Merck: High Upside Expected From Vaccine

Apr. 3.12 | About: Merck & (MRK)

The April 1st issue of Clinical Infectious Diseases will include data from Merck's (MRK) critical Phase III study of its shingles vaccine known as ZOSTAVAX. This announcement made by the company included the results of the study that stated its research demonstrates the vaccine is effective in reducing the occurrence of herpes zoster, more commonly known as shingles, in adults between the ages of 50 and 59 by nearly 70%. This information should be of particular interest to investors because Merck's ZOSTAVAX is currently the only shingles vaccine that is licensed for sales and use within the United States.

The Importance of ZOSTAVAX

In order to understand the financial importance of this vaccine, it is useful to review the statistics provided by the company in the same business wire release. Citing information provided by the U.S. Centers for Disease Control (CDC), there are roughly one million cases of shingles each year. The disease affects about one in three people throughout the course of a lifetime, targeting those individuals who have had the chickenpox earlier in life. Once a person contracts the varicella-zoster virus, it remains in the body permanently. When the virus manifests itself in older adults, it is known as shingles. The later in life that one experiences a flare up, the more severe the incidence is expected to be, and roughly 70% of all cases in the United States occur is adults over the age of 50.

The U.S. Food & Drug Administration (FDA) has increased the indicated used for the drug for those in the study test group. Additionally, the CDC recommends a single dose of the drug for anyone over the age of 60 that is an appropriate candidate under other criteria. These include being free of risk from the safety warnings and having experienced a case of chickenpox in youth. This is recommended even for patients who have experienced a case of shingles as an adult.

The overall message that should be taken away from the information for investors is that the potential client base for this vaccine is vast. With a million new cases every year, it is clear that this is a significant malady for which an effective vaccine will be highly sought after. As the only drug currently on the market in the United States, Merck enjoys not only a first-mover advantage, but patent protection that has the potential to make the drug a perennial blockbuster for the company. While vaccines are not necessarily as lucrative as drugs that are used in a more continuous fashion, it seems unlikely that there will be any lack of demand.

ZOSTAVAX and Health Insurance

As the country anxiously awaits the Supreme Court's decision on Obama-care, it is critical to consider the role of healthcare in Merck's future with this vaccine. In the same release, Merck estimates that as many as 90% of those with private health insurance or Medicare Part D plans have coverage that will reimburse for the vaccine. Additionally, the vaccine has been approved by the U.S. Veterans Health Administration and TRICARE, the U.S. Department of Defense Military Health System's health plan. What this suggests is that access to the vaccine will be largely covered for individuals for whom the vaccine is targeted. This means that Merck will be able to realize profits on the vaccine in the form of payments from insurance companies as opposed to needing to rely solely on out-of-pocket payments by individuals.

How Merck Stacks Up

Before purchasing any stock, it is advisable to understand where the company fits into the overall investment landscape relative to its peers. In terms of major valuation metrics, Merck lags competitors GlaxoSmithKline (GSK) and Pfizer (PFE) by small margins. On a price-to-earnings basis, Merck currently trades at 19.1 times earnings, relative to price-to-earnings ratios of 27.8 and 17.8 for GlaxoSmithKline and Pfizer, respectively. The company lags slightly more in terms of operating efficiency, posting an operating margin of 22%, relative to 30.8% for GlaxoSmithKline and 29.3% for Pfizer. All three are well above the industry average of 12.8%. The real standout metric for Merck, however, is its quarterly year-over-year revenue growth. The company posted a very modest 1.7%, but that figure is very attractive relative to -3.0% for GlaxoSmithKline and -3.5% for Pfizer.

The last consideration of these three peers is the income element of each as determined by the dividend yield. Where Merck is currently trading with a dividend yield of roughly 4.4%, GlaxoSmithKline offers investors 5.9%, while Pfizer offers 3.9%. In an economic landscape in which good yields are extremely difficult to come by, each of these companies is attractive on this basis.

For any major pharmaceutical company, the pipeline can be as important as the drugs currently available. While each is known for having a strong pipeline of new projects, when a company is able to report positive news about a drug in which that company has a clear market share advantage, the impact on the stock has the potential to be significant. In this case, Merck stands alone in this space, and the news could be the type of catalyst to have a real impact. For those not ready to invest, placing Merck on one's watch list is advisable based on the positive reception of this vaccine.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.