rate of 4%. Not bad at all. I like to see a mid single-digit (or better) top-line growth rate from a mature business like this. Merck is getting it done.

Meanwhile, earnings per share grew from $4.07 to $6.35 (adjusted) over this period, which is a CAGR of 5.1%. I used adjusted EPS for FY 2023, due to the fact that Merck had $6.21 per share in charges for certain transactions that do not accurately reflect the company’s ongoing earnings power. So what we’re seeing here is mid single-digit business growth, lining up well with the mid single-digit dividend growth.

If that’s all there were, I’m not sure that Merck would be a super compelling idea. But I think there’s more than that. And that primarily comes down to the fact that the company’s flagship oncology drug Keytruda has only started hitting its stride in the last few years (after initially being approved by the FDA in 2014 and growing its treatment applications thereafter).

If we zoom back to before FY 2019, growth was spotty. But Merck has started showing signs of sustained growth starting from right about FY 2020, as Keytruda is growing way faster than 5% annually. And with Keytruda still in its prime, Merck can soak up those sales while also being financially able to build out its pipeline through organic development and acquisitions (in order to prepare for the next stage of the company’s evolution, after Keytruda peaks and starts to decline).

Looking forward, CFRA believes that Merck will compound its EPS at an annual rate of 9% over the next three years. This jibes with what I was just discussing. A mid single-digit growth rate is not bad at all, but Merck appears poised to do quite a bit better than this over the foreseeable future.

CFRA highlights continued strong growth from Keytruda (sales up 17% YOY for the most recent quarter), as well as encouraging movement on the pipeline (such as FDA approval on hypertension drug Winrevair earlier this year). And I think that’s the one-two punch that gives Merck so much promise over the next few years or so. I’m willing to assume CFRA’s forecast as a near-term base case for Merck’s growth.

Seeing as how the payout ratio is as low as it is, that would set up the dividend to grow at least as fast – perhaps faster. Meantime, those buying in now get to kick things off with an atypical 3%+ yield. If you’re following along, you’re already piecing together a picture that shows faster growth than usual and a yield that’s higher than usual. Hard to not be excited about that kind of setup.

Financial Position

Moving over to the balance sheet, Merck has a good financial position. The long-term debt/equity ratio is 0.9, while the interest coverage ratio is nearly 12. That latter number is artificially and temporarily low, impacted by noted charges. Merck finished last fiscal year with about $25 billion in net long-term debt, which is not egregious at all for a company of this size. It’s not a bulletproof balance sheet, but Merck has no issues here whatsoever. Profitability is great.

Return on equity has averaged 28.3% over the last five years, while net margin has averaged 18.8%. These are outstanding numbers, despite both being negatively affected by FY 2023’s downturn in GAAP results. Both ROE and ROIC are routinely over 20% for Merck in normal years, indicating high returns on capital and an ability to generate excess returns well over its WACC.

With its blockbuster drug Keytruda still in its prime and growing apace, Merck is sitting pretty and, arguably, in its best position ever. And with economies of scale, a global distribution network, patents, IP, and R&D, the company does benefit from durable competitive advantages.

Of course, there are risks to consider. Regulation, litigation, and competition are omnipresent risks in every industry. All three of these risks are elevated for this particular industry, in my view, especially regulation.

Patent cliffs are one of the biggest issues for any pharmaceutical company, but Merck has a large pipeline to develop while its most important drug is still under patent protection for a number of years yet. Speaking further on this point, Keytruda’s status as a linchpin for the business, as well as the fact that patents will not protect it forever, puts a lot of pressure on Merck to work its pipeline and release new blockbuster drugs within the next few years in order to reduce dependency on Keytruda and shepherd in a new era of growth.

Any changes to the complex US healthcare system, which is not popular in its current form, would likely impact Merck directly. The company’s international footprint exposes it to geopolitics and currency exchange rates.

There is execution risk present, as Merck (like many companies of its ilk) likes to buy growth through bolt-on deals. While I think these risks are worth carefully thinking over, Merck’s quality and market positioning should also be considered. And with the stock down nearly 30% from its recent high, the valuation, which looks appealing, should be strongly considered…

Valuation

This stock’s forward P/E ratio, based on midpoint guidance for this year’s adjusted EPS, is just 12.7. That’s absurdly low for a world-class healthcare business. If we move past that earnings multiple, because of the adjusted nature of it, all basic multiples that I look at are lower than usual. For example, the P/S ratio of 4 is well below its own five-year average of 4.5. And the yield, as noted earlier, is higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 7%. What I’m doing here is, I’m roughly splitting the difference between the 10-year dividend growth rate (~5%) and the near-term forecast for EPS growth (9%). I think that down-the-middle approach makes sense here.

The prior decade was hampered by quite a bit of time spent without Keytruda fully ramped up. With that drug now at unexplored heights, Merck has every chance to shine. All the same, though, I wouldn’t expect dividend growth to be in a double-digit range, even if that 9% mark on EPS growth is reached. And that’s because the pipeline has to be developed, there’s still a decent chunk of debt to handle, and Keytruda’s patent protection will start to roll off in a few years. All in all, I don’t see something in the 7% area to be an unreasonable expectation from Merck over the coming years.

The DDM analysis gives me a fair value of $115.56. The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide. The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth. It then discounts those future dividends back to the present day, to account for the time value of money, since a dollar tomorrow is not worth the same amount as a dollar today. I find it to be a fairly accurate way to value dividend growth stocks.

My view is that the stock is priced quite a bit lower than it ought to be. But we’ll now compare that valuation with where two professional stock analysis firms have come out at. This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system. 1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value. Morningstar rates MRK as a 4-star stock, with a fair value estimate of $120.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line. They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold. CFRA rates MRK as a 3-star “hold”, with a 12-month target price of $106.00.

I’m right about in the middle this time around. Averaging the three numbers out gives us a final valuation of $113.85, which would indicate the stock is possibly 14% undervalued.

Bottom line: Merck & Co., Inc. is a high-quality healthcare business with the world’s best-selling drug under its umbrella. Merck has, in many ways, never looked better. It’s set up for a golden era. With a market-beating yield, a low payout ratio, inflation-beating dividend growth, nearly 15 consecutive years of dividend increases, and the potential that shares are 14% undervalued, dividend growth investors looking for more healthcare exposure have low-hanging fruit to pick from here.

Note from D&I: How safe is MRK’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 90. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, MRK’s dividend appears Very Safe with a very unlikely risk of being cut.

Disclosure: I’m long MRK.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

The post Merck: A Low-Hanging Fruit To Pick appeared first on Up2info.com.

• Merck & Co., a global pharmaceutical leader, focuses on oncology, immunology, and vaccines, with strong revenue from Keytruda and Gardasil despite challenges in China.
• Strategic acquisitions and partnerships, including Acceleron, Prometheus, and Daiichi Sankyo, bolster Merck’s drug pipeline and expand its oncology and cardiovascular portfolios.
• Merck’s robust R&D efforts and wide moat, supported by a strong dividend yield and A+ S&P credit rating, make it a compelling buy.
• Despite regulatory risks and patent disputes, Merck’s earnings are projected to rise, with significant growth expected in 2025 and beyond.
• Rose Take and Recommendation for purchase is given along with the Chowder #.

Global drug manufacturer Merck & Co. was founded in 1891 in Rahway, New Jersey where it is also headquartered. It operates worldwide primarily providing pharmaceutical prescription drugs along with some animal health products. Originally it was founded in 1668 in Germany

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MRK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Macro Trading Factory is a macro-driven service, run by a team of experienced investment managers.

The service offers two portfolios: “Funds Macro Portfolio” & “Rose’s Income Garden”; both aim to outperform the SPY on a risk-adjusted basis, in a relaxed manner.

Suitable for those who either have little time/knowledge/desire to manage a portfolio on their own, and/or wish to get exposed to the market in a simple, though more risk-oriented (less volatile), way.

Each of our portfolios, spanning across all sectors, offers you a hassle-free, easy to understand and execute, solution.

Macro Trading Factory for an Upward Trajectory!

The post Merck: Healthcare Pharma Giant: 3.2% Yield, 9.3% 5-Year Dividend Growth, Buy Time appeared first on Up2info.com.

• Merck’s strong financial performance in oncology and vaccines drove a 9% sales increase earlier in Q1 of 2024, despite challenges with other products.
• Promising future developments include successful Phase 3 trials for ovarian cancer and positive CHMP opinion for Welireg, enhancing MRK’s oncology and rare disease portfolio.
• MRK’s drug pipeline is robust, with 60% in Phase 2, indicating medium-term revenue potential, and its EV/EBITDA ratio aligns with sector averages.
• Technical analysis shows MRK at a strong support level around $99, presenting a good buying opportunity, with target prices of $119 first and $133 after the level is breached.

Merck & Co. (NYSE:MRK) has seen significant changes in its financial performance and market position through 2024. In this article, I attempt to provide investors with a comprehensive analysis of MRK’s past business performance, future growth prospects, and its competitive positioning in the pharmaceutical industry. I will also explain why I assign a Strong Buy rating on MRK stock by examining key financial metrics, pipeline benchmarks and technical indicators.

Past Business Performance

MRK, as investors will recall, reported impressive financial results in the first quarter of 2024. The company’s sales increased by 9% worldwide compared to the same period in 2023, reaching $15.8 billion. The company’s strong performance in oncology and vaccines was the main driver of this growth. CEO Robert M. Davis attributed these developments and the expansion of the commercial portfolio to the company’s continued use of innovations.

