Sell Pfizer To Buy Merck?

Based on historical performance, Pfizer (NYSE:PFE) appears to be less attractive compared to Merck (NYSE:MRK) in the current crisis. The current coronavirus crisis will likely impact pharmaceutical companies on two fronts, 1. supply chain disruptions, and 2. potential impact on direct sales due to postponement of minor health related issues and surgeries. On the positive side, pharmaceutical companies are also busy developing a vaccine for COVID-19. Pfizer is working with BioNTech SE to co-develop and distribute a potential coronavirus based vaccine. Pfizer’s stock is down by about -12% compared to about -9% for Merck since early February.

Pharmaceutical companies usually are defensive plays in times of financial crisis, which explains the outperformance of these stocks vis-a-vis the S&P 500, which has declined around 20% since early February. While the outlook for both companies remains strong, as both the companies have a strong pipeline and existing drugs portfolio to drive revenue growth, we believe Merck could be a better bet in the current environment. Merck’s solid oncology portfolio, led by Keytruda, could help it cope better than Pfizer over the crisis.

Our analysis, Is Pfizer Expensive Or Cheap Compared To Merck After Declining Over -10%? compares the stock price performance and fundamentals of Pfizer and Merck over the last few years.

CORONAVIRUS CRISIS: Since early February, Pfizer stock has declined -12% compared to -9% for Merck.

• Pfizer’s stock has declined by about 12% since early February, compared to 9% for Merck, after the WHO declared a global health emergency relating to coronavirus.
• Pfizer’s stock declined 7% while Merck’s stock is down 6% since March 8th, as U.S. cases accelerated.

HISTORICAL PERFORMANCE: From 2009-2019 Pfizer stock has grown at 0.8x the rate of Merck

• Pfizer stock went from $12 at the end of 2009 to $39 at the end of 2019, representing a change of 211.5%.
• During the same time period, the Merck & Co, Inc went from $26 to $90 representing a change of 252.8%.
• This implies that Pfizer stock grew at 0.8x the rate of Merck & Co, Inc

ANALYSIS:

How do valuations for Pfizer and Merck compare, based on the review of fundamentals?

• P/E Ratio: Based on trailing 2019 P/E ratios, PFE stock looks attractive compared to prior years, and attractive compared to Merck & Co, Inc
• Pfizer’s current P/E multiple (based on 2019 results) stands at about 11x, compared to about 15x for Merck.

Historical Revenue and EPS Growth: Pfizer stock looks slightly less attractive compared to Merck.

• Pfizer 2014-19 annualized revenue growth of 1% is 0.4x that of the 2014-19 Merck’s annualized revenue growth rate of 2.1%.
• Pfizer’s 2014-19 annualized adjusted EPS growth of 4.5% is 0.7x that of the 2014-19 annualized adjusted EPS growth rate of 6.8% for Merck.

Conclusion

Merck has posted higher revenue growth compared to Pfizer over the last 6 years. Both the companies’ stocks have been more resilient through the crisis, thus far, and Merck could see a larger upside if the health crisis abates, considering its EPS growth has been much higher than Pfizer. Also, Merck is less leveraged compared to Pfizer. In terms of cash flows, both the companies have enough cash from operations to cover for their interest expenses. Moreover, Merck’s P/E ratio is lower compared to its own historical P/E ratio, though it is slightly higher than that of Pfizer. Merck’s blockbuster drug, Keytruda, will likely continue to gain market share and aid the company’s near term growth.

For more detailed charts and a timeline of the 2007-08 crisis, view our dashboard analysis 2007-08 vs. 2020 Crisis Comparison: Abbott Stock Compared To S&P 500.

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