The stock chart on Merck & Co., Inc. (NYSE:MRK) hasn’t been healthy. During the past year, the shares have lost about 13% of their value. And yes, there are certainly legitimate reasons for the weakness with Merck stock.
The company has seen deceleration across major parts of its portfolio, such as with drugs like Zetia and Remicade. The fact is that the competitive environment for prescription drugs is intense.
Merck stock has also been weighed down by the uncertainty in the healthcare market. For the most part, the federal government is looking at approaches to reduce drug costs. There are also mega acquisitions with health insurers, which may mean even more pressure. Hey, even Amazon.com, Inc. (NASDAQ:AMZN) is looking at ways to disrupt the industry.
However, despite all this, Merck stock still has some key advantages. In fact, I think the shares look fairly attractive at current levels. So let’s see why:
Advantage #1 For Merck Stock: Keytruda
Last week Merck got some negative news with Keytruda. The combination of this drug with Incyte Corp.’s (NASDAQ:INCY) treatments failed in a phase three trial.
Yet this was much more of a problem for INCY than MRK stock. The reason is that Keytruda has many other applications – and is likely to drive growth for the long-haul. During the latest quarter, the drug’s revenues soared by 169% to $1.3 billion. It’s actually the No. 2 best seller for MRK.
Note that Keytruda is a cancer immunotherapy, which leverage’s a patient’s own immune system. The treatment relies on anti-PD-1 (programmed death receptor-1) therapy.
Some of the most recent FDA approvals for indications include mismatch repair deficient, solid tumors; locally advanced or metastatic urothelial carcinoma (a form of bladder cancer); and relapsed or refractory classical Hodgkin Lymphoma (cHL).
Advantage #2 For Merck Stock: Pipeline
Over the years, MRK has done a good job in dealing with the expiration of various major drugs. Then again, the company has been disciplined with acquisitions, investments and R&D. Last year, the company shelled out $10.2 billion on R&D.
It’s true that drug development is highly risky. But the good news is that MRK has a strong pipeline.
For example, there is Lynparza, which involves a partnership with AstraZeneca PLC ADR (NYSE:AZN). The drug has gained FDA approval for ovarian/fallopian tube cancer. There is also an indication for breast cancer.
Then there are Steglatro and Steglajan, which are focused on diabetes. Of course, MRK has a long history of success with this disease, as seen with its No. 1 drug, Januvia.
Advantage #3 For Merck Stock: Scale and Financials
MRK, which is expected to generate revenues of $41.2 to $42.7 billion this year, is a global powerhouse. Because of this, the company is one of a few operators that can commercialize a drug at scale.
MRK also has the benefit of significant cash flow generation. For 2017, operating cash flows came to $6.4 billion. So the company should have the firepower for more buybacks and dividend increases (the current yield is 3.5%).
In fact, the tax reform act should also provide a nice benefit. The company plans to spend a hefty $12 billion on capital projects for the next five years with the savings.
And finally, the valuation on MRK stock is attractive, with the forward price-to-earnings multiple at 12.6X. By comparison, Bristol-Myers Squibb Company (NYSE:BMY) and Johnson & Johnson (NYSE:JNJ) are at about 15X.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.