Shares of pharmaceutical giant Merck & Co., Inc. (NYSE:MRK) have been on a roll lately. MRK stock jumped last week and reached its highest levels over the past year. It also returned to highs last seen in 2001, a distant memory considering this was back when the dot-com bubble was still bursting. Returning to its all-time highs of nearly two decades ago will still take time, but Merck stock’s momentum could easily continue.
The positive news for MRK stemmed from favorable results for a cancer drug called Keytruda that treats non-small cell lung cancer.
The drug is in a category of revolutionary treatments known as immunoncology that use the body’s own immune system to tackle even the most serious cancerous tumors. More on that below.
Pharma rival Bristol-Myers Squibb Co (NYSE:BMY) offers a competing treatment called Opdivo, which also focuses on NSCLC but targets a larger class of patients. Merck & Co.’s drug is more targeted to patients with a higher level of a protein called PD-L1, and the recent results confirmed it works better in patients with these higher levels. Bristol also released results to indicate this to be the case.
The market’s recent excitement about MRK is certainly warranted and continues a trend of positive news for Keytruda over Opdivo. However, the case can be made that both drugs stand a good chance of generating several billions of dollars in new sales within a couple of years for both firms.
The emphasis on Keytruda is also overshadowing Merck’s overall appeal as a worthy investment candidate in the pharmaceutical industry.
Merck & Co. and the Overall Appeal of Pharma
Overall, the pharmaceutical industry is a great place to find appealing individual investment opportunities. Patent expiration of major “blockbuster” drugs meant lost revenue for many years, but that appeared to bottom out last year. For all of 2016, the industry is projected to report positive sales.
The immunoncology space has perhaps the best potential for investment upside. In addition to MRK and Bristol, biotechnology (closely related to pharma, especially the larger players) firm Amgen, Inc. (NASDAQ:AMGN) sells IO-based drug Blincyto to combat leukemia. AstraZeneca plc (ADR) (NYSE:AZN) is looking to beef up its IO research over time. Kite Pharma Inc (NASDAQ:KITE) is a smaller biotech firm competing in the space and is focused on blood cancers, including leukemia and lymphomas.
Pharma stocks are also trading at very reasonable P/E ratios right now. Many are well below market multiples, which currently stand at 24.3 on a trailing basis and 18.1 on a forward basis. This basic measure of a stock’s value is simple, but important, and as we’ll see with MRK stock, looking at both the historical and prospective level can be important.
Finally, the prospect of higher interest rates could be having an adverse effect on the share prices of firms in industries with above-average dividend yields. This is because investors are starting to shift back to bonds at the expense of income-producing stocks. Yields are still low, but the prices of bonds are much less volatile than stocks.
This could explain the recent tepid performance of pharma stocks. Most of the key players again sport yields above 3%, which is well above the market average of 2.1%.
Merck Stock in Focus
MRK stock has momentum right now. It operates in an appealing industry, and is a first mover in the IO space. Merck & Co. stock is currently riding high, while Bristol’s stock has fallen to $50 per share, or 35% below its highs in the past year.
In addition to Keytruda, Merck has an appealing offering of new and existing drugs, and those in the pipeline have strong potential. Januvia is Merck & Co.’s top selling drug and treats diabetes. Bridion is an anesthetic. Zepatier treats hepatitis C and will start competing with offerings from Gilead Sciences, Inc. (NASDAQ:GILD) and AbbVie Inc (NYSE:ABBV). MRK also has a sizeable offering to treat HIV and a promising pipeline in the space.
Despite the excitement with new drugs, Merck & Co.’s sales have yet to move meaningfully forward. Analysts project only roughly $40 billion in sales for both this year and 2017, or still below the $48 billion reported back in 2011. It will be a couple of years before the new offerings completely offset patent expirations, such as arthritis drug Remicade.
However, MRK’s profit growth is returning with a vengeance. Earnings per share were only $1.56 last year, which makes the trailing price-to-earnings ratio of 34 look rather high. But this year, analysts expect earnings to more than double to $3.75 and a further boost to $3.86 in 2017. That puts the forward P/E at 16.5, or well below the market. What a difference a year can make.
Merck & Co.’s current dividend yield of 3% is right at the industry average, but still well above the market’s average payout rate.
Bottom Line on MRK Stock
Keytruda’s momentum over Opdivo is certainly great, but that’s only one of the positives supporting MRK stock’s overall investment appeal. The fact Merck & Co. stock is at its current highs shouldn’t worry investors.
In fact, momentum-minded buyers might find the uptrend even more encouraging and indicative of further upside. It’s also likely that value investors would buy MRK stock on any dips, giving further support to the shares these days.
As of this writing, Ryan Fuhrmann was long Gilead Sciences.