Merck: the good value biotech stock that has cornered the cancer market

Merck, the biopharma giant, dominates the biggest disease sector and looks reasonably valued, says Dr Mike Tubbs.

This year the technology-heavy Nasdaq Composite index has become increasingly volatile. The very high valuations of many large tech stocks offering no dividends have made investors nervous; they are also concerned that President Biden’s stimulus programme could increase inflation. Shares in electric-car maker Tesla, for example, fell by 36% between late January and early March. 

A safer sector is healthcare, historically it’s one of the least volatile sectors. And within healthcare some of the large US biopharmaceutical stocks now offer reasonable valuations, worthwhile dividends and steady growth through new patented treatments for serious diseases. 

One such stock is Merck (NYSE: MRK), which offers over 100 products to treat a range of diseases. Key areas for the group are oncology, vaccines, infectious diseases (including HIV), cardio-metabolic disease and animal health. Merck is the second-largest firm in the global vaccines market (after GlaxoSmithKline) and the third largest in animal health and oncology. 

The company has a very well-stocked pipeline with 27 drugs in Phase-III clinical trials (the final stage of testing before approval) or under review by America’s Food and Drug Administration (FDA); there are another 38 treatments in Phase II. There is a large emphasis on oncology, with 90% of Phase-III trials currently concerned with new cancer treatments.

The world’s top drug

Merck’s strong emphasis on cancer treatments is wise, since cancer was by far the largest global therapeutic market in 2019 and is likely to remain so until at least 2026. Merck’s immuno-oncology drug Keytruda is predicted to be the world’s top-selling drug in 2026 with sales of $24.9bn, more than twice that of the second-most popular drug (also a cancer treatment). 

Keytruda is already approved for the treatment of 18 different cancers including non-small cell lung cancer, melanoma, gastric and cervical cancers, Hodgkin lymphoma and other lymphomas, and liver cancer. The company’s oncology portfolio is growing, with a wide range of Phase-III clinical trials, including those using Keytruda, Lynparza, Lenvima and four other pipeline drugs.

Merck’s 2020 results showed revenues of $48bn, comprising $43bn of pharmaceuticals, $4.7bn of animal health and $0.3bn of sales in other areas. As the world’s third-largest animal-health company, Merck is a major player in this sector. 

Keytruda accounted for $14.4bn of the pharma sales. Group net income was $15.1bn, implying earnings per share (EPS) of $5.94. Analysts are pencilling in sales of $51.8bn to $53.8bn and EPS of around $6.51 in 2021. Merck has announced a second-quarter dividend of $0.65 and this is likely to mean a $2.60 full-year dividend. At the recent share price of $77.47, that gives a decent yield of 3.4%.

Further progress in 2021

There will be some major changes for the company in 2021. Firstly, it is spinning off its mature and lower-margin Organon women’s health activities into a separate company. 

This will probably happen in the second quarter. The move will reduce revenue by around 14%, increase overall margins and provide cash of $8.5bn-$9bn to invest in the pipeline. 

Secondly, Merck has continued its policy of making small biotech acquisitions to strengthen its pipeline. In November 2020 it bought VelosBio, which is investigating a drug to treat blood cancers and solid tumours. It also spent $425m on Oncoimmune, which has a candidate treatment for serious and critical cases of Covid-19. 

Then early this month it acquired Pandion Therapeutics for $1.85bn for Pandion’s pipeline of novel treatments for patients with autoimmune diseases. In February, meanwhile, Merck Animal Health acquired Poultry Sense, which specialises in software to help monitor chickens’ health. 

Thirdly, the 2020 results contained a series of positive announcements about pipeline progress, including FDA approvals for Keytruda to treat a form of breast cancer and Hodgkin lymphoma. The EU, moreover, has now approved its use for colorectal cancer. 

There were also positive trial results for several pipeline drugs and for two Covid-19 treatments. In addition, Merck and AstraZeneca announced EU and Japanese approvals for Lynparza to treat forms of prostate and ovarian cancer and Japanese approval to treat pancreatic cancer. In January 2021, the FDA approved Verquvo, a drug produced jointly by Merck and its rival, Bayer, for serious cardiovascular problems.

Six reasons to buy Merck shares

Merck share price chart

Merck has six main attractions for investors. It boasts a wide protective “moat” (an enduring competitive advantage that keeps rivals at bay); a focus on oncology; expectations of solid growth, a reasonable price/earnings (p/e) ratio; strong cash flows and a solid dividend yield. 

Its wide moat stems from its high-margin patent-protected drugs for unmet medical needs, its scale and a strong pipeline backed up by research and development (R&D) worth a massive 28% of sales in 2020, and from sensible bolt-on acquisitions. The focus on oncology addresses the largest of all disease markets and the sale of its low-margin women’s health business will facilitate yet more investment in this area. Expectations of solid growth are backed up by the predicted 10% revenue growth for 2021 over 2020 and anticipated 2026 Keytruda sales of $24.9bn, up from $14.4bn in 2020. The 2021 p/e ratio is 11.9. The yield is 3.4%. Investment analysis platform Morningstar estimates a fair value for the shares of $100, 29% above the current level. 


Beyond US tech stocks: three global stars to buy now
Share tips

Beyond US tech stocks: three global stars to buy now

There is much to like about the US tech giants, says professional investor Alec Cutler of Orbis Investments highlights. But there are many other excel…
1 May 2021
Stockmarkets have a spring in their step

Stockmarkets have a spring in their step

Global stockmarkets have been basking in the post-Covid economic recovery as GDP, retail sales and manufacturing are all on the way back up.
23 Apr 2021
Three winners of the long-term biotech boom
Share tips

Three winners of the long-term biotech boom

Professional investor Marek Poszepcynski of the International Biotechnology Trust picks three biotech stocks with good pipelines, strong management te…
22 Mar 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021

Most Popular

Could you end up paying inheritance tax on your family home?
Inheritance tax

Could you end up paying inheritance tax on your family home?

The value of the average UK home has risen by 53% since April 2009, but the inheritance tax threshold has remained static. And that means more people …
7 May 2021
Big Tech on steroids: why the 2020s will be the “decade of the DAO”
Bitcoin & crypto

Big Tech on steroids: why the 2020s will be the “decade of the DAO”

Big tech companies have transformed the way we live our lives. But if you thought they were disruptive, you haven’t seen anything yet. As Dominic Fris…
6 May 2021
Why woeful US jobs data might spell higher inflation in the near future
US Economy

Why woeful US jobs data might spell higher inflation in the near future

The latest US employment figures were much worse than expected. And that matters not just for the US economy, but for global markets too – and for inf…
10 May 2021