Merck (MRK) is one of the brightest stars in the pharmaceutical industry with an overflowing pipeline of twenty new drugs in phase III clinical trials. The new drugs cover a host of troubling ailments, including everything from insomnia and allergies to osteoporosis and HIV. Merck is expecting bountiful returns on its research and should be raking in new sales that substantially offset expired patents such as Singulair.
The Schering-Plough acquisition in November 2009 gave Merck a number of new items for its pipeline with very little exposure to patent cliffs. Even though the loss of Singulair was a hard hit for revenues, CEO Kenneth Frazier has great faith in upcoming products.
Despite precipitous losses of revenue from Singulair sales in August and September of this year, shares of Merck have risen for the past 4 months from approximately $37 in June to approximately $46 today. Despite a flowing fountain of new pharmaceuticals, many believe Merck is overpriced and that a correction is impending. I believe Merck is due for a correction and for some investors, this might be the time to sell, allow corrections to take place, and then repurchase the stock. Merck is due to report third quarter earnings on October 26th, 2012. This can lead to a fall in share prices if earnings aren't as spectacular as the current, dazzling share price. If you don't believe me, just look at Google's (GOOG) recent plunge.
Merck has approximately 3.05 billion shares outstanding, a market capitalization of roughly 141 billion with an enterprise value of approximately 143 billion. Merck's PE is currently near 21 and its earnings growth is the highest in the industry at over 600%.
If Merck's YTD growth were any brighter, you would have to put on your Coppertone sun lotion (also made by Merck). Just look at these numbers - YTD growth of over 22%, operating margin of roughly 23% and a profit margin of approximately 13%. I believe the future is bright for Merck, but buyer beware. Although most investors consider Merck a strong buy, it's important to remain mindful the stock has been overbought and may be due for some retraction. So with these cautionary warnings, let's look at how Merck stacks up against other pharmaceuticals.
How does Merck's PE ratio compare to other large pharmaceuticals? With Merck, the trailing PE is roughly 21. Abbott (ABT) currently has a PE near 16 but experienced a major blow to its pipeline last week with the discontinuation of Beacon's phase III study due to safety concerns. In addition, Abbott's shares dropped 4.5% in value over the past week after earnings reports last Wednesday (October 17th) reported third quarter earnings of $9.77 billion, down .04%.
Johnson & Johnson (JNJ) has a PE ratio between 23 and 24 and reported third-quarter results last week with sales of over $17 billion; an increase of over 6 percent. Johnson & Johnson is one of the highest quality blue-chip stocks on the market with a collection of over 200 subsidiaries ranging from Band-Aid to Splenda. This diversification reduces the pressure to produce stellar pharmaceutical groundbreakers and Johnson & Johnson sells its products worldwide with roughly thirty percent of sales in Asia-Pacific / Latin American markets and approximately twenty-five percent of sales generating from Europe. Even with its current lack of pipeline products, fifteen drugs are coming up for FDA review of phase III clinical trials.
Ely Lilly (LLY) currently has a PE ratio of approximately 14 and is one of the largest pharmaceutical companies' worldwide, ranking tenth in sales with an ever-growing portfolio of pharmaceutical products. Lilly maintains laboratories around the world researching the latest clinical trials of some of some of the world's most debilitating diseases. I believe the earnings multiple, which has risen steeply since last June, will continue to rise. Lilly has the richest mid-to-late stage pipeline of its history tackling some of the most important diseases in society, including cancer, Alzheimer's disease and diabetes. On October 24th, Lilly will report its third quarter earnings with declining revenues of roughly 8.5% and $5.6 billion. My advice is to keep an eye on that pipeline.
Pfizer (PFE) has a PE ratio just shy of 19 and a market cap of approximately $188 billion. The company recently announced that it plans to acquire the developer of an attention-deficit, hyperactivity disorder in a transaction valued up to $700 million. Just as other pharmaceuticals are pondering their fate with patent cliffs, Pfizer had to face up to the loss of Lipitor's patent in November of last year. Lipitor revenues amounted to $9.6 billion in 2011, accounting for 14% of Pfizer's total 2011 revenue.
Despite the good news of a baby on the way (the ADHD drug), Pfizer also announced yesterday that their phase III study of INLYTA did not statistically show longer progression-free survival versus Sorafenib in patients with advanced renal cell cancer. Pfizer also dumped another plant in Puerto Rico, from its hit list of facilities "to be closed this year," selling it to Mexico's Neolpharma.
French drug-maker Sanofi (SNY), a global healthcare leader that researches, develops and distributes therapeutic products, has a PE ratio between 13 and 14. With over 110,000 employees in a hundred countries, Sanofi has a strong global presence. Sanofi had a "good FDA week" last week. The FDA voted 9 to 6 in favor of marketing Sanofi's and Isis Pharmaceuticals (ISIS) Kynamro (mipomersen sodium) for treating individuals with Homozygous Familial Hypercholesterolemia despite concerns over possible liver damage. Sanofi also just teamed up with Coca-Cola (KO) to launch a new line of health and beauty drinks in France with the first four drinks focusing on general vitality, hair growth, hastening weight loss and overall vitality. Move over French wines because "Ooh La La!" Coca Cola's health drinks are on the way!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.