A Solid Pharma with a Diversified Pipeline

MRK - Merck

Merck & Co. is a global innovative healthcare company with a rich history of nearly 130 years. The company provides a wide range of prescription medicines, vaccines, biologic therapies, and animal health products. Merck’s operations are managed through four segments, Pharmaceutical, Animal Health, Healthcare Services, and Alliances segments. The Pharmaceutical (~90% of total sales) and Animal Health (~10%) segments are the only reportable segments. In the human healthcare segment, Merck addresses various medical disciplines such as oncology, hospital acute care, immunology, neuroscie nce, virology, cardiovascular, diabetes, women’s health, etc.

Geographically, the U.S. is Merck’s largest market accounting for 43% of 2019 revenues, followed by EMEA, Japan, China, Asia Pacific, Latin America, and others. The company is known as Merck in the U.S. and Canada and MSD everywhere else. Its customers include physicians, wholesalers, hospitals, physician distributors, and government entities. Merck’s core product categories include drugs for diabetes, cancer, vaccines, and hospital acute care. A few of Merck’s best-selling products are Keytruda that accounts for nearly one-quarter of the company’s total revenue, Lenvima, Lynparza (cancer drugs), Januvia (industry-leading diabetic drug), Zetia, etc.

Investment Data

Revenue Growth & Market Exposure

Merck is at the forefront of fighting several deadly diseases and is focusing its research on conditions that pose significant health challenges today like cancer, HIV, HPV, hepatitis C, Alzheimer’s disease, etc. The company is expanding its footprint in emerging markets which are expected to be huge markets for drugs and other medical products. Over the years, the company has developed long-standing relationships with other leading industry names through external alliances, licensing arrangements, and collaborations. Merck is well-positioned to compete in the search for technological innovations. The company spends extensively on R&D (21% of sales in 2019) to deliver innovative healthcare solutions. Merck continues to explore vaccines for COVID-19, as well as potential antiviral drugs that could be deployed more rapidly. 

Merck’s revenues registered an 11% sales growth in the most recent quarter. Both Human Health and Animal Health businesses contributed to the growth this quarter with COVID-19 having not a very significant impact on Merck’s business. Key products in Merck’s oncology, vaccines, and hospital businesses led to revenue growth. In oncology, Keytruda sales increased by 46% YoY, reaching $3.3 billion, Livestock also grew by 24% largely due to the contribution of the Antelliq acquisition and COVID-19 related buy-in. Merck continued to strengthen its overall leadership position in the I/O market, including indications for lung, bladder, and head and neck cancers. Strong demand in its portfolio of innovative products, continued commercial and clinical execution led to overall good performance. The company should also benefit from its robust pipeline of drugs for neurodegenerative diseases like Parkinson’s disease, Alzheimer’s disease, etc. with a wide range of product candidates across each phase of development. 

Merck is all set to spin off its women’s health, legacy brands, and biosimilars segments into a stand-alone business called Organon and expects the transaction to be completed in the first half of 2021. The spin-off would lead to a leaner business and benefit from strong growth across its Oncology, Vaccines, Hospital, and Animal Health businesses. 

Merck’s portfolio is heavily weighted towards products administered by a physician. Nearly two-thirds of its global Human Health revenue is physician-administered products. A reduction in healthcare provider and patient interactions as a result of the pandemic has had an impact on Merck’s business. The company witnessed adverse effects on its vaccine portfolio, both pediatric and Women’s Health products as well as declines in elective procedures. However, the majority of Merck’s manufacturing plants and clinical supply sites remained fully operational with little impact on the production and supply. 

Merck is expecting to progress to normal pre-COVID-19 volumes by the beginning of the fourth quarter. It now expects revenues of $46.1 billion – $48.1 billion, which reflects a decrease of $2.5 billion from its previous midpoint. Merck is in an excellent position to benefit from the growing demand for oncology treatments. The company has also been restructuring its business to cut long-term costs. 

Dividends

Merck is a Dividend Starter. The company has a rich history of paying dividends for almost three decades and has increased dividends for the tenth year in a row. Its 10-year dividend growth stands at 2.7% CAGR. Earnings have grown at a rate of 14% CAGR in the last three years. The company sports an annual average dividend yield of 3.2% and a payout ratio of 61%. It returned $10.5 billion in dividends and share repurchases in the last year and last raised its dividend by an impressive 27%. 

Merck follows a balanced capital allocation program to return cash to shareholders while investing in growth. It spends billions of dollars in strategic acquisitions and meaningful capital expenditure. Though Keytruda has been growing its sales at an impressive pace, Merck is diversifying its cash flow with acquisitions like ArQule and partnerships such as Taiho and Astex. Acquisitions of Antelliq Group and Peloton Therapeutics have also proven to enhance Merck’s portfolio and strengthen its pipeline. Merck’s cash collections continue as expected, with no significant disruption from the COVID-19 pandemic impact. The company had $8 billion in cash at the end of the first quarter. 

The company estimates non-GAAP EPS to be between $5.17 to $5.37, continue to invest in manufacturing capacity expansion, and remain committed to paying its dividends.

Competition

Merck’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, generic drug manufacturers, and animal health care companies. The company also faces intense competition from generic and biosimilar products. Global reach, financial strength, and scientific excellence are a few of Merck’s leading competitive advantages.

Bottom Line

Merck’s long-term growth prospects remain strong, driven by the strong underlying demand for its products. COVID-19 will continue to impact its near-term results, mostly due to patient access challenges. The spin-off of Organon will enhance the company’s ability to focus more fully on its key growth pillars and future innovation. Merck’s value-enhancing business development and a broad and innovative portfolio should also support future growth. It should gain from its rich pipeline addressing areas of unmet needs over the next 5-10 years and should comfortably continue its dividend payment streak in the future.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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