These developments and optimism led to the company gaining 22% in the first half of 2024, pushing its shares to $132. However, the stock fell sharply after MRK released its second-quarter earnings report. The company had reported very strong earnings and even expected revenue growth, but the company unexpectedly lowered its full-year non-GAAP EPS guidance, which made investors pessimistic and sold, and the company’s stock has since fallen to $94 by last month.

Most recently, MRK reported global sales of $16.7 billion in Q3 2024, up 4% from Q3 2023. The biggest drivers of this sales performance were KEYTRUDA sales, which increased by 17%, and the Animal Health segment, which increased by 62%, while the company maintained a solid financial outlook with steady growth in key segments. However, MRK’s GAAP net income fell 33% to $3.2 billion due to expenses from recent acquisitions. MRK also narrowed its full-year 2024 sales guidance to between $63.6 billion and $64.1 billion.

Merck’s stock initially fell 7% following its Q3 2024 earnings report, but quickly rebounded as investors reassessed the news. The decline was due to a slight downward revision to its full-year guidance and concerns about weaker-than-expected performance in some areas, such as GARDASIL sales in China. But the recovery suggests that investors, like me, view the company positively when analyzing overall results more broadly. MRK’s long-term resilience, underpinned by innovation, cost discipline and dividend stability, has reassured investors of the company’s future potential despite short-term challenges.

Merck also faced challenges with some of its other products. Sales of its type 2 diabetes drug Januvia fell 27% from a year earlier due to lower demand, pricing pressures and generic competition in several markets.

The company’s reliance on its flagship drug Keytruda also contributed to this decline. Although Keytruda sales increased by 16% YoY in the second quarter of 2024, the company’s reliance on just one drug was another cause for concern for investors. It is worth adding that sales of MRK’s Type 2 diabetes drug Januvia also fell by 27% YoY due to decreasing demand.

Future Business Expectations

Now that I’ve talked enough about the past, let me talk about what’s happening soon and what these developments signal for MRK.

Earlier this month, MRK announced that its Phase 3 trial of the drug KEYLYNK-001 had been successful in patients with advanced epithelial ovarian cancer. The company is making significant progress in cancer research.

MRK has made progress not only in oncology but also in therapeutics. The European Medicines Agency’s Committee for Medicinal Products for Human Use (CHMP) has given a positive opinion for the conditional approval of Welireg (belzutifan) for treating certain types of von Hippel-Lindau (VHL) disease in adults. This is a really positive development for MRK’s portfolio. This will particularly expand MRK’s rare disease market and provide the opportunity to develop treatments for those affected by VHL, a disease that involves tumor growth in various parts of the body.

Looking ahead, MRK is particularly focused on immunotherapy-targeted treatments. The company is developing a combination therapy for lung cancer (NSCLC) with its R&D investments. This means that MRK is no longer targeting cancers in general, but rather more personalized and effective treatments based on specific genetic mutations in cancers. If it can do this, MRK looks set to move beyond monotherapies.

When I look at it from an investor and analyst perspective, I see that MRK’s business development is promising. Not only me, but probably most analysts think so as well, and the world’s leading financial management companies continue to give significant space to MRK in their pharmaceutical ETFs.

Pipeline Benchmark

While valuing a pharma company, I think one of the most important factors is the drug pipeline, as it represents future revenue potential. Pipeline benchmarks vary by company size. For instance, companies with revenues under $50 million typically have fewer than 10 drugs in development, while those with revenues between $50 million and $250 million might have 10–20 drugs in the pipeline.

In doing this analysis, I will compare MRK with 3 companies that are its close competitors. These companies are Roche Holding AG (OTCQX:RHHBY), AstraZeneca PLC (AZN) and Novartis AG (NVS). The companies were ranked according to their revenues in 2023. In addition, the drugs in the pipelines of RHHBY, MRK, AZN and NVS were separated according to their phases.

RHHBY which has the highest revenue, has 117 drugs in its pipeline, MRK has 105, AZN has 67, and NVS has 97. It is clear that AZN’s pipeline has fewer drugs than it should, compared to the revenue. However, other companies, including MRK, are performing quite normally in this regard. Therefore, dividing the drugs into phases and the share of these phases in total drugs will give us more detailed information about how quickly the drugs will turn into revenue.

We do not want to see the share of Phase 1 in all drugs as too high. The reason for this is that the company has a long time to convert this drug into revenue. On the graph, it is determined that MRK is quite successful in this regard. Only 19.66% of the drugs are in the first phase. In addition, 60% of the drugs in MRK’s pipeline are in the second phase. In other words, this indicates that more than half of the drugs will be converted into revenue in the medium term. Finally, we determine that the rate of drugs in the third phase is 33%. This is close to the company average of 37%. Therefore, it is not bad at all.

Therefore, MRK proves to us that it has a truly positive pipeline by passing the pipeline benchmark test.

Key Pipeline Candidates

MRK is actively developing several important drug candidates in different therapeutic areas, focusing particularly on oncology, immunology and cardiovascular disease. The company currently has four very important candidates in the pipeline and in phase 3.

The first candidate, Bomedemstat, is potentially positioned by MRK as a first-line or alternative treatment with fewer side effects or better efficacy than current treatments. Given the complexity of oncology trials, the drug is likely several years away from approval, but the fact that it is in pivotal trials indicates that the drug is now approaching regulatory review.

The second candidate is the BTK inhibitor Nemtabrutinib. This drug is being developed by MRK to overcome resistance issues seen in current treatments. Since it is on the same timeline as Bomedemstat, the approval process will be similar. The drug is used for chronic lymphocytic leukemia (CLL) and small lymphocytic lymphoma (SLL), and it can be said that the drug has a significant market due to the chronic nature of these diseases.

The third candidate, MK-2870, is being developed by MRK for non-small cell lung cancer (NSCLC) and endometrial carcinoma. As previously stated, the drug is in phase 3 trials and if successful, it will be approved in a few years. The lung cancer market is one of the largest in oncology, so there is no doubt that the drug will be in demand.

It is very likely that MRK will place MK-2870 alongside established cancer treatments such as Keytruda and target combination therapies that may offer higher efficacy. While the growing market for ADCs is positive for the drug, the higher development costs of the drug than others raise some concerns.

The latest candidate is MK-5684 for metastatic castration-resistant prostate cancer (mCRPC). This drug, which is being processed in the same timeframe as the other candidates, is specifically targeting the aging population. The drug will be marketed as a new treatment option for advanced prostate cancer in the aging population, along with existing treatments.

EV/EBITDA Ratio

I wanted to include this valuation ratio in my article because it is widely used, especially among pharmaceutical companies. It is one of the ratios used to understand whether pharmaceutical companies are in their values.

When compared to substitute companies, it was determined that MRK is at 10.46x, which is slightly lower than the average EV/EBITDA value of 11.14x. Since extreme deviations are taken into account when making this analysis, this data is a clear indication that MRK is within the sector average. Therefore, the company is valued according to the sector average. Considering the qualitative developments I mentioned in the previous paragraphs, it is clear that the company has growth potential.

Risks

MRK is currently developing new formulations, such as subcutaneous injections, to extend Keytruda’s patent protection, but if unsuccessful, Keytruda’s patent will expire in 2028, meaning biosimilars will challenge MRK’s market share.

Not only Keytruda, but also drugs like Januvia are at risk of expiring their patents. This will require MRK to implement new product launches and a successful life cycle management strategy. If such compensation methods are not implemented, a potential decrease in revenues is inevitable.

In addition, MRK acquired Harpoon Therapeutics to expand its oncology offerings and fill the revenue gap expected from patent expirations. This strengthened MRK’s pipeline. But this move also carries risks, such as cultural fit, integration, and failure to meet expectations. It’s clear that MRK has risks not only in terms of medicine and business, but also in terms of business management.

Such risks may push the stock price down further and reverse my buy position, so it is beneficial for investors to keep their eyes open to these risks when making their investments.

Technical Analysis

When I analyze a company technically, I use both price action and algorithmic indicators. First, I will use the Hodrick-Prescott indicator to determine the trend; the MACD to determine momentum, convergence and divergence; and the DCA indicator to determine overbought-oversold areas.

When looking at MRK’s price chart from 2009, it is seen that the price was rejected by the Hodrick-Prescott filter until 2012, and therefore the filter was used as resistance. MRK confirmed its transition to an uptrend by breaking the HP filter in December 2011.

MRK has been in a long-term uptrend since then. In 2015, 2018 and 2021, MRK has been approaching the HP filter again and finding support, making its run even stronger. In recent weeks, MRK has been approaching this HP filter again and is currently finding support on the filter. The filter is exactly at $99.02, and this level seems to be a good support level.

When the MACD indicator is analyzed, it is seen that the price has been in a downward wave since July and the MACD has started to rise. This creates a clear bullish divergence formation. However, the DCA indicator is giving the oversold alarm it gave in November 2023 again this week.

When the price action analysis is made, there is an order block that occurred in October 2022, especially around $99. This order block was also tested in both January 2023 and November 2023. The last test is currently being done, and this level also matches the $99 level where the HP filter is located. Therefore, it can be easily said that this level is a good support level, confirmed by both price action and indicators. MRK, which holds at this support level, offers investors a very good buying opportunity.

I think that the target price will be $119 first and then $133 after this level is broken, as the stock returns from this support area and starts running again. The principle of determining these two target prices is to determine that MRK has used these levels as support and resistance points repeatedly in 2023 and 2024, again using the price action method.

