We Remain Optimistic On Merck Despite Recent Fall

-7.29%
Downside
132
Market
122
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MRK: Merck logo
MRK
Merck

Merck‘s (NYSE:MRK) stock has fallen roughly 15% over the last month or so. However, our price estimate for the company still stands at $65, implying a healthy premium of about 30% to the market price. So why are we optimistic about Merck? For starters, most of the recent fall in the stock can be explained by the broader market decline stemming from economic concerns in Asia, particularly China. We expect this price decline to correct itself over time. Second, we believe that Merck’s expected incremental cash flow from its progress in therapies for both Hepatitis C and cancer treatment justify the premium. Both these areas have significant growth potential and Merck is making reasonably good efforts to tap this potential.

See our complete analysis for Merck

We expect Merck’s oncology and anti-infective cash profits (cash flow to firm) to grow from roughly $3.2 billion in 2014 to $4.5 billion in 2022. During the same period, their contribution to the firm’s total cash profits will increase from 25% to more than 40%. This growth will be driven by the ramp up in oncology drugs sales, partially offset by patent-induced  decline in certain anti-infective drugs, especially those falling under acute care category. The anti-infective segment will get some support from growth in vaccines as well as Hepatitis C therapies.

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Merck has couple of Hepatitis C programs in Phase 2 trials and has filed FDA review application for a combination therapy (MK-5172A) of Grazoprevir and Elbasvir. If approved, the drug will help Merck challenge Gilead Sciences’ Harvoni, which is an oral interferon and ribavarin free drug. Merck will benefit from improved revenue growth and higher gross margins, as we expect Hepatitis C drug to have high pricing. Additionally, Merck’s immuno-oncology drug Keytruda has received priority review from the FDA for non-small cell lung cancer (NSCLC). Keytruda can significantly expand its target market over the course of 12 months. Lung cancer is one of the most prevalent cancer types in the world, both in terms of incidence and mortality.

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