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Stock Analyst Update

Merck Posts Solid Results, Shares Undervalued

The market doesn't fully appreciate the wide-moat drugmaker's long-term potential.


 Merck (MRK) reported first-quarter results slightly above both our and consensus bottom-line expectations, but we don’t expect any meaningful change to our fair value estimate. We still view the stock as undervalued, with the investment community not fully appreciating the company’s strong long-term potential. Merck’s ability to show top-line growth in the quarter, despite heavy competition to its virology franchise and generic competition to mature drugs, reinforces our view of Merck’s wide moat, supported by a wide range of patent-protected drugs.

In the quarter, strong gains from immuno-oncology drug Keytruda helped mitigate sales pressures on older drugs, leading to overall operational growth of 3% year over year, a growth rate that looks likely for the remainder of the year. Keytruda's growing sales, largely in lung cancer, should continue based on the recently disclosed Keynote 189 study, which will expand the lung cancer patient population to lower expressers of PDL1. We expect close to 65% growth in Keytruda in 2018, followed by further growth as the drug expands indications. Overall, we expect Merck will gain close to a third of the immuno-oncology market by 2022 with strong leadership in lung cancer.

While Keytruda continues to perform well, several of Merck’s older franchises are facing pressures, slowing overall growth. The company’s virology franchises in HIV and hepatitis C are both under pressure from better-positioned competitive drugs from AbbVie and Gilead. While we don’t expect Merck to regain traction in hepatitis C, Merck’s early-stage nucleoside reverse transcriptase translocation inhibitor MK-8591 holds the potential to help return Merck to the HIV market. Beyond the branded competitive headwinds, generic competition continues to weigh on current results, but we expect the majority of generic competition should annualize by the end of the current year, setting up relatively minor generic pressures for the following three years.

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Damien Conover does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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