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Merck: Can COVID-19 Pill Be Key Catalyst?
Stock Analysis & Ideas

Merck: Can COVID-19 Pill Be Key Catalyst?

Merck (NYSE: MRK) develops pharmaceutical and vaccine products, offering healthcare solutions and vaccines addressing animal health.

The drugmaker has three main segments, Pharmaceutical, Animal Health, and Other. The company has a history of over a century, as it was founded in 1891.

Shares of Merck have underperformed in 2021 with losses of 2.4% year-to-date. Merck is a component of the Dow Jones, and with the index having gains of 14.8% year-to-date, is this underperformance a reason to be among Top Analysts recommendations?

I am bearish on MRK stock. The main reasons are mixed news on two of its pipeline candidates, and weak annual revenue growth.

Merck Business News

The positive news about Merck’s pipeline includes a “positive EU CHMP (Committee for Medicinal Products for Human Use) opinion for KEYTRUDA® (pembrolizumab) as Adjuvant Therapy for Certain Patients With Renal Cell Carcinoma Following Surgery,”  and that “the European Commission (EC) has approved VAXNEUVANCE™ (Pneumococcal 15-valent Conjugate Vaccine) for active immunization for the prevention of invasive disease and pneumonia caused by Streptococcus pneumoniae in individuals 18 years of age and older.”

On the negative side, the clinical trial data for Molnupiravir, which is an oral antiviral for the treatment of COVID-19 showed lower-than-expected efficacy in decreasing the risk of hospitalization from COVID-19 by 30%, compared to 50% that was observed earlier during the trial.

This latest data has made the U.S. Food and Drug Administration (FDA) recommend the drug candidate’s emergency approval by a slight margin, 13 votes in favor and 10 votes against, but Merck is yet to officially receive an emergency use authorization.

Merck also announced clinical holds on studies evaluating Islatravir for the treatment and prevention of HIV-1 Infection placed by the FDA.

Merck is entering, along with Pfizer (PFE), into the oral COVID-19 therapy market, which could be a multi-billion market as the Omicron variant is a risky and unknown yet factor too soon to evaluate. Both of these oral pills need to get FDA approval later in 2022.

Dividend History

What investors should know about Merck’s dividend history is that it is consistent, has 13 years of consecutive year growth, and has a 10-year annualized growth of 63.2%.

It has been increased by 6.2% lately to a quarterly dividend of $0.69. Merck has a forward yield of 3.5%, which is attractive.

Revenue Growth: Momentum Is Absent

Merck in its third-quarter 2021 financial results reported worldwide sales of $13.2 billion, an increase of 20% above Q3 2020. Diluted EPS of $1.80 was a year-over-year increase of 55%, compared to diluted EPS of $1.16 in Q3 2020.

The firm stated that it raised and narrowed the estimated full year 2021 revenue range to be between $47.4 billion and $47.9 billion. This would be lower than FY 2020’s reported revenue of $48.01 billion.

Analyzing the 10-year average growth of only 0.43% according to MorningStar it appears as though Merck has lost its momentum in generating solid sales growth.

This may turn to be problematic over the next quarters despite the very strong sales growth in Q3 2021. Consistent growth should be present to support the stock, which for now is not the case.

Valuation

MRK stock according to Simply Wall Street is relatively overvalued based on its PEG Ratio (1.8x) and based on its P/B Ratio (5.3x) compared to the U.S. Pharmaceuticals industry average (2.5x).

Wall Street’s Take

Turning to Wall Street Merck has a Moderate Buy consensus rating based on eight Buys and nine Holds assigned in the past three months. The average Merck price target of $89.53 represents 18.5% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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