After Allergan Acquisition Is AbbVie A Better Buy Compared To Merck?

The pharmaceutical companies have not been immune to the current coronavirus crisis, although they have fared much better than the broader markets. While Merck’s (NYSE:MRK) stock has declined 9% since early February, after the WHO declared the coronavirus a global health emergency, AbbVie’s (NYSE:ABBV) stock has fared much better as it gained 13% over the same period. In fact, AbbVie’s stock surged 42% compared to a 16% growth for Merck’s stock since the market made its near term bottom on March 23. We believe that AbbVie stock will likely outperform Merck’s stock over the coming months. Our conclusion is based on our detailed dashboard analysis, ‘Is Merck Expensive Or Cheap vs. AbbVie?‘, wherein we compare trends in key metrics for the two pharmaceutical companies to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Why Has AbbVie Outperformed Merck Over Recent Weeks?

AbbVie’s strong rally over the recent days has been led by its better than expected Q1 results, and the company completing the Allergan acquisition. The company reported a 10% jump in top line, while its adjusted EPS grew 13% to $2.42. The growth was led by stocking up of drugs both at patient and the channel level, including Humira and Venclexta. AbbVie’s Allergan acquisition is seen as a huge positive for the company, as it will reduce its dependency on the world’s top selling drug, Humira, which accounts for close to 60% of AbbVie’s total revenues. Merck, on the other hand, is focused on expanding market share for its top selling drug, Keytruda. Merck’s Q1 performance was also good with 11% sales growth and a 23% jump in adjusted EPS.

Merck’s current P/E multiple, based on 2019 earnings, has declined from 17.4x in 2019 to 14.9x currently, while AbbVie’s multiple has increased slightly from 9.6x to about 10.1x. Merck’s multiple still appears comparatively high, considering that the company’s revenues could be at risk, with a normalized level of demand after the initial surge due to stocking up, and growing competition for its top selling drug, Keytruda. Moreover, Merck’s P/E is still about 15% higher than the 13x multiple it traded at in 2015 to 2017, implying that the stock could be vulnerable. On the other hand AbbVie’s current P/E multiple is lower than the levels seen over the past few years.

CORONAVIRUS CRISIS : Since early February, Merck’s stock has moved -8.9% compared to 13.3% for AbbVie.

• Merck’s stock has declined by about -8.9% since early February, compared to 13.3% growth for AbbVie after the WHO declared a global health emergency relating to coronavirus.
• Merck’s stock grew 16.2% while AbbVie’s stock surged 42.3% since March 23rd, after the broader markets made near term lows, and rallied upwards in hopes of a stimulus package.

HISTORICAL PERFORMANCE: From 2014-2019 Merck’s stock has grown at 1.3x the rate of AbbVie

• Merck’s stock went from $48 at the end of 2014 to $90 at the end of 2019, representing a change of 87.5%.
• During the same time period, AbbVie stock went from $52 to $86 representing a change of 65.4%.
• This implies that Merck stock grew at 1.3x the rate of AbbVie.

ANALYSIS: Is Merck stock expensive based on a review of the fundamentals?

• P/E Ratio: Based on trailing 2019 P/E ratios, MRK stock looks attractive compared to levels seen in recent years, and expensive compared to AbbVie. Merck’s 2019 trailing P/E ratio of 17.4x is 1.8x that of the 2019 AbbVie P/E ratio of 9.6x. P/E Ratio is calculated based on year end market price and trailing Non-GAAP earnings. However, for 2020 P/E, we use 2019 Non-GAAP earnings and current market price.
• Revenue Growth: Merck’s 2014-19 annualized revenue growth of 2.1% is 0.2x that of the 2014-19 AbbVie’s annualized revenue growth rate of 10.8%.
• EPS Growth: Merck’s 2014-19 annualized EPS growth of 8.3% is 0.4x that of the 2014-19 AbbVie annualized EPS growth rate of 21.9%. EPS used is the reported Non-GAAP EPS.
• Total Debt: Merck’s Total Debt has increased from $24.8 billion to $26.3 billion between 2016 and 2019. In comparison, Total Debt for AbbVie has risen from $36.8 billion to $63.0 billion.

While AbbVie could outperform Merck over the coming months, even Merck appears to be oversold at the current levels.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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