Merck lost more than 28% of its value – dropping from $92 at the beginning of 2020 to around $66 in late March 2020 – then grew 33% to around $88 now (as of Oct 29, 2021). That means it has partially recovered to the pre-pandemic levels.
Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound with economies opening up gradually, which will bode well for pharmaceutical companies, such as Merck.
Merck in early October announced that its Molnupiravir pill reduces the risk of hospitalization and death by 50% for patients with mild to moderate Covid-19. Merck has already filed for regulatory approvals. Once approved, it will likely be a game-changing moment for the entire healthcare sector, as the pill may be more desirable for people compared to a vaccine jab for Covid-19. The need for booster shots in the long-run may also be of less importance, while the Covid-19 oral pills of Merck may now become a multi-billion dollar opportunity for the company. In fact, Merck estimates $7 billion sales from this drug through 2022.
Note that vaccines are helpful to avoid catching the virus, while the oral pill is an antiviral, and it will help in the treatment of the virus. That said, if the Covid-19 risk can be reduced by a pill, people may be less motivated to take the vaccine jab. As per a media report , the U.S. government had earlier agreed to pay $700 a patient for the drug, and Merck’s margin could be as high as 60%, implying a profit of over $400 per patient. This pricing may not hold steady at a large scale and with different countries, but it does give an idea of the revenue potential for Merck ($7 billion revenues for 10 million patients).
Merck's Q3 results were above the street estimates. Its revenue of $13.2 billion was up 20% y-o-y. While the oncology segment posted strong growth led by Keytruda, which saw 22% growth to $4.5 billion, the demand for vaccines also rebounded with Gardasil sales surging 68% to $2.0 billion, bolstering the overall top-line growth.
Merck reported earnings of $1.75 on a per share and adjusted basis, compared to $1.37 in the prior year quarter, reflecting a 28% growth.
Merck now expects full-year revenue to be in the range of $47.4 billion to $47.9 billion, and earnings to be in the range of $5.65 to $5.70 per share.
Merck in late September announced that it will acquire Acceleron Pharma – a biopharmaceutical company focused on rare diseases – for $11.5 billion funded in cash and debt. Acceleron has multiple potentially blockbuster drugs in its pipeline. To name a few, Sotatercept – is in late stage clinical trials for the treatment of pulmonary arterial hypertension (PAH) with peak sales estimated to be north of $2 billion. Another drug – Reblozyl (in partnership with Bristol Myers Squibb) – which is used to treat anemia in myelodysplastic syndromes (MDS) – is estimated to garner over $2 billion in peak sales.
The Acceleron acquisition is seen as a positive for Merck, as it will strengthen its cardiovascular portfolio and it gives the company multiple potentially blockbuster drugs. The price of $180 a share paid by Merck is also not out of the line with a 34% premium over the levels of around $134 Acceleron’s stock was trading at a couple of weeks before the deal was announced.
Merck in January 2020 announced that it will spin off its Women's Health business, along with legacy brands and biosimilars into a new company. The revenue of around $6 billion for the new entity are expected to decline y-o-y in 2021, led by loss of market exclusivity of Zetia in Japan, and Nuvaring in the US.
Key drivers of Merck's value that present opportunities for upside or downside to the current Trefis price estimate for Merck:
Merck ranks among the world's largest pharmaceutical companies in terms of revenues. The company delivers innovative health care solutions through its prescription medicines, vaccines, biologic therapies and animal health products which it markets directly and through its joint ventures. The firm's operations are managed through the company's three main divisions, namely Pharmaceutical, Animal Health, and the Alliances division. Merck sold its consumer care business to Bayer in 2014.
Merck has a strong portfolio of oncology drugs, led by Keytruda. The segment sales have increased from less than $1.0 billion in 2014 to over $15.8 billion in 2020, and we forecast it to grow north of $28.0 billion by the end of our forecast period in 2027. Most of this growth can be attributed to Keytruda. Merck's other drugs in oncology portfolio include Emed, Temodar, and alliance revenue from Lynparaza and Lenvima. Additionally, the division is unlikely to see any decline in revenues because Keytruda's patent is protected till 2026.
Merck has seen a stellar success with Gardasil, a vaccine used for prevention against HPV (human papillomavirus) virus, which has been linked to certain types of cancers, and thus it is an important vaccine. The vaccine will likely see increased sales given the immunization across various countries. Europe, as well as China, will likely drive the vaccine's future sales growth.
Like other major pharmaceutical companies, Merck is also battling against the impact of patent expiry of its several major drugs including Singulair, Remicade, Propecia, Clarinex, Maxalt, Cozaar, and Hyzaar. Out of these, asthma drug Singulair has had the biggest impact and has continually weighed on Merck’s growth for the past few years.
The fast growing pharma market in emerging economies or referred to as the 'Pharmerging' economies have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that are substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run. Merck's drugs could face potential threat from biosimilars in the future, which are generic versions of biologics.
Governments around the world are trying to rein in fiscal spending in order to manage their budget deficits. Since healthcare costs are one of the biggest components of any national budget, it is expected that an increase in healthcare legislation and reforms around the world will hurt revenues for the entire pharmaceutical sector.
Merck is focused on vaccines, and currently has 2 new vaccines in its phase 3 pipeline, which could potentially generate over $1 billion in peak sales. Ebola is spreading in the Congo in 2018, and Merck’s Ebola Vaccine is currently being used for vaccination. Merck's Erbevo, a vaccine used to treat Ebola, was approved by the US FDA in December 2019.