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Merck (MRK) Falls 10% in 3 Months: Should You Buy the Dip?
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Merck’s (MRK - Free Report) stock has declined 10% in the past three months against an increase of 9% for the industry. The stock has also underperformed the sector and S&P 500 index, as seen in the chart below.
Merck’s stock started declining after the company announced second-quarter results on Jul 25. Though the company beat earnings and sales estimates and also slightly raised the full-year guidance for revenues, the stock took a hit as it cut its earnings guidance to account for acquisition costs. The company also provided a grim outlook for sales of its HPV cancer vaccine, Gardasil, due to lower sales in China. The stock has declined around 9% since its second-quarter results. The stock is also trading below its 50-day and 200-day moving averages since the end of July. This has sent investors wondering whether they should sell the stock following the price drop.
However, we believe the focus of long-term investors should rather be on the company’s strong fundamentals.
Merck boasts more than six blockbuster drugs in its portfolio, with PD-L1 inhibitor Keytruda approved for several types of cancer and alone accounting for around 50% of the company’s pharmaceutical sales. The drug has played an instrumental role in driving Merck’s steady revenue growth in the past few years. Though Keytruda may be Merck’s biggest strength and a solid reason to own the stock, it can also be argued that the company is excessively dependent on the drug and should look for ways to diversify its product lineup.
Let’s understand the company’s strengths and weaknesses to better analyze how to play the stock after the latest price decline.
Keytruda is Merck’s Biggest Strength
Keytruda is already approved for the treatment of many cancers globally. Keytruda is approved for 40 distinct cancer indications. Its sales are gaining from rapid uptake across earlier-stage indications like triple-negative breast cancer and renal cell carcinoma, as well as early-stage non-small cell lung cancer, for which approval was received in the United States in October 2023. Continued strong momentum in metastatic indications is also boosting sales growth. The company expects continued growth from Keytruda, particularly in early lung cancer.
Merck is working on different strategies to drive the long-term growth of Keytruda. These include innovative immuno-oncology combinations, including Keytruda with TIGIT, LAG3 and CTLA-4 inhibitors. In partnership with Moderna (MRNA - Free Report) , Merck is developing a personalized mRNA therapeutic cancer vaccine (V940/mRNA-4157) in combination with Keytruda for the treatment of adjuvant melanoma and non-small cell lung cancer.
Pipeline Progress & Strategic M&A Deals
Merck made meaningful regulatory and clinical progress this year across areas like oncology (mainly Keytruda), vaccines and infectious diseases while also executing strategic business moves like the acquisitions of Eyebiotech Limited, Harpoon Therapeutics and Elanco Animal Health Incorporated’s (ELAN - Free Report) aqua business. It also expanded its existing cancer deal with Japan’s Daiichi Sankyo.
Merck also has some key new products lined up for launch. Between 2025 and 2030, Merck expects eight potential new product approvals. We believe that among these, Capvaxive and Winrevair have the potential to generate significant revenues for Merck over the long term. Winrevair (sotatercept) was approved for pulmonary arterial hypertension in March 2024 while it is under review in the EU, with a decision expected in the third quarter of 2024. Capvaxive (V116), Merck’s 21-valent pneumococcal conjugate vaccine, was approved in the United States in June 2024.
Merck has other promising candidates in its late-stage pipeline like MK-0616, an oral PCSK9 inhibitor for hypercholesterolemia, tulisokibart, a TL1A inhibitor for ulcerative colitis and Daiichi-Sankyo-partnered antibody drug conjugates or ADCs.
Valuation & Estimates
From a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 12.63 forward earnings, lower than 20.47 for the industry as well as its 5-year mean of 13.73. The stock is also much cheaper than other large drugmakers like Novo Nordisk and Eli Lilly (LLY - Free Report) .
MRK Stock Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for 2024 earnings has declined from $8.54 to $8.13 per share over the past 30 days following the company’s guidance cut related to acquisition costs. For 2025, earnings estimates have declined from $9.98 to $9.76 per share over the same timeframe.
MRK Estimate Movement
Image Source: Zacks Investment Research
Conclusion
Merck does have its share of problems, like declining sales of Gardasil in China, generic competition for several drugs and rising competitive pressure, mainly on the diabetes franchise. There are concerns about the firm’s ability to grow its non-oncology business ahead of Keytruda's loss of exclusivity later in the decade.
Nonetheless, we believe the strong demand for Keytruda, higher sales of Gardasil in the United States and other international markets, a significant contribution from new products like Welireg and Vaxneuvance vaccine and the Animal Health segment can keep driving top-line growth. Merck is pinning hopes on PAH drug Winrevair to boost its top line once Keytruda loses exclusivity. Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. Keytruda sales continue to grow year over year as well as sequentially.
However, we believe they may stay invested as the company has one of the world’s best-selling drugs in its portfolio, generating billions of dollars in revenues. Merck’s stock is reasonably valued and buying this fundamentally strong company at the current reduced price can prove to be beneficial for long-term investors.
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Merck (MRK) Falls 10% in 3 Months: Should You Buy the Dip?
