Merck (MRK) is the No. 2 drug company in the world — and it’s no surprise, given its decades of experience reading the market, developing important drugs and judiciously managing Wall Street, as well as Pennsylvania Avenue.
When MRK reported last quarter’s earnings in late July, it appeared that like the rest of its industry, the company was going to have some challenges growing in coming quarters.
What’s more, the knock against most big pharmaceuticals like MRK is that their days at the top of food chain were numbered and niche biotech firms were the next wave. The thinking was that big pharma was losing its patents on its major drugs — the patent cliff — and that would leave them in a very difficult situation, competing against generic drug makers and the new specialty drug makers.
But MRK is well diversified and draws its strength from its research and development as well as its broad drug portfolio.
Growth Through Acquisitions for MRK Stock
It has also been continually active in the mergers and acquisitions market, finding ‘bolt on’ additions that can immediately contribute and add a new facet to the overall operation.
Last year, it made its biggest purchase ever, buying specialty chemical and equipment maker Sigma Aldrich for $17 billion.
Its purchase of Cubist Pharmaceuticals in December 2014 was also indicative of MRK’s approach to acquisitions. Instead of building out its own vaccine and next-generation antibiotics division, it bought Cubist for $8.4 billion. This immediately made MRK a leading player in the sector and increased its exposure to hospitals.
Until recently, drug makers shied away from making vaccines and antibiotics because there was little return for the effort. But the Food and Drug Administration recently began offering incentives for drug makers to develop the next generation of antibiotics to take on the new superbugs that are resistant to older strains of drugs.
These small- and mid-sized deals are what MRK is known for and where it derives much of its long-term value.
Getting Into the Hepatitis Treatment Market
They also help the company get into a new market much faster, by either acquiring a company that is moving a promising drug through trials or already has decent market share in a new sector.
One of the hottest sectors now is treating Hepatitis C (HCV), a disease that destroys the liver if left untreated.
Current treatments are available from biotechs Gilead (GILD), which controls about 90% of the market, and AbbVie (ABBV). This market is huge: GILD’s two HCV drugs are the biggest-selling drugs in the course of a year in the history of modern medicine. The drugs generated $12.5 billion in 2014 and $9.5 billion in the first six months of 2015.
That is a serious market that is growing significantly in the US and globally.
And MRK is about to enter the fray with a drug that may have a competitive edge on both of the current drugs. If it can price itself under GILD’s $1,000 a pill price, it could get a great deal of support from insurers, hospitals and the government.
All this is compelling enough, but the fact that MRK has been beaten down with the rest of the industry — it’s off 3% for the year — makes it a bargain at current prices.
And don’t forget it’s also kicking off a 3.3% dividend yield.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.