Conclusion

In summary, MRK is at a very good buy point for investors with a qualitatively solid drug portfolio, developments in oncology and rare diseases and quantitatively staying at an oversold position at the $99 support, targeting $133. While risks such as Keytruda dependency and regulatory uncertainty remain, MRK’s diversified portfolio, advantageous position in the sector and ongoing R&D investments provide assurance that the company will grow further.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in MRK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Merck: Buy Opportunity Backed By Growth appeared first on Up2info.com.

• Merck’s shares have declined, making its dividend yield climb and valuation compress, presenting an attractive investment opportunity at current prices.
• Keytruda, the company’s largest drug, continues to show strong revenue growth and potential for further approvals and market expansion.
• MRK’s diverse drug portfolio, including Gardasil and Winrevair, and its robust pipeline with numerous phase II and III programs support future growth.
• Merck is trading at a significant discount compared to its historical valuation, offering a solid dividend yield and potential for attractive total returns.

Article Thesis

Merck & Co., Inc. (NYSE:MRK) is a leading pharma company with an attractive drug portfolio that has seen its shares decline significantly in the recent past. This has made Merck’s dividend yield climb, while its valuation has

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in MRK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Is This an Income Stream Which Induces Fear?

The primary goal of the Cash Flow Kingdom Income Portfolio is to produce an overall yield in the 7—10% range. We accomplish this by combining several different income streams to form an attractive, steady portfolio payout. The portfolio’s price can fluctuate, but the income stream remains consistent. Start your free two-week trial today!

The post Merck Has Become Very Cheap Again appeared first on Up2info.com.

• In recent weeks, financial participants have remained pessimistic about Merck’s development prospects, partly due to the nomination of Robert F. Kennedy Jr. as head of HHS.
• However, I believe Mr. Market overreacted to this news, given the strong performance of Merck’s oncology franchise in recent quarters.
• So, sales of Keytruda amounted to $7.43 billion for the three months ended September 30, 2024, an increase of 17.2% year-over-year.
• In addition to its extremely high dividend yield of over 3%, in this article, you will discover why I upgraded Merck’s rating from ‘Buy’ to ‘Strong Buy.’

On October 31, Merck (NYSE:MRK) released its financial results for the third quarter of 2024, which demonstrated many positive aspects, as well as some of the difficulties that its CEO Robert Davis has to face, which I will also draw your attention to in this article.

Investment thesis

Merck’s revenue was about $16.66 billion for the three months ended September 30, 2024, up 4.39% year over year and beating both my expectations and Wall Streets’, thanks to stronger sales of Keytruda, Winrevair, Prevymis, Welireg, RotaTeq, which also helped offset the decline in demand for its HPV vaccines, called Gardasil and Gardasil 9, and Pneumovax 23, a pneumococcal vaccine.

Meanwhile, its non-GAAP earnings per share reached $1.57 for the third quarter of 2024, which was in line with consensus estimates. However, the completion of the acquisition of EyeBio, which allowed Merck to significantly strengthen its ophthalmology portfolio, and Curon Biopharmaceutical’s CN201, which in turn is an experimental next-generation medication for the treatment of B-cell mediated diseases, led to a temporary year-over-year decline in this financial metric.

So, right at the beginning of the article, I want to note the performance of Welireg, which is becoming one of the key assets in the portfolio of Merck’s marketed drugs, along with its blockbuster PD-1 inhibitor Keytruda and other cancer medications that it commercializes in partnerships with AstraZeneca (AZN) and Eisai (OTCPK:ESALF).

It is a selective HIF-2α inhibitor approved by the FDA, EMA, and other regulatory agencies to treat certain types of cancer associated with von Hippel-Lindau disease.

Welireg sales were $139 million in the third quarter of 2024, up 157.4% year over year and 10.3% quarter over quarter.

What are the reasons for the increase in demand for Welireg (belzutifan)?

In addition to the expansion of the global renal cell carcinoma treatment market, I highlight two other key factors that have contributed to the acceleration of Welireg’s sales growth since the beginning of 2024.

First, it was approved by the FDA on December 14, 2023, for the treatment of certain patients with advanced renal cell carcinoma. In general, renal cell carcinoma is one of the common types of cancer that forms in the tubules of the kidney. According to the American Cancer Society, 81,860 new cases of this cancer [52.38 thousand in men and 29.23 thousand in women] will be diagnosed in 2024 in the United States.

The second factor that contributed to the sharp increase in belzutifan sales is its widespread introduction into medical practice in the US and abroad.

But that’s not all, as I already noted in the article “Merck: Buy This Bargain Before It’s Gone,” this potential blockbuster is under review in the European Union/Japan for the treatment of a certain group of people with previously treated advanced RCC, as well as in the EU for the treatment of VHL disease.

In the table below, I have included updated information about the clinical development program for Welireg [renal cell carcinoma, endometrial cancer, esophageal cancer, hepatocellular carcinoma, prostate cancer, and rare cancers].

As I often note in articles, dry figures and the cherished word for any financial market participant in the company’s press release “beat” the expectations of Wall Street analysts are undoubtedly important.

However, for me, as a Seeking Alpha analyst who is upgrading Merck’s rating from ‘Buy’ to ‘Strong Buy,’ it is more critical to determine the factors that contributed to this and also those that will have a significant impact on its financial position in the future.

Merck’s Q3 2024 financial results and outlook beyond 2024

First of all, I want to note that Merck’s financial results for the third quarter of 2024 left me with more positive emotions than disappointment and once again confirmed that Keytruda remains a cash cow, mainly due to which the company’s levered free cash flow [LFCF] over the past 12 months exceeded $14 billion, which in turn is 51.4% more than in 2023.

Moreover, this PD-1 inhibitor was able to minimize the negative impact of sluggish demand for the Gardasil franchise in China, as well as less than satisfactory growth rates of RotaTeq sales, which is a vaccine for protection against rotavirus gastroenteritis.

In addition to Welireg, whose performance I discussed earlier, I want to highlight the sales, as well as the setbacks and achievements in the clinical development of some of Merck’s key products and experimental medications.

The following drugs have contributed significantly to Merck’s improved financial position, allowing it to accelerate the pace of development of next-generation product candidates aimed at combating various types of cancer [ifinatamab deruxtecan, patritumab deruxtecan, and quavonlimab], autoimmune diseases [MK-6194, tulisokibart], and diabetic macular edema [MK-3000].

So, I believe that these products will continue to play a vital role in increasing the company’s dividend payments for at least the next five years, as well as helping reduce its reliance on Keytruda, which will face increased competition from its biosimilars in the US in 2028.

However, for a more comprehensive understanding of the current situation and the development of Merck’s business in the next five years, it is also necessary to discuss the performance of the main star of its oncology franchise, namely Keytruda [PD-1 inhibitor].

Its total sales were $7.43 billion for the three months ended September 30, 2024, up 17.2% year-over-year and 2.2% quarter-over-quarter, driven in part by growing demand for it to treat certain types of lung, breast, and endometrial cancer.

In addition, in the second half of 2024, it received multiple regulatory approvals in the treatment of people with non-small cell lung cancer, unresectable/metastatic melanoma, cervical cancer, urothelial carcinoma, and more, both as monotherapy and in combination with other medications, including Pfizer’s Padcev (PFE).

As a result, this allows Keytruda to remain a leader in the global cancer therapeutics market, which is also reflected in its higher sales growth rates relative to competitors, including GSK’s Jemperli (GSK), Bristol-Myers Squibb’s Opdivo (BMY), and Regeneron Pharmaceuticals’ Libtayo (REGN).

Seeking Alpha offers financial data, as well as Wall Street analysts’ forecasts for Merck’s revenue and earnings per share through 2030 and beyond.

So, Wall Street analysts expect Merck’s revenue for the fourth quarter of 2024 to be between $15.06 billion and $16.33 billion, which implies growth of 6.8% year-on-year.

Meanwhile, its price/sales ratio [FWD] is 3.81x, which is not only 12.1% lower than the 5-year average but also lower than many of its Big Pharma peers, including its key competitors in the global oncology drugs market, such as Novartis [P/S ratio is 4.09x] (NVS), AbbVie [P/S ratio is 5.25x] (ABBV), and Amgen [P/S ratio is 4.52x] (AMGN), thus being the first of the factors that, in my opinion, indicate that the New Jersey-based company is currently trading at a discount.

Now, I’ll zoom out.

I expect Merck’s revenue to continue to grow in the coming years, primarily driven by continued strong demand for its megablockbuster Keytruda, label expansions for Winrevair, Welireg, and Lynparza, potential regulatory approvals of its antibody-drug conjugates, which it is developing in partnership with Daiichi Sankyo, and other product candidates including quavonlimab and favezelimab.

In forecasting the company’s revenue and operating income, I took into account the continued decline in sales of its diabetes portfolio due to increased generic competition and the launch of more effective medicines by Eli Lilly (LLY) and Novo Nordisk (NVO), as well as the loss of U.S. exclusivity for some of its key medications and vaccines including Simponi, Lenvima, and Bridion, the impact of which I discussed in detail in “Merck’s Soaring Stock: Examining The Euphoria Amidst Potential Pitfalls.”

Overall, I anticipate its total revenue to be $78.1 billion in 2028, which firstly implies its average annual growth over the next five years by single-digit percentages [from 3.9% to 7.3%], and secondly, it is in line with the expectations of 13 analysts [$69.96-$87.57 billion]. Accordingly, Merck’s price-to-sales ratio will decrease from 3.9x over the past 12 months to below 3.4x.

