Is Merck Stock A Better Pick Over ABBV?

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We believe that AbbVie stock (NYSE: ABBV) is a better pick than its industry peer, Merck stock (NYSE: MRK). MRK stock trades at a slightly higher valuation of 4.8x trailing revenues, compared to 4.2x for AbbVie, and this valuation gap will likely narrow over time in favor of AbbVie, in our view.  Looking at stock returns, Merck stock has fared better than AbbVie, and both have underperformed the broader indices. While MRK is down 2% this year, ABBV is down 16%, and the S&P500 index is up 10%. There is more to the comparison, and in the sections below, we discuss why we believe ABBV stock will offer higher returns than MRK stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Merck vs. AbbVieWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. AbbVie’s Revenue Growth Is Better

  • AbbVie’s revenue growth has been better, with a 21.2% average annual growth rate in the last three years, compared to 15.1% for Merck.
  • AbbVie’s revenue growth has been buoyed by its Allergan acquisition in 2020.
  • The company is best known for its blockbuster drug – Humira – used to treat rheumatoid arthritis and Crohn’s disease, among others. Humira garnered $21.2 billion in 2022 sales, reflecting a 3% y-o-y growth. Now, Humira’s biosimilar has already hit the European and U.S. markets, weighing on the company’s sales.
  • Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for vaccines, primarily Gardasil.
  • However, if we look at the last twelve-month period, Merck fares better with sales growth of 7.2% vs. no growth for AbbVie.
  • Keytruda alone garnered $21 billion in sales in 2022, growing at a solid 22% y-o-y. Gardasil accounted for $7 billion in sales last year.
  • Merck saw a $6 billion contribution from sales of Lagevrio – its Covid-19 antiviral pill.
  • Our AbbVie Revenue Comparison and Merck Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Merck will see Lagevrio’s sales decline in 2023 and beyond. Some other drugs, including Januvia/Janumet, are also likely to see a slowdown in sales, with increased competition. However, Keytruda is expected to see continued market share gains in the near term, aiding the company’s top-line growth.
  • For AbbVie, more Humira biosimilars are expected to enter the U.S. this year, likely resulting in a significant drop in the drug’s sales over the coming years.
  • That said, AbbVie is prepared to combat this biosimilar impact with its Allergan acquisition in 2020, giving it access to Botox, a multi-billion dollar product. Furthermore, its relatively new drugs – Skyrizi and Rinvoq – used to treat plaque psoriasis and rheumatoid arthritis, are gaining market share. For perspective, these three products garnered $13.0 billion in 2022, reflecting about 40% y-o-y growth.
  • Overall, 2023 will be a painful year for AbbVie, with a decline in sales due to Humira biosimilars, but it will likely return to growth from 2024 with its relatively new drugs gaining market share.

2. AbbVie Is More Profitable 

  • AbbVie’s operating margin declined from 39% in 2019 to 31.2% in 2022, while Merck’s operating margin rose from 18.7% to 30.3% over this period.
  • Looking at the last twelve-month period, AbbVie’s operating margin of 28.5% fares marginally better than 27.7% for Merck.
  • AbbVie’s 2019 operating margin of 39% was higher due to an $890 million other income recorded in the financials.
  • Our AbbVie Operating Income Comparison and Merck Operating Income Comparison dashboards have more details.
  • AbbVie’s free cash flow margin of 42.7% is higher than 27.1% for Merck.
  • Looking at financial risk, Merck fares better with its 11.1% debt as a percentage of equity lower than 25.8% for AbbVie, and its 10.8% cash as a percentage of assets higher than 5.0% for the latter, implying that Merck has a better debt position and more cash cushion.
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3. The Net of It All

  • We see that AbbVie has demonstrated better revenue growth, is more profitable, and is trading at a comparatively lower valuation multiple. On the other hand, Merck has a better debt position and cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe AbbVie is the better choice of the two, primarily because of its slightly lower valuation and promising new drugs. Also, it appears that the investors have already priced in Humira’s biosimilar risks.
  • If we compare the current valuation multiples to the historical averages, AbbVie fares better, with its stock currently trading at 4.2x trailing revenues vs. the last five-year average of 5.3x. In contrast, Merck stock trades at 4.8x trailing revenues vs. the last five-year average of 5.2x.
  • Our AbbVie (ABBV) Valuation Ratios Comparison and Merck (MRK) Valuation Ratios Comparison have more details.

While ABBV may outperform MRK in the next three years, it is helpful to see how AbbVie’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Given the higher inflation and the Fed raising interest rates, MRK has seen a 2% fall this year. But can it drop from here? See how low Merck stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a high-performance portfolio with a low downside instead? Here’s a reinforced value portfolio that has beaten the market consistently while limiting losses during periods of sharp market declines.

Returns May 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
MRK Return -5% -2% 85%
ABBV Return -10% -16% 118%
S&P 500 Return 1% 10% 88%
Trefis Multi-Strategy Portfolio 1% 10% 247%

[1] Month-to-date and year-to-date as of 5/31/2023
[2] Cumulative total returns since the end of 2016

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