- I continue to believe large healthcare equities with well covered dividends are coming back in style.
- Merck appears to be breaking through resistance on the back of a well received earnings report.
- If Merck can hold a price above $92 as a weekly/monthly closing datapoint, I believe MRK stock is likely to blow through $100 within the quarter, or the next one.
- Keytruda continues to be one of the best performing drugs and a meaningful alternative to chemotherapy for many suffering patients.
Merck (NYSE:MRK) looks like it is ready to join the party. I believe several large healthcare equities are breaking out of long basing periods. Merck looks like it is about to break out of a multi-year base. Even in this terrible tape, MRK shares are fighting the current, showing tremendous relative strength as it marches onward and upward.
Merck's quarterly earnings were well received
Merck recently reported quarterly earnings, and the market was pleased. Revenue was $15.9 billion, which included $3.2 billion in sales from the company’s COVID-19 pill molnupiravir. Excluding molnupiravir, revenue was up 19 percent compared to Q1 of 2021.
Strength was seen throughout Merck's portfolio of drugs. Keytruda generated $4.8 billion in revenue, which was 23 percent year over year growth, and Gardasil brought in $1.5 billion in revenue, which was a whopping 59 percent growth compared to Q1 of 2021.
Net income for the quarter increased by over 50 percent to $4.3 billion. Margins were lower, but a substantial reason for that decline was the immediate blockbuster status of molnupiravir, where Merck has a profit sharing agreement with Ridgeback Biotherapeutics.
In addition to the strength seen from the above mentioned drugs, one of the most important things that Merck provided with earnings was a guidance raise. Increasing guidance is becoming increasingly rare, and a meaningful differentiator in 2022. Merck's full-year guidance now anticipates $56.9 to $58.1 billion in revenue, as weak as and $7.24 to $7.36 in non-GAAP earnings per share.
While molnupiravir is a rising star with unclear long term potential, Merck's crown jewel continues to be Keytruda. The monoclonal antibody alternative to chemotherapy and/or radiation continues to get new approvals and expanded indications. Keytruda has even received new approvals since reporting earnings on Thursday, April 28, where the EU approved it for multiple new indications on April 29.
Keytruda is now approved throughout Europe as a second-line monotherapy option for adult patients suffering from multiple different types of tumors that have microsatellite instability and deficient mismatch repair biomarkers. This would include tumors associated with colorectal, gastric, and small intestine cancers, as well as endometrial carcinoma. EU regulators also approved the Keytruda for use in combination with chemotherapy for adults with cervical cancers with tumors expressing the PD-L1 protein.
Merck recently acquired Acceleron for about $11.5 billion, where Acceleron was a commercial stage biopharmaceutical company with two key drug candidates: Sotatercept for pulmonary arterial hypertension, and Reblozyl for the treatment of anemia in rare blood disorders. The acquisition which was made in late 2021 provided increased diversification to Merck's pipeline, and the potential for it to add new and diversified blockbusters.
Sotatercept is in multiple phase 3 clinical trials, and it is possible that there will be some material update within the second half of 2022.
MRK stock - Knock thrice for entry
In January, I proposed that Merck was in a four year basing pattern, where it appeared primed to test what was clearly overhead resistance and rarified air that was the higher $80s.
Merck's dependence upon blockbusters like Keytruda and Gardasil is a risk. Now we have to add the capricious nature of a Covid-19 antiviral to the mix. That seems to be a good problem at the moment, but it is unclear whether the bottom may fall out of that business at any moment, or if it may have significant legs into the future. Uncertainty is discounted, so this risk appears like opportunity.
Merck is also highly sensitive to political risk, as is every large pharmaceutical company. Any increased attention upon the company or industry could weigh on share demand. Even large pharmaceutical companies can suffer drawdowns of greater than 20% during heightened political scrutiny, and this is a mid-term election year. The success of molnupiravir or anything within any pharma portfolio could become a short term target.
Any significant negative trial update is also likely to weigh upon Merck's valuation. This would especially be the case if it affected Keytruda's continued rollout, or called into question the future of Sotatercept. I expect a meaningful update regarding Sotatercept within the next 6-9 months.
Merck had two blockbuster drugs and a large portfolio of supporting treatments, and now appears to have three blockbusters due to the addition of molnupiravir. Merck's dividend is reasonably well covered, and the company is likely to increase the quarterly payout late in 2022. I believe Merck is fairly valued, but that it is precisely the type of stock that is favored in the current market. I expect this preference to continue through, at the least, 2023.
I continue to believe that Merck is likely to make new all-time highs within 2022. I believe there is significant resistance in the low $90s, but that if Merck can maintain a weekly closing price above $92, that it is likely to test $100 in the near term.
This article was written by
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