As I have noted in previous articles, let’s move on to a discussion of an equally important financial indicator, namely non-GAAP earnings per share [non-GAAP EPS].

Why?

This needs to be done because it more accurately and comprehensively determines how effective the business strategies implemented under the leadership of Robert Davis are.

So, Merck’s non-GAAP EPS is anticipated to be in the range of $1.80 to $2.13 in the fourth quarter of 2024, implying its growth of more than 61 times year-over-year.

From a global standpoint, I expect Merck’s operating income growth trend to continue through the next five years, mainly due to rising prices and demand for medications in its oncology portfolio.

Moreover, after acquiring several pharmaceutical companies, which allowed the company to significantly strengthen and rejuvenate its pipeline of product candidates and, more importantly, potentially minimize the damage from the loss of Keytruda’s exclusivity in the U.S. in 2028, I expect its R&D expenses to return to $3.1 billion per quarter.

Consequently, due to the anticipated resorting of its management to the share repurchase program in the coming years, as well as the increase in its revenue under my forecast, which was noted earlier, I anticipate the company’s non-GAAP EPS to be $12.50 in 2028, which is slightly above the analysts’ median range [$8.04-$14.24] due to my more optimistic expectations for sales of its oncology franchise, particularly Keytruda, and secondly implies a drop in its P/E ratio from 16.2x to 8.14x.

It is equally important to discuss Merck’s debt. In my assessment, it does not pose a risk to its financial position and, more importantly, will allow it to continue acquiring promising assets to develop its oncology and immunology franchises.

Overall, given the growth of its EBITDA year-on-year, including due to the factors I indicated in the article earlier, as well as the increase in total cash and ST investments [$7.09 billion at the end of 2023 and $14.6 billion at the end of Q3 2024], the company’s net debt/EBITDA ratio approached 1x by the end of September 2024.

Also, I would like to point out that Merck’s credit ratings from S&P Global Ratings (SPGI) and Moody’s (MCO) remain at investment grade [A+/A1].

Risks

In addition to the expected appointment of Robert F. Kennedy Jr. as head of HHS and a temporary slowdown in demand for the Gardasil franchise, I’ve highlighted several risks in the table below, including Pneumovax 23’s poor performance, that long-term Merck investors should consider to minimize potential losses.

Takeaway

As a result of a slight reduction in its full-year non-GAAP EPS, primarily due to the completion of the acquisition of CN201 on October 1, Merck’s stock price has reached a strong support zone in the $96-$97 per share range.

Despite the apathy from institutional and retail investors, I believe the company has made significant progress in developing its oncology franchise, including multiple regulatory approvals for Keytruda in the U.S., Japan, the EU, and China.

Ultimately, thanks to stronger sales of Prevymis, Welireg, Vaxneuvance, and Keytruda, lower net debt quarter-on-quarter, and a rich pipeline of experimental drugs, I am upgrading Merck’s rating from ‘Buy’ to ‘Strong Buy.’

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Merck: Seriously Undervalued At Peak Pessimism (Rating Upgrade) appeared first on Up2info.com.

• Merck’s stock is undervalued, trading at less than 4x expected 2024 revenues, despite strong revenue growth from Keytruda and other drugs.
• Keytruda’s revenue is projected to increase by 70% from 2024 to 2032.
• Declining Gardasil sales in China and competition from Summit Therapeutics and Roche’s Tecentriq may have contributed to recent stock volatility.
• Merck’s pipeline, including Winrevair and Koselugo, offers potential for substantial revenue growth, making the stock a Buy.

Thesis

Merck & Co. Inc. (NYSE:MRK) keeps on generating more and more revenue, with revenue guidance for FY 2024 up 6-7% from 2023. Much of the added revenue, and more than the entire revenue of the company, is generated by Keytruda, the company’s oncology product. Although Keytruda keeps on receiving continuous approvals for various indications, its main patent will end in 2028. The question is how this upcoming patent cliff will impact sales, and subsequently, the company’s stock.

The company may need to look for further acquisitions to replace revenue generated from Keytruda. At this time, in spite of an impressive pipeline, I do not see a worthy replacement for Keytruda. However, with Keytruda revenues expected to increase by about 70% between 2024 and 2032, even a patent cliff should not scare away investors. Merck has recently also announced positive Phase 3 results in neurofibromatosis type 1, which the market may have overlooked, I believe.

Merck’s stock has been volatile the past year. With the company’s stock trading at less than 4x the company’s expected 2024 revenue and in spite of an interesting dividend, I believe the company comes at an attractive valuation. However, the market is often also about sentiment, and from that perspective further sales increases from Keytruda may not be able to stop the stock’s decline.

Company Overview

Merck is a large pharmaceutical company a product portfolio that is focused for about 90% on treatments for humans, and about 10% is focused on animals. Merck’s financial performance over the past years has been excellent.

The company’s primary revenue-generating products are Keytruda, Gardasil, Vaxneuvance, Lynparza, Lenvima and Welireg. Total sales for the past quarter were $16.7 billion, and Merck is guiding for $63-$64 billion in revenue for the entire 2024.

Keytruda, a drug for different cancer indications, generates by far the most revenue, more than half of the company’s total revenue. And those sales keep on increasing year-over-year.

Keytruda

Keytruda, approved for the first time in 2014, is an anti-PD-1 drug that has been approved in a variety of cancer indications, either as monotherapy or in combination with other therapies. Some of these indications the drug is approved for are cervical cancer, Hodgkin lymphoma, a number of carcinomas, non-small-cell lung cancer, melanoma and certain solid tumors.

Just for the year 2023, the company has received FDA approvals as adjuvant treatment for non-small-cell lung cancer, for unresectable or metastatic MSI-H or dMMR solid tumors, locally advanced or metastatic urothelial carcinoma, for resectable non-small-cell lung cancer as neoadjuvant treatment, Merkel cell carcinoma, biliary tract cancer, HER2-negative gastric or GEJ adenocarcinoma, urothelial cancer. Several other geographies such as the European Union and Japan also gave approval in various indications. In 2024, the same line of further approvals can be seen, for example in stage III-IVA cervical cancer, biliary tract carcinoma, primary advanced or recurrent endometrial cancer and endometrial cancer, and unresectable advanced or metastatic malignant pleural mesothelioma.

In total, Keytruda now has over 40 FDA approvals and 30 EC approvals in distinct indications, based on 25 studies with a benefit shown in overall survival.

Other lead drugs in Merck’s portfolio

Merck’s other lead drugs Gardasil, Lynparza, Lenvima, Welireg and Vaxneuvance also generate steadily improving income. Gardasil, by far the second-best revenue-generator of Merck’s portfolio, has declining sales in China which worry some investors.

Winrevair is the most recently approved of Merck’s drugs. The drug, acquired by Merck in 2021 through the acquisition of Acceleron Pharma for $11.5 billion, has been approved in March 2024 and already generated sales of $149 million in the third quarter of 2024.

Merck furthermore has an impressive pipeline, with a substantial number of drugs in Phase 2 and Phase 3 trials.

Expectations for the future

The positives: ramping Keytrade revenues and Winrevair expectations

In essence, I would say that Merck has two contrasting dynamics, which make it hard to judge where the company could be going to in a post-2028 scenario. That scenario may already be relevant now, or in the coming years, as the company’s $249 billion valuation – at the time of writing – is based on forward projections related to revenue and earnings.

I will provide some detail in relationship to the two dynamics below, starting with the positive and ending with the negative.

At least for the coming four years, I expect Keytruda sales to keep on improving in light of the company’s approvals for the drug in a variety of indications. Many of these indications have huge markets, and one can expect a continued uptake by healthcare professionals and patients of Keytruda over the coming years.

For the year 2024, Keytruda is expected to generate more than $27 billion in sales. In 2028, the year its main patent will end, Keytruda is expected to be the world’s best-selling drug, with $31.52 billion in revenue expected at that time.

The Keytruda market is expected to grow strongly even beyond that point, namely to $45.9 billion by 2032, at a CAGR of 9.20%.

This would mean that from 2024 onwards, when sales are expected to be more than $27 billion, to 2028 ($31.5 billion), and further to 2032 ($45.9 billion), an eight-year period overall, revenues for Keytruda are projected to improve by $18.9 billion. That is about a 70% increase. Until 2028, these revenues are solely for Merck.

Apart from other drugs in Merck’s pipeline that are on a steady growth trajectory, Winrevair is one to watch. Expected peak sales here are still unclear, but should be reasonably high. Some analysts had estimates of $2 billion, while another one was expecting $3 to $4 billion. In any case, Winrevair will be a drug to watch in the coming years.

On November 12, 2024, Merck has also announced positive results Phase 3 trial for Koselugo in adult patients with neurofibromatosis type 1. These patients do not have an approved therapy available, meaning the market is largely untapped. And this is a substantial market, valued at $8.3 billion in 2023 and expected to grow to $21 billion in 2027 and $27 billion in 2029.

The above projections are very positive for Merck. Now for the negatives.

The negatives: patent cliff and Roche’s subcutaneous Tecentriq

I assume that, once the main patent for Keytruda has expired, only half of the Keytruda revenues will still go to Merck. That could mean that, for example in 2030, about $20-$25 billion in sales could still be generated from Keytruda. It is also possible that the commercialization of biosimilars may lead to Merck revising its price downward in order to remain competitive.

