Why We Are Ahead On Merck

Our price estimate for Merck (NYSE:MRK) stands at $63.30, implying a premium of about 10% to the market price. We have upgraded Merck’s valuation based on the company’s recent progress in two critical growth areas – Hepatitis C and Immuno-Oncology. We have previously stated that a successful launch of hepatitis C drug and additional approvals for Keytruda are likely to be key catalysts for Merck’s stock (read: These Two Catalysts Can Move Merck’s Stock Up) At this point, it appears that Merck will get some incremental profits from the potential approval of a combination therapy for Hepatitis C and the approval of Keytruda for lung cancer treatment.

See our complete analysis for Merck

A combination therapy for Hepatitis C (grazoprevir and elbasvir) filed by Merck is up for FDA review. The treatment has demonstrated impressive cure rates for genotypes 1, 4 and 6 of the disease. This puts it in direct competition with Harvoni, which is an oral interferon and ribavarin free drug developed by Gilead Sciences. If Merck’s new drug is successful, it could add incremental revenues of several billion dollars over the next few years. This impact will come not only from improved revenue growth, but also from an increase in gross margins, as we expect high margins for Hepatitis C drugs.

Additionally, Merck’s immuno-oncology drug Keytruda has received priority review from the FDA for non-small cell lung cancer (NSCLC). If approved, the drug can significantly expand its target market over the course of next year. The commercial opportunity can increase significantly due to larger population of potential patients. Lung cancer is one of the most prevalent cancer types in the world, both in terms of incidence and mortality.

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