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Merck in good health

Slimming down into a more focused group, with blockbuster drug ‘Keytruda’ at the helm
July 2, 2020

Merck (US:MRK) is a leading specialist in ‘immuno-oncology’ – a form of cancer treatment that helps the immune system to detect and fight tumour cells. While the New York-listed healthcare giant only launched its immunotherapy product ‘Keytruda’ five years ago, this has since been approved across 16 different types of cancer – from non-small cell lung cancer to renal cell carcinoma. It has also generated huge revenues for Merck – achieving growth of 45 per cent to $3.3bn (£2.7bn) in the first quarter of 2020 alone, or roughly a third of the group’s overall pharmaceuticals sales.

IC TIP: Buy at $75.19
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Strong growth driven by blockbuster ‘Keytruda’ drug
Revenues diversified across product lines
Margin expansion
Encouraging pipeline

Bear points

Guidance knocked by Covid-19 disruption
Risk of trial failures and competiton

That three-month figure was not far off the $3.8bn in revenues achieved by Keytruda for the entirety of 2017, reflecting just how quickly demand has ramped up. And the blockbuster drug should have plenty of road ahead of it, while scientists continue to trial new potential uses. Indeed, as of 1 May, the group’s pipeline included 14 late-stage (‘phase three’) clinical development programmes for Keytruda – meaning we may well see further approvals over the eight years before Merck loses it exclusivity rights.

Among its other pharma products, Merck offers the oncology drug ‘Lynparza’ in collaboration with AstraZeneca (AZN). It also makes vaccines, which typically have high barriers-to-entry, including the ‘Gardasil’ human papillomavirus (HPV) inoculation. And it has a separate animal health division. That 'conglomerate structure' is what makes Merck “a very attractive long-term growth asset” in the view of Dani Saurymper, manager of the AXA Framlington Health Fund (GB00B6WZJX05). Merck was the second-largest holding in both this fund and the Worldwide Healthcare Trust (WWH) at the end of last month.

Merck has not been immune to the disruption caused by coronavirus. About two-thirds of its pharma revenues constitute doctor-administered products, which have been hit by social-distancing measures and fewer elective surgeries. And while the animal health business reported a $60m benefit during its first quarter as customers stocked up on livestock goods, Merck said it expected fewer veterinary visits along with lower protein and milk consumption because of restaurant and school closures. It follows that the group anticipates a $2.1bn hit to full-year sales, reducing its guidance to $46.1bn-$48.1bn. It has also suspended its share buyback programme.

Still, in normal times, Merck boasts a solid financial track record – with a compound annual revenue growth rate (CAGR) of 5.6 per cent over the three years to 2019. Meanwhile, pre-tax profits enjoyed a much greater CAGR of 35 per cent. And margins should continue to strengthen as Merck focuses increasingly on its core areas of expertise – shifting from a broader-based primary-care model to a hospital oncology and specialty business.

The group announced in February that it would spin off its women’s health, legacy brands and biosimilar divisions into a new publicly-listed entity next year. This would, management said, allow it to “move closer to its aspiration of being the premier research-intensive biopharmaceutical company” – and a target adjusted operating margin of more than 40 per cent by 2024.

Merck has also added to its portfolio this year with its acquisition of Themis, a developer of vaccines and immune-modulation therapies, in late May. That deal, plus collaborations with biotech firm Ridgeback Bio and non-profit organisation IAVI, has allowed it to enter the Covid-19 fray.

Merck & Co., Inc. (NYSE: MRK)    
ORD PRICE:7,519ȼMARKET VALUE:$190bn  
TOUCH:7,519-7520ȼ12-MONTH HIGH:9,264ȼLOW:6,525ȼ
FORWARD DIVIDEND YIELD:3.4%FORWARD PE RATIO:12  
NET ASSET VALUE:1,038ȼ*NET DEBT:78%  
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)**Earnings per share (ȼ)**Dividend per share (ȼ) 
201842.314.5434192 
201946.816.1519220 
2020**47.116.2525244 
2021**51.218.7608256 
% change+9+15+16+5 
Beta:0.32
*Includes intangible assets of $36bn or 1,421ȼ a share
**RBC Capital Markets forecasts, adjusted PTP and EPS figures