Merck Advances Mean a Bright Future for All

Merck Advances Mean a Bright Future for All

Price $77.10                          Recent Purchase                        June 17, 2021

  • 130 years of experience in the United States.
  • A strong list of patents spanning into the late 2020s.
  • Oncology and Vaccine breakthroughs.
  • Focusing on fewer products poised for growth.
  • Dividend Yield of 3.3%.

Investment Thesis

Merck & Co develops medicines, vaccines, and therapies for humans and animals. Organon, the spinoff, will focus Merck on fewer products and maximize research efficiency.

Because of COVID-19, there have been several breakthroughs in medical science tied to mRNA technology. There is also significant demand for oral treatments for COVID-19, which Merck is at the forefront of. We believe that once the COVID-19 pandemic winds down, Merck will be an excellent choice for the future of vaccination and oncology drugs.

Important Products

Name

Uses

Q1 2021

Sales ($ Millions)

Patent Expiration (US)

KEYTRUDA

Oncology

3,899

2028

JANUVIA

T2 Diabetes

1,295

2023

GARDASIL

Vaccine

917

2028

VARIVAX/

PROQUAD/MMRII

Vaccine

449

N/A

BRIDION

Anesthesia

340

~2030

Lynparza

Oncology

228

2028

SIMPONI

Immunosuppressant

214

N/A

ISENTRESS

HIV Antiviral

245

2027

PNEUMOVAX

Vaccine

256

~2026

ROTATEQ

Vaccine

222

~2033

Animal Health

Various

1,214

N/A

Some drugs – frequently vaccines — are covered by multiple patents, therefore the dates of expiry are averaged out, when biosimilar and generics may begin to appear. There is a fast drop-off period once patents expire, and revenue can be cut by billions of dollars should a drug be suddenly cut out of exclusivity.

Operations and Organon Spin-Off

Merck’s primary revenue comes from the drugs it manufactures and sells as the sole patent holder. They expand their catalog of products through original research, licensing, or acquisition.

Merck wishes to focus on its research, oncology, and vaccination portfolio, which has significant growth potential. For this reason, Merck has decided to spin off Organon. The spin-off will significantly reduce the load on Merck for human health and general medicine production. Merck estimates this will improve revenue growth and reduce $1.5 billion in operating inefficiencies by 2024. This will allow for $9B in special dividends by 2024 and for Merck to hit its >24% operating margin target.

Merck/Organon Investor Day

Important Trials

One of the most important developments is Monupiravir for COVID-19. It is an experimental oral anti-viral drug that was originally created for influenza treatment. The US Government has committed to purchasing $1.2 billion, should it get FDA approval for COVID use. It is currently in Phase 3 trials, with promising results and tolerability in trial patients.

The largest development in Merck’s vaccines is the 3 dose VAXELIS, a combined Tetanus, whooping cough, hepatitis B, and Haemophilus B vaccine. It is the only approved vaccine of its kind for 6 months to 4-year-olds.

HIV collaboration with Gilead. Islatravir is in Phase 3, as a single-use drug (oral capsule) to be taken in conjunction with a standard HIV treatment regimen. Islatravir operates to reduce HIV enzymes in the body, thereby reducing the impact of HIV on the body and assisting standard treatment. It is believed to be effective in treating strains of HIV that are usually treatment-resistant. Importantly, it is being investigated for HIV prevention as well, as a long-term PrEP (Pre-exposure prophylaxis) option, is taken once per month orally. Additionally, Phase 1 trials are underway for an Islatravir distributing removable implant, for PrEP.

Pandion Therapeutics has been acquired, a clinical-stage biopharma company specializing in autoimmune conditions. They are currently the lead candidate (PT101 “TALON”) in human trials for regulatory T cell suppressants (Tregs), for ulcerative colitis, Lupus, and other inflammatory autoimmune diseases. Preclinical work for Tregs-based Type 1 Diabetes treatment is underway as well.

