4 Reasons Merck Will Break $40 By 2013

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 |  About: Merck & Co Inc. (MRK), Includes: BMY, LLY
by: Vatalyst

Merck (NYSE:MRK) has been on a relatively decent run in recent months. The value was at around $30 a share around August 2011, but it has moved up to around $39 a share this past month. I feel that the value of Merck should continue to rise in the next few weeks. The stories that are coming out of the company are very promising and should suggest that it will continue to grow even as a few of its main competitors are starting to challenge it.

Revenue

One of the most notable points about Merck is that it is increasing in terms of its value. The revenues that Merck was able to get this past quarter have proven to be much higher than what most expected. Reports show that Merck had a first quarter profit of about 67%. The first quarter profit for 2012 was $1.74 billion, a number that is much higher than the $1 billion that it had in the same time in 2011. Much of this is thanks to the fact that Merck has been more fiscally responsible, by working with lower marketing and production costs, while at the same time, cutting the prices on Hyzaar and Cozaar, two blood pressure medications that have not been selling as well in recent years.

The cash flow for the company has been substantial. It is at $2.6 billion, a far cry from the -$650 million in the middle of 2009. The P/E ratio is also at 17, a value that has been consistent for much of the past quarter. This ratio was at around 129 in the early part of 2011, though.

Another factor to take into account is how Merck is going to keep on earning more money over time. Zetia and Vytorian will continue to be available only through Merck for now until 2017. This is thanks to the company successfully fending off a threat from Mylan (NASDAQ:MYL) to try and potentially create generic versions of these medications before the patents that Merck has expire in 2017. This is critical, because these two medications combined to sell for about $4 billion last year. I consider this to be a substantial development for Merck, because it will keep the company's cash flow intact, thus making it a little more viable.

Merck remains incredibly diverse. Merck does not have any single kind of medication form that clearly dominates. About 26% of Merck's shares come from anti-infective products like Nasonex, while about 22% come from legacy medications. Metabolism and cardiovascular drugs also make up a combined total of 29% of the stock's value. The values of what Merck has are great to see, and they make me feel that the company will be a little more attractive with regards to what it has to sell. I feel that a business that is more diverse will be a low-risk business; it will always have something that can bring in revenue and potentially keep the cash flow under control.

Risks

There are some risks within the company that might impact its value. It is true that Singulair, a top-selling asthma medication, will become available in a cheaper generic form this August. Singulair was able to get about $5 billion for Merck this past year, thus creating a substantial issue over what could happen to money in the future.

There are also concerns over the recent halting of a study on Vorapaxar, a blood-thinning medication. Merck is not willing to release details on the company's concern. I feel that this is a risk, because companies could pounce on the opportunity to catch up to Merck by going along with other medications.

Competition

I expect the competition for Merck to be strong, but at the same time, it should not be too much of a hassle for Merck to manage. Part of this competition will come from the fact that some Merck products going generic and from other medications that different companies are releasing. One such medication that holds promise is a new Type 2 diabetes drug from Eli Lilly (NYSE:LLY) called Jentadueto. This medication will be used to lower a patient's blood sugar levels. This could influence medication sales in the future. Jentadueto will be competing alongside Merck's Janumet XR, an extended-release tablet. It will work in practically the same way as Jentadueto.

Also, the dividend yield for Merck is relatively close to some of its competitors. Merck has a yield of 4.3%. Bristol-Myers Squibb (NYSE:BMY) has a 4% yield as well, while Eli Lilly is near 5%. This competition could make it so people will stay with Merck, but at the same time, I feel that people should at least keep an eye out on what Bristol-Myers Squibb and Eli Lilly are doing. Other companies have reported similar gains. Abbott Labs (NYSE:ABT) has announced a 44% increase in sales over the first quarter this year. This does not mean that Merck will be dealing with competition from all companies. AstraZeneca (NYSE:AZN) has suffered a decline in revenue by nearly 50%, with a profit of $1.6 billion in the first quarter.

My overall consideration about where Merck will be going in the future involves what is going on with the company's evolution into new products, recent lawsuit resolutions and changes in what it will offer and who is competing. I feel that Merck is on the rise, thanks to its variety of products and its continued ability to get new products on the market and to protect what it already has. This does not mean that it is safe from competition. The risk of what will happen when Singular goes generic will be something to take a look at. I do not expect any dramatic increases, but I do expect the value to at least stay consistent or go up.

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