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Merck lost more than 28% – dropping from $92 at the beginning of 2020 to around $66 in late March 2020 – then grew 17% to around $77 now (as of June 17, 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's Q1 results were below the street estimates. Its revenue remained unchanged (y-o-y) at $12.1 billion. While the oncology segment saw strong growth led by Keytruda, which saw 19% growth to $3.9 billion, the demand for vaccines remained low due to the impact of Covid-19, impacting the overall top-line growth.
Merck reported earnings of $1.40 on a per share and adjusted basis, compared to $1.51 in the prior year quarter, reflecting a 7% decline. However, the company did not change its earlier provided full year 2021 earnings outlook to be in the range of $6.48 to $6.68 per share.
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's stock price declined 5% from around $85 levels at the end of January, when the WHO declared a global health emergency, to $81 levels as of April 28. This can be attributed to fears of the global economy going into recession, after the coronavirus outbreak into several countries, and an oil price war, with Saudi Arabia increasing production, which led to over a 75% decline in oil prices (WTI moving from $51.56 on January 31, 2020 to $13.50 on April 28, 2020). The Covid-19 crisis has impacted the overall hospital visits and new patient starts volume. This has impacted the sales of pharmaceutical companies, including Merck. The vaccine business, in particular, is one of the worst hit segments for Merck. That said, its cancer drug, Keytruda, will continue to be a top selling treatment option, and bolster the company's overall sales growth.
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.