Furthermore, although Merck may have several additional patents, it does not appear that Keytruda by way of a subcutaneous version may be able to replace the current intravenous version. In fact, although a Phase 3 trial with the subcutaneous version is still ongoing with results expected in 2026, Merck chose not to publish results of another trial with this subcutaneous version which apparently led to a higher morbidity than placebo. Roche’s (OTCQX:RHHBY) (OTCQX:RHHBF) (OTCPK:RHHVF) Tecentriq will be the first anti-PD-(L)1 cancer immunotherapy, in light of its approval in September 2024.

Financials

Merck’s latest quarterly results indicate that sales have grown but operating expenses and tax rates have gone up more, leading to lower GAAP earnings per share compared to the year before.

The company’s now guides for full-year sales of in between $63.6 billion and $64.1 billion, with a non-GAAP gross margin rate of about ~81%, operating expenses of about $26.8 billion to $27.6 billion, $350 million expenses and a tax rate of in between 15.5% and 16.5%.

The company has about $19.63 billion in cash and currently also pays a dividend of about $3.08 per share on a yearly basis.

Recent stock developments

The stock has sold off quite considerably since mid-2024, and selling does not seem to be done yet, by the looks of it.

I attribute that to declining Gardasil sales in China and investor fears that the Keytruda patent cliff may lead to bigger losses in revenue in the coming years than I do. Merck is heavily dependent on that drug. Recent quarterly results showed about 45% of sales came from Keytruda, and last year’s results mentioned that Merck was dependent on Keytruda and Gardasil for 56% of sales [page 32].

Furthermore, there is also increased competition for Keytruda. One recent development to highlight here is the announcement by Summit Therapeutics that ivonescimab reduced the risk of progression or death by 49% compared to Keytruda in non-small-cell lung cancer. Summit’s drug blocks both PD-1 and VEGF, and a caveat in that respect is that VEGF inhibition comes with toxicity, which often leads to lower overall survival. Nonetheless, Merck’s stock dipped and Summit’s soared the day of the announcement.

Valuation

Merck’s stock currently has a $249 billion valuation, down about -4% on a yearly basis and down from about $340 billion at this year’s peak, which represents a decline of about $91 billion. From many perspectives, different valuation indicators show that Merck has a rather low valuation at this time. The stock gets an A+ rating according to Seeking Alpha’s overall valuation measurements.

I believe the drop to a $249 billion is unwarranted. With about $63-$64 billion in expected revenue this year, the stock would currently be trading at a $3.92 EV/2024-sales multiple. If the projections for Keytruda sales would not be expected to improve, I would understand the sell-off. However, Keytruda is expected to generate an additional $4.5 billion in sales from now until 2028, and several of other Merck drugs and therapies such as Winrevair are also on the rise. With all other sales constant, adding another $4.5 billion to earnings would lead to close to $70 billion in earnings by 2028, with high profit margins.

And that growth trajectory for Keytruda may even continue considerably for the years to follow, up to $45.9 billion by 2032 as projected above, which may mean that even the drop in revenues related to Keytruda going off patent could be compensated by overall rising Keytruda sales.

Besides, Merck is still on the dealmaking path, and I assume it will want to strengthen its pipeline with late-stage assets to compensate for declining Keytruda revenues in the years to come.

Conclusion

Merck’s stock has been on the decline since mid-2024, having come off a market cap of about $340 earlier this year to about $249 billion at this time. The company currently trades at less than 4x expected 2024 revenues.

The recent decline in the stock price may have multiple reasons. I mentioned some possible explanations, such as declining Gardasil sales in China, investor fears that the Keytruda patent cliff may lead to big losses in revenue in the coming years, increased competition for Keytruda from Summit Therapeutics and Roche’s approval of subcutaneous Tecentriq, a PD-(L)1-inhibitor.

I believe that drop is unwarranted. I believe the market may underestimate the impact of expected revenues for Keytruda in the coming years, both before and after 2028 when Keytruda’s main patent will expire. Additionally, other drugs such as Winrevair and Koselugo may be able to generate additional billions in revenues in the coming years.

For the above reasons, Merck is a Buy for me here.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MRK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Merck: Keytruda’s Sales Projections Outweigh Competitive And Patent Risks appeared first on Up2info.com.

• Keytruda, Merck’s flagship oncology drug, drives significant revenue growth, with a solid market position and patent protection ensuring continued growth.
• Merck is the second largest player in the oncology drugs industry, which is expected to observe a 6.7% CAGR over the next five years.
• Merck’s consistent dividend payments over 34 years, healthy balance sheet, and attractive valuation highlight its investment appeal.
• Despite foreign exchange and geopolitical risks, Merck’s diversified portfolio and innovative pipeline support a bullish outlook.

Introduction

Merck & Co., Inc. (NYSE:MRK) is one of the world’s largest pharmaceutical companies, and its stock is conservatively valued. The company recently delivered a solid Q3 performance, consistent with its overall long-term trend of strong performance. Its exceptional capital allocation allows it to balance innovation, growth, and consistently paying growing dividends. The company is strategically positioned and actively expands its reach through R&D and M&A. The stock certainly deserves a ‘strong buy’ rating.

Fundamental analysis

Merck is a global healthcare company that develops and sells prescription medicines, vaccines, biologic therapies, and animal health products. With its $255 billion market cap Merck is the seventh-largest public healthcare company in the world.

The company operates in two primary segments: Human Health (around 90% of sales) and Animal Health. Merck has a diverse portfolio of offerings, but some of the most well-known are Keytruda and Gardasil. Keytruda is an oncology drug that represents the lion’s portion of the company’s revenue. According to the Q3 10-Q report, Keytruda generated $7.4 billion in sales out of the total $16.4 billion revenue. This represents around 45% of the total.

According to Statista, Merck and Roche share the second spot among the largest players in the oncology market by market share. This suggests Merck’s strong strategic positioning in the growing market. The same source indicates that the global oncology market is expected to demonstrate a solid 6.7% CAGR between 2024 and 2029. The below chart suggests that Keytruda sales are growing at an impressive pace. The drug loses its exclusivity in the U.S. in 2028, meaning there are still several years to enjoy solid growth.

The company is heavily focused on innovation, which I see from its $10.7 billion TTM R&D spending. Merck boasts over twenty Phase 3 assets in its pipeline, which underscores the company’s commitment to innovation and driving sustainable growth for shareholders. Apart from the R&D, Merck also seeks to grow through M&A. The recent acquisitions like EyeBio and Curon are aimed at enhancing the company’s capabilities in ophthalmology and immunology, which will help in improving Merck’s therapeutic reach.

Overall, Merck’s capital allocation strategy looks well-balanced as the company allocates capital between R&D, M&A, CapEx, dividends, and buybacks. At the same time, Merck’s balance sheet looks healthy with relatively low leverage. Another positive sign for investors is that Merck is a true dividend champion with 34 years of consistent dividend payments. The forward dividend yield is decent and above inflation at 3.06%.

The dividend is highly likely rock-solid based on Merck’s ‘A+’ credit rating from Fitch and historically strong profitability. Moreover, the recent Q3 earnings release was positive as well. MRK delivered positive revenue surprise and in-line non-GAAP EPS. Total quarterly revenue reached $16.7 billion, marking a 7% year-over-year growth on a constant currency basis. The EPS decline from $2.13 to $1.57 should not mislead because the increase in operating expenses were caused by the boost in R&D spending and impacted by acquisition-related charges. The important part is that the non-GAAP gross margin improved year-over-year by 3.4 percentage points on a constant currency basis.

So, what do we have at the end of the day? An innovative pharmaceutical company with strong positioning in a thriving oncology drugs market. Its flagship product demonstrates robust growth, and its U.S. patent is not expiring soon. There is a strong commitment to growth through R&D and M&A, backed by a healthy balance sheet and historically strong, improving profitability. I believe these factors are sufficient to support a bullish stance.

Valuation analysis

Merck appears very attractively valued when considering the dynamics of the forward P/E ratio through FY2027. The forward 12.8 FY2024 P/E ratio seems quite low, even for the defensive healthcare industry. Despite these low FY2024 levels, the P/E ratio is projected to shrink notably further through FY2027.

Merck’s dividend consistency is exceptional, making the DDM approach suitable for my valuation analysis. Merck’s cost of equity is 8.1%. The past decade’s dividend CAGR is 6.3%, and this is my first scenario. The current dividend is $3.05.

With a 6.3% constant growth rate MRK’s fair value is $169.44, around 69% higher than the current share price. Maintaining a 6.3% constant dividend growth rate might be a very challenging task, and it appears that I have to simulate a more conservative scenario. On the other hand, MRK’s share price was around $130 just a couple of months ago, meaning that a $169.44 fair value estimation is not that unrealistic.

Nevertheless, in the below table I am simulating the second scenario to find out which dividend growth rate the market expects from the stock based on the company’s current valuation. With the same 8.1% discount rate it appears that the market prices in a 5.1% dividend growth rate. This is significantly lower compared to the past decade’s CAGR, meaning that MRK is very conservatively valued.

Mitigating factors

In my analysis, I highlighted that Merck’s Q3 revenue grew by 7% on a constant currency basis. However, when factoring in foreign exchange headwinds, revenue grew by a more modest 4%. This indicates a significant adverse effect from foreign exchange fluctuations. This is due to Merck’s extensive international presence, with around 48% of sales generated outside the U.S. As a company that generates almost half of its sales internationally, Merck faces not only foreign exchange risks but also international trade and geopolitical risks. The situation might become adverse for Merck following Donald Trump becoming the 47th U.S. president, given his aggressive approach to resolving international trade disputes.