They codeveloped KEYTRUDA with AstraZeneca. It is primarily used as a cancer drug to target advanced-stage cancer, that is metastatic or not responding to other treatments. It is also used in conjunction with surgery to prevent the relapse of melanoma. KEYTRUDA has already been approved by both the FDA and European Council (EC) to be combined with chemotherapy. More recently, it was approved for limited monotherapeutic uses in the US, and for children with treatment-resistant Lymphoma in Europe. There is additional research underway for it to be used for early-stage-high-risk-pre-surgery breast cancer candidates. With AstraZeneca, they are also in Phase 3 trials with Lynparza, a similar drug made to target certain ovarian, breast, and prostate cancers.

They codeveloped Lenvima with Eisai. Lenvima is an oral drug for inoperable liver cancer, chemo-resistant thyroid cancer, and alternative treatment-resistant kidney cancer. It is currently also in Phase 3 trials.

Gefapixant is currently under review by the FDA. Gefapixant is a long-term cough suppressant, a treatment for chronic coughs that are inexplicable. This is expected to be approved in December of 2021.

International Expansion

COVID-19 caused significant drops in sales across the entire catalog of products, as was the case in the United States.

Merck’s animal health department grew 17% since Q1 2020, largely in part to growth in international sales.

China and emerging markets in Africa are some of the primary buyers of vaccines from Merck. The Zaire ebolavirus vaccine ERVEBO was approved in several central and west-African countries. The approval of KEYTRUDA and LENVIMA in China does mean that Merck is gaining market share of Oncology drugs in China.

Risk

Merck, like any other pharmaceutical firm, faces several risks. The primary risks being regulatory risk, unforeseen side effects, quality control failures, or generics/biosimilar drugs. Failure of quality control and unforeseen side effects can lead to extensive legal problems, which Merck has experienced in the past with Vioxx and Fosamax. Patent expiry and losing exclusivity can lead to rapid sales declines as cheap generics, or biosimilar drugs hit the market. Experimental concerns are primarily focused on the possibility drugs are not approved or research yields no results. Legislative concerns include pricing legislation and export restrictions.

Merck has an ongoing name dispute with its former parent, Merck Group of Germany. As a part of this dispute, Merck & Co. has exclusive right to use the name Merck in the United States and Canada. Merck Group has exclusive rights to use it in Europe. For this reason, Merck & Co. operates as MSD in Europe, and Merck Group operates as EMD in the United States and Canada.

Metrics

Due to COVID-19, fewer people have been going to the doctor for wellness visits. For this reason, many patients have not begun treatment or have not been vaccinated. Despite this, Merck has only seen a 1% drop in sales in 2020. For 2021, management predicts 8-12% growth.

EV/EBITDA

Forecasted Price-to-Earnings

E2021

E2022

E2023

Merck & Co

9.55

12.5

11.6

11.2

In the following 5 years, Merck will seek to expand its bottom line to support unmet needs over the preceding 5 years. Coupled with the Organon spin-off, Merck could be poised to be even more of a power player in Oncology than they have been before.

Estimated 2021

Dividend Yield

Market Cap (Billions $)

Price-to-Earnings

Merck & Co (MRK)

3.3%

196.92

12.5

Pfizer (PFE)

4.0%

219.21

10.3

Johnson & Johnson (JNJ)

2.5%

433.83

17.3

AbbVie (ABBV)

4.5%

203.10

9.1

Bristol-Meyers Squibb (BMY)

2.9%

148.16

8.9

Novartis (NVS)

3.6%

225.10

14.4

FDA Approval Process

The FDA approval process begins once a biologics license (BLA) or new drug (NDA) is filed. The FDA has massive power in deciding if – and when – a drug will become available for sale. There are 5 program designations. Fast track, breakthrough, accelerated approval, priority review, and standard (drugs can hold more than one designation). The fast track gives the FDA access to facilities and researchers, to allow for the FDA to see developments as they happen (rolling submission of documents for example). Breakthrough is analogous to fast track but involves a more FDA-intense process, including more implementation guidance. Accelerated approval allows the FDA to preemptively approve a product based on preliminary results that can predict clinical benefit; this does require post-approval confirmatory trials. Priority review means the FDA will take action within 6 months, compared to under 10 months which is standard.