Skip to Content
Stock Analyst Update

Disappointing Quarter for Undervalued Merck

We plan to maintain our fair value estimate for the wide-moat firm, which offered solid 2020 guidance.


We plan to maintain our fair value estimate for Merck (MRK) following slightly disappointing fourth-quarter earnings but solid 2020 guidance along with the surprising spin-off announcement of several legacy drug platforms (including women’s health and biosimilars). We continue to view the company as undervalued, with the market not fully appreciating the firm’s strong position in immuno-oncology, led by Keytruda. Additionally, we don’t expect the spin-off of the older product lines to impact Merck’s wide moat, as Merck's intangible asset moat source remains intact, supported by a strong portfolio of drugs generating cash flows to develop the next generation of drugs.

Merck’s decision to divest older legacy drugs (just over $6 billion of expected 2021 sales or close to 12% of sales) should set up faster sales growth and a more focused company (50% less products), but sales dependence on Keytruda will grow. Merck is planning the spin-off in the first half of 2021, which should enable slightly faster growth for the remaining company. The spin-off should give Merck $8 billion-$9 billion in a special dividend, which we expect Merck will use for share buybacks and small tuck-in acquisitions. However, with the loss of the legacy drugs and the expected growth of Keytruda, we expect Merck’s dependence on Keytruda will grow to almost 40% of total sales by 2022, up from 24% currently. While Keytruda holds an excellent outlook, the increasing dependence on one drug increases Merck’s uncertainty.

Turning to the quarter, overall sales growth of 9% in the quarter was led by cancer drug Keytruda (up 46%). We expect Keytruda to lead overall growth for the next several years, supported by leading efficacy in lung cancer and likely new indications in earlier use settings. Lower sales from human papillomavirus vaccine Gardasil (partly due to shifts in inventory) weighed on the quarter, but we expect the vaccine to return to growth, driven by international markets.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

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

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.