Keytruda is a major growth driver for Merck, and I bet any pharmaceutical company would want such a stellar product in its portfolio. However, having such an apparent star also means high reliance and dependence on the success of a single product. This could be adverse for Merck, especially considering the tough competition in the global oncology drugs market.

Conclusion

I think Merck is an attractive investment opportunity. The valuation is quite conservative, and the stock offers a solid dividend yield backed by historical consistency and solid growth. The company is well-positioned in a thriving oncology industry, demonstrates historically strong financial performance, and has delivered a strong quarter recently. The stock certainly deserves a ‘strong buy’ rating.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Merck: An Undervalued Dividend Machine appeared first on Up2info.com.

• Merck & Co., Inc.’s Q3 earnings report is anticipated on 31st October — next Thursday.
• Despite strong Q2 performance, Merck’s stock fell due to a guidance downgrade related to issues with key drugs Gardasil and Winrevair.
• Merck’s diversified pipeline includes promising oncology candidates and a new pneumococcal vaccine, but lacks a ready-made Keytruda replacement.
• Investors should monitor R&D updates closely, as Merck’s future hinges on new drug developments amid looming patent expirations.
• Keytruda is now under threat not only from patent expiries but also from new drug candidate ivonescimab, the first to outperform it in a Phase 3 study. It shouldn’t be forgotten that >$9bn p.a. selling Gardasil also loses patent protection in 2028.

Investment Overview

Merck & Co., Inc. (NYSE:MRK) will report its Q3 earnings next Thursday, 31st October. I covered the company shortly before Q2 earnings, assigning the stock a “Hold” rating. My reasoning was fairly straightforward – after surging from $100 per share, in November 2023, to $130 per share, shortly before earnings were set to be announced, I didn’t see compelling reasons for Merck’s valuation to grow much higher, writing:

Today, Merck’s forward price to sales ratio is ~5x, which is about average for the Big Pharma sector, while its price to earnings ratio is ~15x, which is a little lower than average, without being compelling.

I suspect that strong, mid-single digit growth and an increase in profit margins is already baked into Merck’s share price at this time, while the referendum on Keytruda is just beginning. Personally, I am on the sidelines until there is more clarity about what the implications of Keytruda’s loss of market exclusivity may be.

Keytruda is the jewel in Merck’s crown, being its >$25bn selling (in 2023) cancer immunotherapy, which accounts for ~45% of Merck’s total revenues. The programmed death (“PD-1”) pathway inhibitor is approved for multiple types of cancer, mainly solid tumor, and is typically viewed as a “best-in-class” treatment option in most of its indications.

Keytruda’s patents are due to expire in 2028, however, at which point generic versions of the drug will be permitted to enter the market, which will undercut Keytruda on price and reduce its sales volumes – revenues will likely begin to decrease by 25-35% per annum.

As such, I also concluded in my last note that:

the importance of Keytruda to Merck’s business is such that, going forward, almost every quarterly earnings review is likely to become a referendum on how the company will cope before, during, and after, the dreaded patent expiration.

Just for good measure, Merck’s second best-selling asset, the HPV vaccine Gardasil – >$8.9bn of revenues in 2023 – is also set to lose its patent protections in 2028. That is ~$35bn, or 60% of Merck revenues at risk of being eroded at >25% per annum after 2027.

Q2 Earnings Overview: A Beat, But A Bad Market Reaction

In Q2, Merck outperformed analysts expectations on earnings per share (“EPS”) – GAAP and non-GAAP – and on revenues – which were $16.1bn for the quarter, with GAAP EPS of $2.14, and non-GAAP EPS of $2.28.

The company also guided for full-year 2024 revenues of $63.4bn – $64.4bn, and EPS of $7.94 – $8.04. This translates to a forward price to sales (“P/S”) ratio – at current share price of $105 per share, and market cap valuation of $267bn – of ~4.2x, and a forward price to earnings (“P/E”) ratio of ~13x.

The ratios look more compelling today than they did back in July for one primary reason: post Merck’s Q2 earnings, the market sold off Merck stock, which fell in value by nearly 10% overnight.

The above guidance was downgraded from Q1, when management advised FY EPS of $8.53 – $8.65. This was put down to the company’s acquisition of the eye disease drug developer EyeBio, for $1.3 billion in cash and, potentially, a further potential $1.7 billion in developmental, regulatory and commercial milestone payments.

Other issues that affected performance were a slowdown of Gardasil sales in China, and a slightly underwhelming post launch revenue figure of $70m for pulmonary arterial hypertension drug Winrevair, which Merck has suggested could be a ~$6bn peak revenue drug. Winrevair has since secured approval in the EU.

Merck markets and sells numerous drugs. I have provided an overview below, breaking down revenues in 2023, Q1 and Q2 2024, and an estimated final year revenue figure, also showing sequential growth as a percentage, and the percentage of total revenues each product accounts for.

We might conclude that Merck actually delivered a fairly impressive performance in Q2, with key divisions such as Oncology, Vaccines, Cardiovascular, and Hospital Acute Care all showing good sequential growth. This is despite Virology division revenues falling due to the absence of COVID-19 therapy revenues, and Diabetes division revenues also falling owing to the patent expirations of Januvia and Janumet. Animal Health revenues also fell by ~2%.

Despite the approval of Winrevair in Europe, however, and multiple new approvals for Keytruda in various combinations with either cancer drugs (and some study failures in the same field, it should be acknowledged), shares have not picked up any value in the past few months. In fact, they have fallen in value – and once again, the reasons for this is likely Keytruda related.

A New Keytruda Threat Emerging?

In early September, the share price of a small biotech named Summit Therapeutics (SMMT) went supernova. It rose from $12, to $31 per share, after its Chinese partner, Akeso Therapeutics, became the first company to produce a drug that outperformed Keytruda in a Phase 3 clinical trial.

The drug’s name is ivonescimab, and according to Summit it is:

a novel, potential first-in-class bispecific antibody intending to combine the effects of immunotherapy via a blockade of PD-1 with the anti-angiogenesis effects of an anti-VEGF compound into a single molecule.

Akeso shared data from its study, which indicated that ivonescimab “reduced the risk of disease progression or death by 49% compared to pembrolizumab monotherapy.” Ivonescimab also achieved a median progression free survival (“PFS”) of 11.14 months versus 5.82 months for Keytruda, with a comparable safety profile. The drug also outperformed pembrolizumab (the underlying ingredient in Keytruda) in terms of objective response rate (“ORR”) and disease control rate (“DCR”) as well.

Essentially, Summit, led by the biotech entrepreneur Robert Duggan – whose former company Pharmacyclics developed Imbruvica, a >$10bn per annum peak selling leukemia drug – will attempt to bring ivonescimab to market in the US, and market it as Keytruda 2.0. It appears as effective at PD-1 blocking as Merck’s drug, with the added benefit of VEGF inhibition.

Naturally, it’s early days for Summit and ivonescimab, but it is probably no coincidence that Merck stock has slipped from nearly $120 per share, to $105 since Akeso’s data was released.

During a fireside chat at a recent Bank of America healthcare conference, Merck’s President of Human Health International, Joseph Romanelli, discussed ivonescimab and the ground-breaking data as follows:

I would say, encouraging for them to then start a Phase III study. We’ll see what happens. Typically, our experience in anti-PD-1, combined with an anti-VEGF, generally, they are disparities between regions. And we’ve seen that with anti-VEGF, certainly, it seems to work better in East Asian population.

I mean this is one country. It was in China where they had the study. Again, can you replicate that study internationally, do multinational clinical studies, do the Phase III. And what’s important, particularly for payers for where we are in the world right now is you need overall survival. And so, making sure that you set up the studies, do you prove overall survival.

The other issue is KEYNOTE-189, our combination of KEYTRUDA and chemo, creates a very high bar. And I know that in this particular study it was just KEYTRUDA. So KEYNOTE-189, whether it’s for them, so anyone that’s trying to develop combinations of bispecific or if it’s us using KEYTRUDA with one of the ADCs that we partnered with, whether it’s Kulun or Daiichi Sankyo. And we’re very excited about our entire portfolio ex KEYTRUDA.

On the one hand, it’s pretty clear that Keytruda revenues will not be blown off course by ivonescimab in the short term, while ivonescimab still has so much to prove, especially in the US. On the other hand, we might speculate that one way or the other, whether it’s through generics, or ivonescimab, or another drug, the Keytruda era is approaching the beginning of the end of its natural conclusion.

It is only the beginning of the end because it should be noted that Merck is working on a subcutaneously administered version of Keytruda. If successful, it could provide many more years of patent protection, but likely, only in ~50% of Keytruda’s current markets.

What Should We Expect In Q3?

Analyst’s consensus is that Merck will achieve normalized EPS of $1.58 in Q3, GAAP EPS of $1.48, and revenues of $16.49bn. I doubt Merck will fail to meet that mark. However, I also doubt the company will confound expectations with a strong quarter. It may take time to bring Winrevair up to speed commercially, and the issues affecting Gardasil may not yet be fully resolved.

I would not be surprised if Keytruda revenue surpasses expectations again, however. It remains the most successful cancer drug on the market by a long way, and will remain so for at least two-or three more years, likely breaking past $30bn revenues per annum. We should also note the recent approval of Capvaxie, a pneumoccocal vaccine expected to drive >$1bn in peak revenues.

