Shares of Dow component Merck (MRK) are getting a nice little shot in the arm this morning on an upgrade by Dr. Tim Anderson at Sanford C. Bernstein. He's putting an "Outperform" or "Buy" rating on MRK and raising his target price three bucks to $30.
Dr. Anderson says the stock price was too low -- tied with Pfizer (PFE) for the lowest forward price-to-earnings multiple -- for a company that he calls a "best-in-class grower." In a research note to clients he writes, "MRK/SGP offers the highest growth of the 10 names we cover in the US and Europe." In an accompanying voiceblast Dr. Anderson said, "Lowest valuation with the highest growth, with a nice dividend yield and a near-term pipeline, what's not to like?" Regarding the near-term pipeline, Dr. Anderson singled out a heart attack prevention drug owned by Schering-Plough (SGP) that "could potentially be a multi-billion dollar product."
He acknowledges that a potential dispute over SGP's pre-existing relationship with Johnson & Johnson could throw a wrench into the whole thing, especially if JNJ (JNJ) gets into a bidding war with MRK for SGP. Many analysts have said that could happen. But even if MRK were to lose that fight, Dr. Anderson says Merck would likely walk away with the keys to the whole cholesterol drug joint venture with SGP that includes Vytorin and Zetia. He estimates that would immediately add 15-20 percent to MRK's earnings.
Yes, the overall market has had a good week. But the biopharma ticker, especially over the last couple of days, seems to be picking up steam. I think it could be a combination of factors: speculation about the next takeout target, a reaction to what many thought was a stock-market overreaction to President Obama's proposed healthcare reform plan, a relief rally because it looks like the next FDA Commissioner won't be Dr. Steve Nissen, and maybe some of it's all the money coming out of Genentech (DNA) finding new homes.
Disclosure: Someone on the Bernstein research team owns MRK stock and a part of Bernstein owns at least one percent of MRK and SGP.