Here’s Why Merck Stock May Continue To Rise

[Updated: Oct 4, 2021] Merck Stock Rise

The stock price of Merck (NYSE: MRK) surged 8% to levels of $81 on Friday, Oct 1, after the company announced that its Molnupiravir pill reduces the risk of hospitalization and death by 50% for patients with mild to moderate Covid-19. The data is so encouraging that Merck has now stopped new patient enrollments and it is moving forward for regulatory approvals. ^[1] Once approved, it will likely be a game-changing moment for the entire healthcare sector. In fact, the stock prices of vaccine makers, such as Moderna plummeted 11% in Friday’s trade, as the pill will 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. 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). ^[2]

But now that the MRK stock has seen a 11% rise in a week, will it continue its upward trajectory or is a fall in MRK stock imminent? According to the Trefis Machine Learning Engine, which identifies trends in the company’s stock price using ten years of historical data, returns for MRK stock average around 4% in the next one-month (twenty-one trading days) period after experiencing a 11% rise over the previous week (five trading days) implying that the stock will likely continue to rise in the near term. In fact, the Covid-19 pill opportunity is huge for Merck, and it is very likely that MRK stock may see much higher gains than 4% (going by historical performance). But how would the returns fare if you are interested in holding MRK stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Merck stock price forecast. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!

For additional details about Merck historical returns, and return comparison to peers see Merck (MRK) Stock Return

Merck Stock Movements: Q&A with Trefis AI Engine

Q1: Is the price forecast for Merck stock higher after a drop?

Answer: Consider two situations,

Case 1: Merck stock drops by -5% or more in a week

Case 2: Merck stock rises by 5% or more in a week

Is the price forecast for Merck stock higher over the subsequent month after Case 1 or Case 2?

MRK stock fares better after Case 1, with an expected return of 4% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an expected return of -0.5% for Case 2. This implies a price forecast of $85 in Case 1 and a figure of $81 in Case 2 using MRK market price of $81.40 on 10/4/2021.

In comparison, the S&P 500 has an expected return of 3.1% over the next 21 trading days under Case 1, and an expected return of just 0.5% for Case 2 as detailed in our dashboard that details the expected return for the S&P 500 after a rise or drop.

Try the Trefis machine learning engine above to see for yourself how the forecast for Merck stock is likely to changes after any specific gain or loss over a period.

Q2: Does patience pay?

Answer: If you buy and hold Merck stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For MRK stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

You can try the engine to see what this table looks like for Merck after a larger loss over the last week, month, or quarter.

Q3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than a after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets. More specifically, after the S&P500 rises 5% over five days, the average return over the next seven trading days is negative. You can expect a nominal gain only if you remain invested for at least two weeks (10 trading days). But this average return figure swells to 11.7% over a period of a year (252 trading days).

It’s pretty powerful to test the trend for yourself for Merck stock. It would be great to hear how the results compare versus your own intuition.

[Updated: Oct 1, 2021] Merck To Acquire Acceleron

Merck (NYSE: MRK) yesterday 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.

Now, MRK stock was being weighed down in the recent past due to slowing sales for some of its drugs and a high reliance on a single drug – Keytruda – for revenue growth. 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 ago. Overall, this deal is likely to put some of the concerns around Merck’s growth trajectory to rest and bolster its trading multiple going forward.

We continue to believe that MRK stock is undervalued, and going by our Merck valuation of $91 a share, based on our adjusted EPS forecast of $5.65 and a P/E multiple of around 16x for 2021, there is more than 20% upside likely from the current levels of around $75.

[Updated: Sep 21, 2021] Merck Stock Undervalued

The stock price of Merck (NYSE: MRK) reached its 52-week high of around $82 in Sep 2020. It has since hovered in the range of $70-80 for the better part of the last year, and it currently trades at levels of around $72. We believe that MRK stock is undervalued at its current levels, and investors can use the recent dips as a buying opportunity for long-term gains, in our view. MRK stock is down more than 15% over the last year or so, despite revenue increasing 6% over the same period. Looking at a longer time period, MRK stock is up only 28% from the levels of around $56 seen toward the end of 2017, significantly underperforming the broader markets, with the S&P 500 rising 63%. The  growth in Merck’s earnings was partly offset by a decline in its P/E multiple, resulting in slower stock appreciation.

Looking at its fundamentals, Merck’s total revenue actually grew 21% to $48.5 billion over the last twelve-month period, compared to $40.1 billion in 2017. The revenue growth can largely be attributed to market share gains for its mega-blockbuster drug – Keytruda – approved for multiple types of cancer treatments. Merck’s net income more than doubled since 2017 to $5.6 billion over the last twelve month period, driven by both a rise in revenues as well as margin expansion. The company also repurchased more shares over the recent years, resulting in a 7% fall in total shares outstanding since the end of 2017. As such, on a per share basis, Merck’s earnings surged 150% to $2.20 for the last twelve month period, compared to $0.88 in 2017. Despite a large EPS growth over the recent years, Merck’s P/E multiple has contracted 49% to 33x currently, compared to levels of 64x seen in 2017, and we believe that the multiple will likely expand over the coming years. Our dashboard, Buy Or Fear Merck’s Stock has the underlying numbers.

Outlook

For Merck much of the revenue growth over the recent years has been led by its oncology drug – Keytruda – which saw its sales double from $7.1 billion in 2017 to $14.4 billion in 2020. Though the Covid-19 pandemic surely impacted the sales growth for some of its drugs due to fewer hospital visits, and a lower vaccination rate for Gardasil and Proquad, this trend reversed in Q2, with Gardasil sales surging 88%. There are concerns over slowing sales of Januvia and Janumet, which are nearing their patent expiration. However, Merck is seeing steady growth in other areas, including its Animal Health business as well as Lynparaza and Lenvima alliance revenues. There has been a rise in pet ownership during the pandemic and this has resulted in an increased demand for animal health pharmaceuticals products at large, including those offered by Merck.

Merck’s cash-cow – Keytruda – continues to gain share in several markets given its approval in multiple indications, including, lung, head & neck, bladder, renal, and skin cancer among others. Keytruda’s patents are protected for another seven years and it alone will likely garner over $25 billion in annual sales by 2026. With its recent spin-off of its women’s health, legacy brands, and biosimilars businesses, Merck can now focus on more profitable drugs, implying better margins going forward.

Overall, there are more positives for Merck to look forward to than the pessimism surrounding slowing sales growth for some of its drugs. Going by our Merck’s Valuation, with an adjusted EPS estimate of $5.65 and a P/E multiple of 16x in 2021, this translates into a price of $91, which is over 26% above the current market price of around $72.

While MRK stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Freeport vs UnitedHealth.

1. Merck’s Press Release, Oct 1, 2021 [↩]
2. Merck’s $15 bln gain is stingy, Reuters, Oct 1, 2021 [↩]