Merck is certainly not ignoring the upcoming patent expirations of Keytruda or Gardasil, and is developing a host of intriguing pipeline candidates, and I’d expect there to be plenty of updates shared when earnings are released next week.

By my count, Merck has ten mid-to-late stage oncology candidates in development. Some are leveraging Merck’s partnership with Daiichi Sankyo to develop antibody drug conjugates (“ADCs”), a pioneering new type of dual action therapy (two candidates to date – ifinatamab deruxtecan (I-DXd) and patritumab deruxtecan – have delivered promising data in lung cancer).

There is also a promising late-stage RSV vaccine candidate, cardiovascular drug MK5475, and four immunology drugs (targeting hypercholesterolemia, inflammatory bowel disease, and ulcerative colitis – multi-billion dollar markets).

Strangely, Keytruda is the only cancer drug the company fully owns and markets and sells. However, expect that to change in the coming years. Merck and Daiichi’s partnership involved an initial $4bn payment from Merck, but that could rise to >$23bn based on how many candidates are developed and approved, and their commercial success. We might also note Merck has acquired another biotech, Modifi Biosciences, spun out from Yale University, and specializing in DNA repair proteins known as O6-methylguanine methyl transferase, or MGMT.

Final Thoughts: Merck Rarely Underperforms Expectations, But Hard To Ignore Gardasil / Keytruda Issues

As we can see above, Merck’s quarterly performance is generally solid, and while revenue growth has not been explosive in the past couple of years, profitability in 2024 to date has been exceptional.

Merck shareholders – in my view – are entitled to shrug their shoulders at recent share price losses and ask what the problem is? The company has the world’s best-selling drug, with three more years – at least – of >$30bn per annum revenues (I suspect this figure may be reached in 2024). It is the second or third-highest revenues of any Pharma company globally, a dividend that yields nearly 3% per annum, a share price up >30% on a five-year basis, and current assets of ~$38bn (as of Q2), against long-term debt of ~$35bn (low by Big Pharma standards).

What exactly is the issue? It is a fair argument, but investors chasing near-term value may not find Merck stock especially compelling now. I wrote in Q2 that Keytruda – despite being a miraculous drug and an incredible source of revenues that may well still be earning >$15bn per annum in 2035 – will be a headache for Keytruda’s investor relations team because the questions around loss of exclusivity and new competitive threats will keep coming.

Unlike AbbVie (ABBV), another Pharma giant who once marketed and sold the world’s best-selling drug, Humira, and developed two ready-made replacements in Skyrizi and Rinvoq before Humira even lost US patent protection, Merck does not have a ready-made replacement for Keytruda (although Summit Therapeutics may have one). The challenge of developing four or five highly successful cancer drugs to offset revenues from a single asset will not be easy.

As such, while Merck shareholders may feel they can afford to sit tight and ride out the Keytruda / Gardasil patent storm, they may also be wise – along with anybody searching for short-term value or a decent entry point to open a position in Merck stock – to pay close attention to the R&D updates during the Q3 earnings call. These are arguably more important than the financials, which will take care of themselves, so long as Keytruda is patent protected.

Merck’s new era will begin when Keytruda revenues begin falling – it isn’t here yet, but it may not be too far away, and the company is arguably less well-prepared for this era than it might be. For example, the company may do well to attempt to enter the weight loss market, and develop a GLP-1 agonist to rival the likes of Eli Lilly’s (LLY) tirzepatide or Novo Nordisk’s (NVO) semaglutide.

These drugs will become the world’s new best-selling drugs before the end of the decade, and Merck does not have candidates of note in this field. As such, if I were holding Merck stock, I may be ever so slightly tempted to switch my holding into a comparable Pharma that does have such a candidate – there are a few to choose from.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABBV either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

If you like what you have just read and want to receive at least 4 exclusive stock tips every week focused on Pharma, Biotech and Healthcare, then join me at my marketplace channel, Haggerston BioHealth. Invest alongside the model portfolio, or simply access the investment bank-grade financial models and research. I hope to see you there.

The post Merck Q3 Earnings Review: Solid Financials May Be Undermined By New Keytruda Threat appeared first on Up2info.com.

• Merck is a blue-chip stock, but that doesn’t mean I want to own it here. The risk of loss is too high, based on several metrics I track.
• Technical indicators and charts suggest high risk for MRK, with the stock repeatedly breaking down and showing negative trends.
• MRK’s current dividend yield and price-to-sales ratio indicate it’s expensive and not a good buy at present.
• MRK remains on my watchlist, awaiting a lower-risk buying opportunity, but it’s a strong sell given its current high-risk profile.

My previous article “featured” a set of 11 stocks out of the 30 in the Dow Jones Industrial Average that have earned zero returns over periods of a few years to a quarter-century. These are not penny stocks. They are blue chips. And that serves as a reminder to me (and perhaps to other, like-minded investors) that when it comes down to it, investing in stocks is not a 2-way street.

We humans tend to fall in love with stocks. Often it is either because we have had profitable experiences with them, or in the case of young companies or those deeply out of favor, we see reason for optimism when others may be less aware, or less willing to dive in and risk capital.

My YARP™ dividend stock portfolio likes Dow Industrials stocks. But not this one

My 40-stock portfolio that I have written about here several times recently favors the stocks in the Dow with strong yields. However, it doesn’t matter what the stock is, or how blue a chip it happens to be. If it doesn’t pass some tests I apply quite consistently, it doesn’t fit in the portfolio. Instead, as with MRK, it stays on my watchlist, which is 35 stocks I’d like to own “at a price” but that price is not yet a reality. And of course, since I stick to 40 stocks at most, if a stock does not merit replacing one I own, that’s also a “no” for me.

Merck (NYSE:MRK) is far from being a new kid on the block. It was a high-growth company back around the time of the dot-com bubble, and like a tech stock (which it is not), it flew high, then crashed hard. And while I don’t see the risk being as high as it was then, I don’t think it has been higher since that time, 24 years ago.

As always, I come back to my mantra on stocks: anyone can go up in price at any time. Where one stock differs from another is in how much risk one is taking to own it.

MRK could find a way to rally for any of several reasons, including “tagging along” if there’s another leg higher in the broad stock market, or if healthcare stocks suddenly become safe havens again. But I’ll pass on that potential here. I think the risk is historically high, for a range of technical and quantitative reasons described below.

The case against MRK

I often save the technical charts for last. But here, I want to start with them, since they ooze risk to me. This is the daily. Not only is the stock obviously falling (you don’t need to have 44 years of stock charting under your belt as I do to see that), it is also breaking down repeatedly. First, to the March 2024 lows, and then below that. And that 20-day moving average (red line, top part of chart) is now rolling over again. That is as good a short-term sign that something is up as any.

The bottom of the chart above shows a similar “rolling over” pattern in the PPO indicator I favor for my stock work. Furthermore, it is rolling over while rejecting a move above the 0.00 line. Sort of like it came close but then failed at the goal line.

The weekly chart below is more of the same. Except that the PPO trend is poised to enter new low territory. It is already negative, and getting worse.

None of this automatically spells doom. I don’t invest that way. I don’t include 100% or 0% possibilities, as I don’t think they exist in investing. And if they do, there’s always a first time. Risk management is all about that in modern markets, with things happening to stocks that we have not seen in the past. Earnings reactions have become a casino game. And “great companies” can be terrible stocks if bought just when they were at peak popularity.

So in MRK, I see a very low probability of strong gains for a while, until the bad stuff noted above is worked off. That could take some time. And still, if someone asked me “is there a chance that MRK can go up 10%, 20% or more before it falls by that much” I’d say, of course. But that’s not a chance I intend to take. There are too many other stocks to consider, including the many I currently own, which avoid the need for chasing or taking on risk in the face of pictures that look like these.

YARP analysis: very high risk

Here is when MRK was a buy based solely on my Yield at Reasonable Price statistic, which will formally carry a registered trademark later this month. This runs through the fourth quarter of 2022. The 7-year through that time saw MRK in a dividend yield range of about 2.6% and 3.8%. As 2022 ended, the yield was toward the top of that range, but showing signs of dropping from that peak. That implies not only a positive-trending stock price, but also that it could be climbing back from the top of the yield/bottom of the price range.

MRK moved about 60% higher in price within under 2 years.

And now it looks as shown below. The opposite picture, with dividend yield moving up from the bottom of the 7-year range. That’s a high-risk YARP scenario. Again, no guarantees. Just very high risk. I code that “red” in my 5-color scale (green is highest, then blue, gray, yellow, and red as highest risk).

2.8% is not a great yield “on cost” to enter MRK. Not historically, not now.

It is on my watchlist because at some point I expect it to be very buyable. But who knows when that will be? Profitability gets an A+ grade, and that plus the growth grade tell me that this is not a matter of not wanting to own MRK. It is more that I’d like to have a chance to buy it well south of here.

Is that at $100 a share? $85 a share? Lower? I won’t know until we get there, and my process signals me that risk is low compared to reward potential.

This Price-to-sales ratio confirms my analysis above. Expensive!

So too does this smoothed PE ratio (5 years of trailing earnings).

The dividend is solid. I just want a “solid” 3%+ yield when I buy in.

Conclusion

MRK is a watchlist name, not an “own it now” name for me. And a strong sell given that ominous-looking chart set.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Merck: Murky Is A Better Description – Strong Sell (Technical Analysis) appeared first on Up2info.com.

