Second-quarter results for Merck (NYSE:MRK) are in and Merck stockholders can breathe a sigh of relief. MRK stock gained 1.6% after announcing better than expected results on Friday, ending its 2-day negative streak at the stock market.
The star was yet again the oncology division, which continues to prove the naysayers wrong.
For the first decade of the new millennium, the company faced immense challenges with regards to settlements, loss of patents, and divestitures. It shed 47% of its value during that period.
However, the opposite has transpired in this decade. Merck gained 118.6% led by the success of its hugely successful therapeutics business over the past five years. It has ambitious plans to invest over $19 billion to expand capacity over the next three years and restructuring its business to increase its profitability.
Stellar Second-Quarter Results
Merck investors have a lot to be cheerful about after the pharma giant reported beat Wall Street estimates for its second quarter and subsequently sending shares up 1.6% in early trading.
The company reported second-quarter sales of $10.9 billion, beating analyst estimates by an impressive $0.5 billion. Additionally, its earnings per share of MRK stock were $1.37, which comfortably beat estimates of $1.06 per share.
Perhaps the most encouraging sign is that Merck has raised yearly guidance, which it had previously lowered due to pressures exerted by the novel coronavirus pandemic. Earnings per share are expected to range from $5.63 to $5.78, which is again higher than analyst estimates of $5.31 per share.
Keytruda’s Impact Is Felt
The stellar performance in the quarter is primarily driven by Merck’s blockbuster cancer drug, Keytruda. It sold $3.4 billion in the quarter, up 29% from the same quarter last year. This is no surprise. Oncology is Merck’s most successful division, growing more than 770% from 2015 to 2020.
Merck’s pharmaceutical division, though, took a hit and was down 7% compared to the same quarter last year. The slowdown was triggered by the pandemic, which caused a drop in routine vaccinations and acute care products. Pediatric vaccines, in particular, plummeted 44% while the Gardasil vaccine, which prevents papillomavirus, also dropped 26%.
Merck’s animal health division saw a modest decrease of 2% in sales.
Animal healthcare is set to become one of the top divisions for the company in the future. The market is set to reach $47.31 billion by 2026 growing at a CAGR of 4.9%. Therefore, Merck has been aggressively expanding the division.
MRK Stock and Dividends
One of the primary concerns for any investor is a company’s ability to pay and grow dividends consistently. Merck pays shareholders a quarterly dividend of 61 cents, which is roughly 3% of the MRK stock price.
Merck’s dividend payout ratio of 48.1% for its latest quarter is significantly lower than the previous three quarters. The ratio is surprising, considering how earning per share for its first quarter 2020 was the highest compared to the previous three quarters.
Moreover, the company has generated positive cash flows for the past 10 years, which suggests the dividend is safe.
The company’s 5-year dividend growth is around 4.5%, which is lower than its competitor average of 6.5%.
Merck is not precisely a dividend aristocrat, but it has been increasing dividends consistently since 2012.
However, if you’re looking for specifically a dividend stock within the sector, I would suggest investing in other companies. One alternative is Abbvie (NYSE: ABBV), which has a dividend growth of 20.7% in the past five years.
Exciting Developments Ahead
There are several exciting developments ahead for Merck. The first and most talked about topic in the pharma sector this year is a vaccine for Covid-19. Several companies are scrambling to develop vaccine candidates and be a step ahead of the competition.
Merck recently made inroads in the race through agreements with Themis, IAVI, and Ridgeback Biotherapeutics.
Merck signed an agreement to acquire Themis for an undisclosed amount. Themis focuses on developing vaccine candidates and immune-modulatory therapies using its measles virus vector platform.
However, many believe Merck is a little late to the party after the company announced it would begin clinical studies of one of its Covid-19 vaccines by the end of September, and another by the end of this year.
On Feb. 5, Merck announced that it was moving its biosimilars, women’s health business and legacy brands into a new company. The remaining businesses will be centered around the company’s core segments in vaccines, oncology, animal health and hospital segments. This focus is an effort to create more value.
The company also posted significant successes in its animal health segment. The FDA has approved Bravecto 1-Month chews for puppies and dogs for the prevention of fleas and ticks.
Additionally, Merck entered into an agreement with longtime partner in Zymeworks (NYSE: ZYME) for commercializing up to three specific antibodies in for animal healthcare. Zyme will receive an undisclosed upfront amount up to $411 million in option exercise fees and up to $480 million in milestones.
Final Word on MRK Stock
Merck is in a great spot heading into the second half of the year with an awesome second quarter. Theere are several projects in the pipeline, which will bear fruit from 2021 and beyond.
Additionally, its oncology division – spearheaded by its Keytruda drug – continues to perform exceedingly well and will be a catalyst for the company’s growth.
I’m bullish on MRK stock’s prospects at this stage.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.
