Merck (MRK) appears to present a strong relative value within the market. Merck shares have gone nowhere in a while, but I believe this is the last part of a break-out process on a multi-year base. I believe MRK shares are now ready to exit this trading range and melt up into a new higher valuation and multiple.
Merck has a reasonably strong portfolio of drugs. Its crown jewel is Keytruda, which is a monoclonal antibody used to treat cancer as an immunotherapy alternative to chemotherapy and/or radiation therapy. Keytruda continues to be approved for new and expanding indications, and the company continues to grow its sales. Additionally, Merck continues to grow sales of Gardasil, the company’s HPV vaccine. Both of these drugs are blockbusters, earning billions each quarter. In its last reported quarter, Merck had sales of $4.5 billion from Keytruda, and $2 billion from Gardasil.
Merck also has an animal health division that earned about $1.4 billion last quarter. This division may make for a great spin-off or sale. This might add greater focus on Merck’s core areas, while also potentially creating a pure play animal health entity. Merck recently divested Organon, which included Merck’s women’s health and a portfolio of lower margin/growth generic drugs.
Acceleron adds some cardio
Merck recently acquired Acceleron about $11.5 billion. Acceleron is a commercial stage biopharmaceutical company with two key drug candidates: Sotatercept for pulmonary arterial hypertension, and Reblozyl for the treatment of anemia in rare blood disorders.
This acquisition adds significant diversification to Merck’s pipeline, and the potential for it to add new and diversified blockbusters. Sotatercept is in multiple phase 3 clinical trials, and it is likely that there will be some material update within 2022.
Acceleron also brings with it some level of expertise in TGF-Beta, which appears to have great potential to provide oncology and autoimmune therapies.
Major breakout potential
Moreover, it also appears that this multi-year basing process is forming a handle on a multi-decade cup and handle, while simultaneously entering the second decade of an uptrend. Merck is actually approaching prices it last hit around two decades ago, before Vioxx liability hurt the company.
Merck’s dependence upon blockbusters like Keytruda and Gardasil is a risk. Anything that hurts to the sale of either would be a serious issue, as each represents a significant share of total revenue, and projected growth in the coming years.
Merck is also highly sensitive to political risk, as are all large pharmaceutical companies. Any increased attention upon the company or industry could weigh on share demand. Even large pharmaceutical companies can suffer drawdowns of greater than 20% during heightened political scrutiny.
Any significant negative trial update is also likely to weigh upon Merck’s valuation. This would especially be the case if it affected Keytruda’s continued rollout, or called into question the future of Sotatercept.
Merck has two blockbuster drugs and a large portfolio of supporting treatments. Merck’s dividend is reasonably well covered, and the company is likely to increase the payout late in 2022. The company appears undervalued, and likely to melt up through the first half of the year. Merck appears reasonably likely to make new all-time highs within 2022.