Merck (NYSE:MRK) is a very appealing investment for a long term defensive position. Current shareholders should hold and interested investors should initiate a position in October or near term. Merck offers an adequate dividend and its metrics are comparable to its peers. Merck is proactively offsetting key patent expirations as its diabetes division has experienced strong growth thus far and has the potential to be a long-term blockbuster patent. Merck is having successful trials with another diabetes drug while it's focused on developing drugs for HIV, Alzheimer's and expanding its portfolio in China as well. Merck is having continued success with its insomnia drug. Merck's goals are also helped through investing in partnerships to bolster its pharmaceutical portfolio while divesting noncompetitive agreements. Current operations indicate that Merck is developing key patents that can position it to be the leader amongst the big pharmas for the long term.
Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), GlaxoSmithKline (NYSE:GSK) and Novartis (NYSE:NVS) are the major pharmaceuticals that are most comparable to Merck & Co. Pfizer's and Johnson & Johnson's price is around 22 times earnings, Merck & Co. is closer to 21 times earnings. Merck's EPS is around $2.19, its EPS growth this year exceeds 639% - this EPS growth is the highest among these big pharmas. Merck's 16.2% sales growth over the past five years is also the highest. Novartis's 11% sales growth is the next highest.
Merck's 2.1 current ratio is the highest among the firms - its debt-to-equity ratio is around 0.34. Merck's ROE is 12.15%, its operating margin is 18.8% and its profit margin is 14.1%. Merck's average daily volume is around 12.6 million and its relative volume is around 0.5. The stock's 26.6% YTD growth is the strongest among the big pharmas. Merck is up 5.6% in the past month and up 5.5% since its last earnings release. Merck's annualized dividend is around $1.68.
Merck's recent earnings release showed worldwide sales totaled $12.3 billion, increasing 1%, YOY. Income before taxes increased to $2.68 billion from $.67 billion, YOY. Net income totaled $1.79 billion, decreasing from $2.02 billion, YOY. Merck & Co.'s long-term debt totaled $15.05 billion, decreasing from $15.52 billion, YOY. Cash and cash equivalents at the end of first half 2012 totaled $16.7 billion, increasing from $12.3 billion, YOY. Total Pharmaceutical sales increased to $10.56 billion from $10.36 billion, YOY. The increase in total revenue was primarily due to increasing sales for several products.
Januvia sales totaled $1.05 billion, increasing 36%, YOY. Janumet sales totaled $411 million, increasing 28%, YOY. Singulair sales totaled $1.43 billion and Victrelis increasing to $126 million. The increase was partially offset by 4% negative currency impact and declining sales of Remicade. Merck expects future rapidly declining revenues from Singulair's US exclusivity expiration in August 2012. European exclusivity expires in February 2013 and Japan exclusivity expires in 2016. Despite macroeconomic headwinds in Europe, Merck was able to increase volume growth in these markets.
Merck's diabetes franchise, Januvia and Janumet, are on track for totaling $6 billion for the year. Merck may capitalize on this opportunity for the long-term as MK-3102, a once-per-week drug for diabetes type 2, recently proved to be effectively lowering blood sugar levels in its mid-stage clinical trial. Merck will begin phase iii trials soon in order to test for serious heart or safety risks but MK-3102 has been well tolerated thus far. The diabetes market is currently around $23.7 billion, analysts feel it could double by 2020. Merck's diabetes Januvia/Janumet franchise is currently leading the market this year. Analysts project sales reaching $9 billion annually by 2018.
Increasing market share in China is also an opportunity for Merck to improve its revenues looking forward. Only 2.3% of Merck's sales currently come from China; the US accounts for 43%, Europe accounts for 25% and Japan is 12% of sales. But, Merck's sales in China did increase 23% in the first half of 2012, YOY. Merck recently entered into an agreement with Simcere Pharmaceutical (NYSE:SCR) to help increase market share in China's growing healthcare sector.
China's government recently increased its healthcare budget to 7% of GDP, and its healthcare sector is projected to increase to $1 trillion by 2020. Pfizer, Novartis and GlaxoSmithKline are all taking similar measures to capitalize on this growing opportunity in China. Simcere Pharmaceutical Group and Merck will work together in a joint venture called Simcere MSD to focus sales, manufacturing and R&D on China's 260 million chronic disease cases per annum.
Despite the success of Merck's diabetes franchise, it's taking a diversified approach for improving its long-term product portfolio. Merck recently entered a $578 million exclusive rights partnership with Ablynx (ABLX.BR) in order to make sophisticated treatments based on nanobodies. Ablynx makes nanobodies that reach new targets within the body and can be taken orally, making Merck's drugs more effective and less arduous for patients. Merck Serono, Merck's German division, recently spun-off a firm, Asceneuron, to focus on developing treatments for Alzheimer's disease. Merck also divested its partnership with Cardiome Pharma (NASDAQ:CRME) from 2009 for Vernakalant due to regulatory and development headwinds in order to streamline its portfolio and reduce costs.
Merck's insomnia drug, Suvorexant, continues to show positive results during its phase iii trials. This treatment can substantially increase revenue as it will be the first of its kind to treat chronic patients. A new study in the Archives of Pediatric & Adolescent Medicine cleared Merck's Gardasil vaccination of any serious health issues beyond skin infections or fainting the day of treatment. Gardasil revenue totaled $608 million in the first half of 2012, up from $490 million, YOY.
Merck recently entered into two independent licensing agreements for investigation HIV candidates; it's also entering its own MK-1439 next-generation non-nucleoside reverse transcriptase inhibitor into phase iib trials. Developing an effective treatment for HIV patients through one of these three ventures could also significantly increase Merck's long-term earnings. Merck & Co. has several promising ventures underway that can position it as the leading major pharmaceutical firm for the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.