VALUATION HIGHLIGHTS

1. Oncology Drugs constitute 42% of the Trefis price estimate for Merck's stock.
2. Vaccines constitute 22% of the Trefis price estimate for Merck's stock.
3. Animal Health & Others constitute 14% of the Trefis price estimate for Merck's stock.

WHAT HAS CHANGED?

MRK Stock Performance

MRK stock has seen extremely strong gains of 65% from levels of $80 in early January 2021 to around $130 now (early April 2024), vs. an increase of about 40% for the S&P 500 over this roughly 3-year period.

However, the increase in MRK stock has been far from consistent. Returns for the stock were -6% in 2021, 45% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that MRK underperformed the S&P in 2021 and 2023.

Q4 2023 Performance

Merck's Q4 results were above the street estimates. Its revenue of $14.6 billion was up 6% y-o-y, primarily due to higher sales of Keytruda and Gardasil.

Merck reported an adjusted profit of $0.03 per share, compared to $1.62 in the prior year quarter.

Merck now expects full-year 2024 revenue to be in the range of $62.7 billion to $64.2 billion and earnings to be in the range of $8.44 to $8.59 per share.

Coronavirus Impact On Merck's Stock

Merck lost more than 28% of its value, dropping from $92 at the beginning of 2020 to around $66 in late March 2020. It then surged 2x to around $130 now (as of early April 2024). That means it is now above 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 2020 helped the markets stage a strong recovery. Investors expected a quicker economic rebound with economies opening up gradually, boding well for pharmaceutical companies, such as Merck.

Harpoon Acquisition

Merck in March 2024 completed the acquisition of Harpoon in a $680 million deal. This acquisition will help Merck expand its oncology portfolio with the Harpoon pipeline, including a promising portfolio of T-cell engagers, including HPN328 (MK-6070).

Prometheus Acquisition

Merck in June 2023 completed the acquisition of Prometheus in a $11 billion deal. This acquisition will help Merck expand its immunology portfolio with the Prometheus pipeline, including a promising experimental treatment for ulcerative colitis and Crohn's disease.

Acceleron Pharma Acquisition

Merck, in late September 2021, announced that it would 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.

Women's Health Business Spinoff

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 spin-off was completed in June 2021.

Loss of Marketing Exclusivity

Several of Merck's drugs have lost market exclusivity in recent years. This includes Zetia, Vytorin, Invanz, Dulera, Nasonex, and NuvaRing. The patent loss has resulted in slower sales amid competition from other players.

Strong Growth In Gardasil Sales

Merck has seen success with Gardasil, which is a vaccine used for the prevention of the 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.

Keytruda Is One of The Top Selling Drugs In Immuno-Oncology Space

Keytruda is witnessing increased acceptance, and it is now one of the top-selling drugs in the immuno-oncology space, which is currently led by AbbVie's Humira, which garnered over $21 billion in sales in 2022. The sales growth for Keytruda over the recent past was largely led by gains in lung cancer. Keytruda sales are seeing strong growth outside the U.S. as well. In the U.S., Keytruda was approved for the adjuvant treatment of patients with melanoma with involvement of lymph node(s) following complete resection in Q1 2019. The drug since then has captured dozens of approvals, expanding its use. The drug is expected to garner more approvals for different indications in the future, given it is currently under multiple programs in the phase 3 pipeline. This will continue to aid the sales growth for Merck in coming years.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Key drivers of Merck's value that present opportunities for upside or downside to the current Trefis price estimate for Merck:

Commercial Launch of Phase 3 Drugs

• Late-Stage Pipeline: Merck has a handful of new compounds in its late-stage pipeline, with potential peak sales of over $8 billion. Our valuation reflects probability-adjusted sales of phase 3 drugs. If all phase 3 drugs are approved within the next three years, it could imply roughly a 5% upside potential to our price estimate.

Keytruda's Progress Halts

• Merck's Oncology Revenues: Merck's blockbuster oncology drug, Keytruda, has received regulatory approvals for several indications, including skin, lung, and Hodgkin's lymphoma, among others. We estimate that the drug could garner as much as $28 billion in peak annual sales. However, considering the effort big pharma firms are putting into immuno-oncology, there is a chance that a new competing drug could halt Keytruda's growth, and its peak halts around $21 billion. In such a situation, there could be over a 10% downside to our price estimate.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

Oncology Drugs Portfolio

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 $23 billion in 2022, and we forecast it to grow north of $32 billion by the end of our forecast period in 2029. Most of this growth can be attributed to Keytruda. Merck's other drugs in the 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.

KEY TRENDS

Loss of Patents Impacting Sales

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.

Growing Threat of Generic Products

The fast-growing pharma market in emerging economies, referred to as the 'Pharmerging' economies, has the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that are substantially cheaper than their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run. Merck's drugs could face potential threats from biosimilars in the future, which are generic versions of biologics.

Globalization of Healthcare Reforms

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.