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Summary

  • Recent clinical data for a combination of drugs MK-5172 and MK-8742 showed high cure rates among patients with genotype 1 of the disease.
  • According to Deutsche Bank, the overall market for Hepatitis C treatment could reach $20 billion by 2020.
  • With analysts' highest price target currently at $70, Merck stock looks set to reach that mark in the next 12 to 18 months, with Hepatitis C progress serving as a catalyst.

With better-than-expected results coming in from AbbVie (NYSE:ABBV), Johnson & Johnson (NYSE:JNJ) and dominant names in big pharma, there is now even more pressure on Merck (NYSE:MRK) to prove that the company is not being left behind following its weak February quarter. Despite Merck's struggles with growth, I never believed the company was in any real danger of losing its status to Pfizer (NYSE:PFE) as a drug kingpin.

My belief in Merck was not popular, especially since the company was approaching several expiring patents. But with Merck's immuno-oncology candidate, MK-3475, I don't think the company's drug pipeline is as weak as being perceived. I will agree that the stock, which is percentage points away from a 52-week high, is not exceptionally cheap at this level. But value-oriented investors with a long-term horizon can still do well here. If my suspicions are correct, there is at least 22% more upside to these shares in the next 12 to 18 months.

Merck will report first-quarter earnings results on Tuesday. The Street will be looking for 79 cents in earnings per share on revenue of $10.44 billion. Revenue is projected to be down 2% year-over-year, while earnings per share is expected to shed 6 cents, after reaching 85 cents a year ago. For the full year, the Street will be looking for earnings of $3.44 per share on revenue of $42.92 billion.

Although Merck's recent results have been anything but stellar, I remain encouraged that management has made clear that its top priorities remain immuno-oncology and entering/dominating the Hepatitis C (HCV) and vaccines market. These are areas where rivals like Roche (OTCQX:RHHBY) and Bristol-Myers Squibb (NYSE:BMY) have begun to lay strong foundations. The good news is that the Street, which is no longer punishing Merck from the revenue miss, has begun to pay attention to these strategies.

On Tuesday, Merck's management has to also present the ways it plans to return value to shareholders. They've done a solid job up to this point. But it's going to take more convincing to get new investors to buy in at near 52-week highs. To that end, I believe Merck should be able to uncover ways to grow underperforming businesses. Its animal health and consumer businesses have needed some attention for a long time.

Likewise, I don't believe the pharma segment has performed up to expectations. I say this even though that segment has produced modest results. There just hasn't been that healthy consistency investors would like. What I mean is, despite Merck's strong portfolio of effective drugs, some are working harder than others. And with a recent 50% drop in Singulair sales, its blockbuster once-a-day asthma drug, management must find ways to offset that decline.

That said, Merck management hasn't been asleep at the wheel, either. And with some strategic moves and a re-dedication to research and development, I think they can positioned this company to regain the market share it has lost. The good news is, Merck is getting close to conducting Phase III trials for a combination treatment for Hepatitis C. As noted, this can help strengthen the pharma segment and get Merck back towards long-term growth.

As it stands, the recent clinical data for a combination of drugs MK-5172 and MK-8742 showed high cure rates among patients with genotype 1 of the disease, which is enough to prompt management to proceed to Phase III trials. For now, Gilead Sciences (NASDAQ:GILD) is the clear-cut leader in Hepatitis C treatment. The demand for this market suggest that close to 150 million people suffer from Hepatitis C globally. According to Deutsche Bank, the overall market for Hepatitis C treatment could reach $20 billion by 2020. And Gilead is projected to capture roughly 80% of that market.

But Merck has the tools and the resources to narrow that gap. To what extent, remains to be seen. But suffice it to say, there is a lot of potential here, which is (in my opinion) enough to place a bet on Merck ahead of Tuesday's results. Given that analysts' highest price target currently stands at $70, I project Merck stock to reach that mark in the next 12 to 18 months. I believe the company's progress in Hepatitis C will serve as a strong catalyst.

Source: Why Merck Is Heading To $70