Merck’s (MRK - Free Report) stock has declined 10% in the past three months against an increase of 9% for the industry. The stock has also underperformed the sector and S&P 500 index, as seen in the chart below.
Merck Stock Underperforms Industry, Sector & S&P 500
Merck’s stock started declining after the company announced second-quarter results on Jul 25. Though the company beat earnings and sales estimates and also slightly raised the full-year guidance for revenues, the stock took a hit as it cut its earnings guidance to account for acquisition costs. The company also provided a grim outlook for sales of its HPV cancer vaccine, Gardasil, due to lower sales in China. The stock has declined around 9% since its second-quarter results. The stock is also trading below its 50-day and 200-day moving averages since the end of July. This has sent investors wondering whether they should sell the stock following the price drop.
However, we believe the focus of long-term investors should rather be on the company’s strong fundamentals.
Merck boasts more than six blockbuster drugs in its portfolio, with PD-L1 inhibitor Keytruda approved for several types of cancer and alone accounting for around 50% of the company’s pharmaceutical sales. The drug has played an instrumental role in driving Merck’s steady revenue growth in the past few years. Though Keytruda may be Merck’s biggest strength and a solid reason to own the stock, it can also be argued that the company is excessively dependent on the drug and should look for ways to diversify its product lineup.
Let’s understand the company’s strengths and weaknesses to better analyze how to play the stock after the latest price decline.
Keytruda is Merck’s Biggest Strength
Keytruda is already approved for the treatment of many cancers globally. Keytruda is approved for 40 distinct cancer indications. Its sales are gaining from rapid uptake across earlier-stage indications like triple-negative breast cancer and renal cell carcinoma, as well as early-stage non-small cell lung cancer, for which approval was received in the United States in October 2023. Continued strong momentum in metastatic indications is also boosting sales growth. The company expects continued growth from Keytruda, particularly in early lung cancer.
Merck is working on different strategies to drive the long-term growth of Keytruda. These include innovative immuno-oncology combinations, including Keytruda with TIGIT, LAG3 and CTLA-4 inhibitors. In partnership with Moderna (MRNA - Free Report) , Merck is developing a personalized mRNA therapeutic cancer vaccine (V940/mRNA-4157) in combination with Keytruda for the treatment of adjuvant melanoma and non-small cell lung cancer.
Pipeline Progress & Strategic M&A Deals
Merck made meaningful regulatory and clinical progress this year across areas like oncology (mainly Keytruda), vaccines and infectious diseases while also executing strategic business moves like the acquisitions of Eyebiotech Limited, Harpoon Therapeutics and Elanco Animal Health Incorporated’s (ELAN - Free Report) aqua business. It also expanded its existing cancer deal with Japan’s Daiichi Sankyo.
Merck also has some key new products lined up for launch. Between 2025 and 2030, Merck expects eight potential new product approvals. We believe that among these, Capvaxive and Winrevair have the potential to generate significant revenues for Merck over the long term. Winrevair (sotatercept) was approved for pulmonary arterial hypertension in March 2024 while it is under review in the EU, with a decision expected in the third quarter of 2024. Capvaxive (V116), Merck’s 21-valent pneumococcal conjugate vaccine, was approved in the United States in June 2024.
Merck has other promising candidates in its late-stage pipeline like MK-0616, an oral PCSK9 inhibitor for hypercholesterolemia, tulisokibart, a TL1A inhibitor for ulcerative colitis and Daiichi-Sankyo-partnered antibody drug conjugates or ADCs.
Valuation & Estimates
From a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 12.63 forward earnings, lower than 20.47 for the industry as well as its 5-year mean of 13.73. The stock is also much cheaper than other large drugmakers like Novo Nordisk and Eli Lilly (LLY - Free Report) .
MRK Stock Valuation
The Zacks Consensus Estimate for 2024 earnings has declined from $8.54 to $8.13 per share over the past 30 days following the company’s guidance cut related to acquisition costs. For 2025, earnings estimates have declined from $9.98 to $9.76 per share over the same timeframe.
MRK Estimate Movement
Conclusion
Merck does have its share of problems, like declining sales of Gardasil in China, generic competition for several drugs and rising competitive pressure, mainly on the diabetes franchise. There are concerns about the firm’s ability to grow its non-oncology business ahead of Keytruda's loss of exclusivity later in the decade.
Nonetheless, we believe the strong demand for Keytruda, higher sales of Gardasil in the United States and other international markets, a significant contribution from new products like Welireg and Vaxneuvance vaccine and the Animal Health segment can keep driving top-line growth. Merck is pinning hopes on PAH drug Winrevair to boost its top line once Keytruda loses exclusivity. Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. Keytruda sales continue to grow year over year as well as sequentially.
The declining estimates and the recent price drop have made investors somewhat skeptical about retaining this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, we believe they may stay invested as the company has one of the world’s best-selling drugs in its portfolio, generating billions of dollars in revenues. Merck’s stock is reasonably valued and buying this fundamentally strong company at the current reduced price can prove to be beneficial for long-term investors.