Company Reports

Merck's 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.

We are increasing Merck's fair value estimate to $120 from $114 based on strong first-quarter results that ran ahead of our expectations combined with a pipeline that is progressing well.

Merck's 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.

Based on Merck’s better-than-expected fourth-quarter results driven by wide portfolio support and robust pipeline advancement, we plan to increase our fair value estimate. In the quarter, total sales increased operationally 13% (excluding COVID-19 sales), a rate we expect to decelerate as cancer drug Keytruda (up 22%) and human papillomavirus vaccine Gardasil (up 27%) mature in their lifecycles. However, the expiration of royalty payments on these drugs should allow for significant margin expansion. Further, new indications in earlier cancer settings for Keytruda (especially the recently approved perioperative lung cancer setting) will be important for close to an incremental $10 billion in annual sales over the next five years.

We are maintaining our $103 fair value estimate for Merck after third-quarter results that were slightly higher than we projected, but some of the outperformance was due to robust international sales of COVID-19 treatment Lagevrio that seem unlikely to continue. The underlying core business looks solid, with operational sales growth of 8% (excluding Lagevrio), led by cancer drug Keytruda (up 17%). Merck’s steady pipeline innovation, especially the movement of Keytruda into earlier lines of lung cancer, should enable a 5% annual compound growth rate over the next five years. Further, Merck’s earnings should grow faster as royalty payments on human papillomavirus vaccine Gardasil and Keytruda fall in 2024.

We are holding firm to our Merck fair value estimate following the presentation of leading efficacy data for Keytruda in periadjuvant non-small-cell lung cancer and the announcement of a partnership with Daiichi for three new antibody-drug conjugates. Merck's continued strong innovation with Keytruda and fair deployment of capital reinforce its wide moat.

Merck's 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.

Following a review of Merck's pipeline, we are increasing our fair value estimate to $103 from $97 based on slightly increased projections for several pipeline drugs, including pulmonary arterial hypertension, or PAH, drug sotatercept, which has shown excellent efficacy and continues to look well-positioned versus the competitive landscape. Phase 3 data presented earlier in the year was exceptionally strong, with an 84% reduction in death or clinical worsening. With the current PAH market close to $6 billion annually, we believe sotatercept can complement current therapies well and expand the overall market. While current drugs are helpful in managing the disease, the five-year mortality rate is close to 40%, according to Reveal study data, showing the need for new therapies. We expect sotatercept will gain approval in 2024. Beyond sotatercept, we remain optimistic for several other pipeline drugs, including cancer drugs V940, favezelimab, vibostolimab, and quavonlimab, which should all post important additional clinical data over the next three years. The strong and growing late-stage pipeline reaffirms our view of Merck's wide moat.

Merck's 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 reported strong second-quarter results slightly above our expectations and raised full-year 2023 guidance, but we don’t expect any major changes to Merck’s fair value estimate based on the minor outperformance.

Merck reported strong first-quarter results slightly above our projections, and we don't expect any major changes to the firm's fair value estimate. While total sales fell 5% operationally, the expected decline from COVID-19 treatment Lagevrio was the main driver of the decline, as the remaining portfolio was up 15%. We expect the remainder of the year to show improving growth because year-over-year comparisons become easier (the majority of Lagevrio sales in 2022 occurred in the first quarter).

Merck’s $10.8 billion acquisition of Prometheus Biosciences adds the well-positioned late-stage immunology drug PRA023 at largely a fair price, in our view. We don’t expect any major changes to our fair value estimate based on the deal, but strategically, this helps position Merck to cope with the eventual patent loss (starting in 2028) on cancer drug Keytruda. This deal combined with the 2021 Acceleron acquisition shows solid redeployment of cash flows (heavily supported by Keytruda sales) to augment internal research and development efforts and mitigate biosimilar Keytruda threats over the longer term. While we don’t see this purchase as significantly affecting Merck’s wide moat, it does help diversify the company's late-stage pipeline.

Merck reported fourth-quarter results that slightly exceeded our expectations but issued 2023 guidance that is a little below our projections. Taken together, we don't expect any major changes to Merck's fair value estimate based on the update. The lower-than-expected growth guidance is partly driven by higher-than-expected 2023 expenses in research and development and marketing costs (along with a higher tax rate). We believe Merck is investing in the business to help prepare for the 2028 U.S. patent loss on the firm's leading drug Keytruda. We expect Merck's pipeline developments to help mitigate the significant eventual loss of Keytruda and reinforce the company's wide moat.

Merck's 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 reported strong third-quarter results ahead of our projections, and we plan to slightly raise our fair value estimate. Strong and largely broad-based growth supported 14% operational growth excluding COVID-19 sales from Lagevrio. The strong portfolio of branded drugs along with a developing pipeline continues to support Merck’s wide moat.

After taking a closer look at what we consider the three key elements of the Inflation Reduction Act that will affect the biopharma industry over the next decade, we're reducing our fair value estimates for 17 of the biggest biopharma names in Morningstar's coverage by an average of 2%. We think the step-down in U.S. branded drug sales from capping Medicare price increases to inflation (fully rolled out in 2023), redesigning Medicare Part D (beginning in 2025), and Medicare negotiation (beginning in 2026 for small molecules) will result in a 3% reduction in total sales for these firms by 2031, with firm-level reductions depending on the firm's reliance on the U.S. market, proportion of the portfolio targeting seniors, history of price increases, and relative size of its small molecule and biologics portfolios (as biologics are immune from Medicare negotiation for 13 years instead of nine). Our estimates factor in some ability for the industry to either benefit from certain changes (like potential increased prescription fill rates in Part D with lower out-of-pocket costs) or compensate for headwinds (like responding to inflation caps on price increases with higher launch prices). Overall, we think the effect of the Inflation Reduction Act is manageable for the industry, and we see the competitive advantages and economic moats of these firms remaining intact.

Merck's 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.

The likelihood of drug-pricing policy changes in the United States changed dramatically over the course of July, and we are now assessing the impact of the various measures included in the Inflation Reduction Act of 2022 in our Big Biopharma valuation models. Assuming the bill is eligible to pass via reconciliation (the Senate parliamentarian is reviewing the bill), we think Democrats will be able to pass the Senate bill, paving the way for it to be signed into law. Overall, we don’t expect major changes to our fair value estimates or moat ratings, as the changes net out to a moderate negative that we believe is manageable, likely through a combination of cost-cutting, agreements with generic firms for limited authorized generic launches (to avoid the list for negotiated drugs), and higher launch prices (to counter pressure on price increases and earlier declines due to negotiation).

Merck reported strong second-quarter results ahead of our projections, but we do not expect any major changes to our fair value estimate based on the minor outperformance. With the strong stock performance over the past few months, we now view the stock as only slightly undervalued, with the market better appreciating the growth potential of the firm’s current portfolio and pipeline, the keys pillars to Merck’s wide moat.

Merck's 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.