• Merck’s recent decline is due to reduced profit guidance and FDA decisions, but shares are at a support level that is likely to hold.
• Keytruda remains a key revenue driver, with potential for continued growth and extended patent protection through a subcutaneous formulation.
• Strategic acquisitions are broadening Merck’s pipeline and should reduce its reliance on Keytruda, despite the short-term profit impacts.
• Merck’s dividend is well-covered, and shares are positioned for appreciation, making current pricing an attractive entry point.

After several years of outperformance, Merck (NYSE:MRK) has been declining since the start of the summer, and especially following the company providing a guidance cut to its full-year profit outlook. In the last few weeks, Merck has continued to decline, including after the FDA voting against broadened use of Keytruda in certain patients with stomach cancer. Now, shares have reached the bottom of their recent trading range, and appear to be at a level of support that is reasonably likely to hold. As such, shares offer a reasonable value at risk at current pricing, and a strong likelihood of appreciating in the coming months and quarters.

Last month, the FDA’s Oncologic Drugs Advisory Committee voted 10-2, with one member abstaining, that Merck’s Keytruda and Bristol Myers Squibb’s (BMY) Opdivo are not beneficial for stomach cancer patients who test negative for the PD-L1 cancer biomarker. This decision also compels a change in the labeling information for these drugs, which are indicated as first-line treatments for HER2-negative unresectable or metastatic gastric or gastroesophageal junction adenocarcinoma (“GEJ”).

This label change and failure to obtain a broadening of use reduces the projected future revenue of Keytruda, and this has likely weighed on Merck’s valuation. Also, the reduced profit guidance Merck provided in July is probably still contributing to it recently declining. That reduced profit guidance was due to multiple factors, such as the slowing growth seen by versions of its Human Papillomavirus vaccine, Gardasil, as well as the almost halving of revenue from Merck’s COVID-19 therapy, Lagevrio.

The key driver behind Merck’s reduced full-year 2024 profit guidance was the one-time impact from recent buyout deals. Merck anticipated the cost of those deals will reduce full-year earnings by approximately $0.77 per share.

Merck also recently completed the acquisition of CN201.

Merck, through a subsidiary, has agreed to acquire CN201, a novel investigational clinical-stage bispecific antibody for the treatment of B-cell associated diseases.

“We continue to identify opportunities to expand and diversify our pipeline,” said Dr. Dean Y. Li, president, Merck Research Laboratories. “Early clinical data have provided robust evidence for the potential of CN201 to target and deplete circulating and tissue B cells with the potential to treat a range of malignant and autoimmune diseases.”

Under the terms of the agreement, Merck through a subsidiary will acquire full global rights to CN201 for an upfront payment of $700 million in cash. Curon is also eligible to receive up to $600 million in milestone payments associated with the development and regulatory approval of CN201.

Since the acquisition was agreed to in early August, the charge was not included in Merck’s full-year financial outlook guidance provided on July 30.

Adding this acquisition to the July information means the total cost of recent deals should reduce Merck’s full-year prior guidance by approximately $1.05 per share. The July 30 update included Merck’s acquisitions of EyeBio, and Elanco Animal Health’s Aqua business, both of which Merck completed in early July. Merck indicated it would record a charge of approximately $1.3 billion, or approximately $0.50 per share, for EyeBio, and in the third quarter of 2024, which would have been included in the July 30 update. Merck also completed the acquisition of Harpoon Therapeutics In March for approximately $650 million, or approximately $0.26 per share, but this charge was disclosed in Merck’s initial full-year 2024 financial outlook that it issued in February.

Merck appears to be getting punished for its multiple acquisitions, as well as the decision to pay for them up front. Nonetheless, Merck’s actions were not particularly bad, and actually are what a company like Merck should be doing. The company is still incredibly profitable, but has become highly dependent upon the performance of Keytruda, so Merck is using some of its profits to acquire a pipeline of drugs, as well as existing revenue streams. Elanco’s Aqua business brought with it products across both warm-water and cold-water species, and generated for Elanco an estimated $175 million in revenue and approximately $92 million in adjusted EBITDA, excluding the allocation of corporate costs, in 2023. These appear to be reasonable acquisitions, where Merck needs to broaden its drug portfolio in order to reduce concentration risk related to Keytruda.

Other recent concerns that may be affecting Merck likely include a significant cut to Medicare pricing for Januvia, Merck’s diabetes drug. Among the ten drugs for which the U.S. negotiated lower pricing, Januvia took the largest percentage reduction, with a 79% price cut from the 2023 list price.

The key product within Merck’s portfolio of drugs continues to be Keytruda, which brought in approximately $7.3 billion in sales during the second quarter of 2024, and which is still growing. Keytruda Q2 2024 revenue grew by about 16% year-over-year and beat expectations by approximately $100 million. Last quarter, Keytruda’s revenue made up about 45% of Merck’s total quarterly revenue, which came in at about $16.1 billion. This total revenue figure also represented year-over-year revenue growth of about seven percent.

Another positive result is that should kick in on upcoming earnings reports is from Winrevair, following its FDA approval for pulmonary arterial hypertension this March. Winrevair was acquired along with Merck’s 2021 buying of Acceleron Pharma. Q2 was the first full quarter for Winrevair and the drug brought in about $70 million in revenue, which is likely to increase in coming quarters. Winrevair’s growth in the second half of 2024 may not provide total clarity into the drugs trajectory, as it is possible that the Q2 numbers included some initial stocking of inventory. Of course, that could also be in effect in Q3. In any event, Winrevair appears likely to become a more meaningful contributor to sales over time.

While I anticipate that Keytruda growth will eventually peak due to the significant size it has already reached, as well as its eventual patent expiration, the drug is often approved for additional indications and earlier lines of therapy. It is still entirely possible that Keytruda might sustain double-digit revenue growth for the next few years. Further, Merck is working on a subcutaneous formulation of the drug that could be applicable for about half of the current Keytruda indications. The subcutaneous formulation is currently in Phase 3 development. By coming out with a subcutaneous formulation, Merck could extend patent protection into the late 2030s.

Merck’s chart also indicated that shares are trading at the bottom of its apparent trading range. If this is the case, shares should find a reasonable level of support here, and could be at or close to their near term bottom.

Merck’s performance at the end of 2023 was also reasonably weak, but the company gapped up at the start of the year, when it quickly returned to that level, after which it continued to appreciate towards new all-time highs. This recent decline has taken shares back to a level that acted as both support and resistance in 2023. It also takes shares back to a level that appears in line with the bottom of Merck’s still continuing long-term uptrend over the last three years.

For these reasons, I believe that Merck’s gap down has taken shares to a level that is likely to be supportive, and where it makes sense to acquire shares upon any continued weakness. A break of this level is likely to also find strong support at about $100, but I believe that a drop to that level is unlikely due to the strength of Merck’s revenue on profitability, as well as its dividend.

Merck’s dividend payout is currently an annualized $3.08 per share, or a yield of about 2.8 percent, and it is well covered with Merck’s earnings per share being more than double this level. Also, Merck has raised its dividend in each of the last 13 years, and usually in the fourth quarter of the year, with its 5-year growth rate being just under eight percent. This indicates a reasonable likelihood that a dividend increase is forthcoming later this year.

Risk

Risks to Merck include its continued dependence upon Keytruda. The drug is one of the most successful drugs on the market, and contributed nearly half of Merck’s total revenue. Competing medications should eventually be approved. Also, Medicare may negotiate better pricing, which would reduce Merck’s revenue and profit margins. Keytruda also faces patent expiration in 2028, and this is likely to cause margin pressure. Though Merck is working on a subcutaneous formulation that could extend that patent protection by another decade, it would only apply to about half of Merck’s existing Keytruda prescriptions.

Merck also consistently makes acquisitions, and probably needs to continue to do so in order to reduce its dependence upon Keytruda. It is possible that future acquisitions will further reduce Merck’s profit guidance, and the failure of the pipeline drugs it acquires would also be a negative.

Other concerns include potential poor results from clinical trials. For example, in September, Merck announced that a Phase 3 trial designed to test Keytruda as part of a combination regimen in patients with a type of colorectal cancer did not reach the primary endpoint. Merck also recently discontinued two Phase 3 Keytruda trials due to poor benefit/risk profiles. One, KEYNOTE-867, was evaluating Keytruda plus stereotactic radiotherapy in patients with stage I or II non-small cell lung cancer, and the other, KEYNOTE-630, was evaluating Keytruda for the adjuvant treatment of patients with high-risk locally advanced cutaneous squamous cell carcinoma following surgery and radiation. Merck also stopped another Keytruda late-stage for its use as a first-line treatment of patients with extensive-stage small cell lung cancer.

It is also often the case that pharmaceutical companies and related healthcare equities become volatile and sustain temporary declines prior to presidential elections. This is due to heightened uncertainty around the potential for increased regulatory pressure and potential Medicare price negotiations.

Conclusion

Merck has declined over the last several months due to some reduced profit guidance that is largely due to a series of acquisitions the company made in 2024. Merck also had some poor clinical trials related to Keytruda, and a recent FDA vote that failed to further expand the drug’s usage in certain stomach cancers. Merck now appears to be at a price that acted as both support and resistance in 2023, and which is likely to act as support here. Merck’s revenue continues to appear strong, and Merck is also likely to increase its dividend later this year. For these reasons, I believe Merck shares currently offer a reasonable value at risk and are likely to appreciate over the coming months and into 2025.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MRK, BMY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Merck Is At Support And Should Go Higher (Technical Analysis) appeared first on Up2info.com.