Merck’s Current Portfolio Looks Well Positioned for Growth in the Near Term

Business Strategy & Outlook

Merck’s combination of a wide line-up of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term. Further, following the divestment of the Organon business in June 2021, the remaining portfolio at Merck holds a higher percentage of drugs with strong patent protection. On the pipeline front, after several years of only moderate research and development productivity, Merck’s drug development strategy is yielding important new drugs. Merck’s new products have mitigated the generic competition, offsetting the recent major patent losses. In particular, Keytruda for cancer represents a key blockbuster with multi-billion-dollar potential: It holds a first mover advantage in one of the largest cancer indications of non-small cell lung cancer with excellent clinical data. Also, the new cancer drug combinations will further propel Merck’s overall drug sales. However, the intense competition in the cancer market with several competitive drugs likely to report important clinical data over the next couple years in earlier stage cancer settings. Other headwinds include generic competition, notably to diabetes drug Januvia, likely to intensify in 2023. After several years of mixed results, Merck’s R&D productivity is improving as the company shifts more toward areas of unmet medical need. Owing to side effects or lack of compelling efficacy, Merck experienced major setbacks with cardiovascular disease drugs anacetrapib, Tredaptive, Rolofylline, and TRA along with Telcagepant for migraines. Safety questions ended the development of osteoporosis drug odanacatib. Despite these setbacks, Merck has some solid successes, including a successful launch for its PD-1 drug Keytruda in oncology. Following this success, Merck is shifting its focus toward areas of unmet medical need in specialty-care areas, and Keytruda is leading this new direction. Keytruda’s leadership in non-small cell lung cancer will be a key driver of growth for the company over the next several years.

Financial Strengths

Merck remains on solid financial footing. The company closed 2021 with debt/capital of 46%, and strong cash flows expected over the next several years should further strengthen the balance sheet. Also, with the spinoff of Organon, Merck received a one-time payment from Organon of $9 billion. Merck redeployed this capital through the acquisition of Acceleron to help fortify its late-stage pipeline. Merck has signalled a strong willingness to make acquisitions, and historically it has tended to make several bolt-on acquisitions each year. Given that Merck hasn’t made any major acquisitions since the Schering-Plough deal in 2009, it will make a larger acquisition over the next two to three years. Beyond acquisitions, the steady future dividends, supported by a payout ratio of close to 50% relative to adjusted earnings per share.

Bulls Say

Keytruda looks best positioned in the immuno-oncology landscape, buoyed by a first-mover advantage in the important indication of first-line non-small cell lung cancer.
The growth in Merck’s high margin cancer drugs should help expand the company’s overall operating margin.
Merck supports a strong dividend yield that looks secure based on a wide diversified portfolio of drugs.

Company Description

Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiometabolic disease, cancer, and infections. Within cancer, the firm’s immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, just under half of the firm’s sales are generated in the United States.

(Source: Morningstar)

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