Merck's Stock Is Underappreciated

Bulls Say

• The growth in Merck’s high-margin cancer drugs should help expand overall operating margins.
• 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.
• Merck’s strong dividend yield looks secure, thanks to a wide diversified portfolio of drugs.

Bears Say

• Merck needs to increase its number of late-stage pipeline drugs outside of immuno-oncology.
• While the majority of patent losses are behind it, the company does face generic competition on diabetes drug Januvia, potentially as early as 2022.
• Advancements in oncology can happen quickly, which could cause disruption for Merck’s leading growth driver, Keytruda.

Morningstar Analyst Damien Conover Says

Merck’s (MRK) combination of a wide lineup 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 generic competition, offsetting 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. We expect new cancer drug combinations will further propel Merck’s overall drug sales. However, we expect intense competition in the cancer market, with several competitive drugs likely to report important clinical data over the next two years in earlier-stage cancer settings. Other headwinds include generic competition, notably to diabetes drug Januvia, likely to start as early as 2022.

After several years of mixed results, Merck’s R&D productivity is improving as the company shifts 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 to areas of unmet medical need in specialty-care areas, with Keytruda leading this new direction. We expect Keytruda’s leadership in non-small-cell lung cancer will be a key driver of growth for the company over the next several years.

Watch: Dividend-Stock Deep Dive: Drugmakers

Key Proprietary Morningstar Metrics

Fair Value Estimate: $94
Star Rating: 4 Stars
Economic Moat Rating: Wide
Moat Trend Rating: Stable

To read the full analyst report for Merck and 1,500 other stocks, start your free 14-day trial of Morningstar Premium. Learn more about how to read a Morningstar Stock Analyst report here.