With the year almost over, we’re taking a look at all 30 stocks in the Dow, starting with the worst performers— Boeing and Walgreens Boots Alliance —and working our way up to the highest-flying stock in the benchmark— Apple. The ranking may shift before the close of 2020 trading, but the stories behind the stocks shouldn’t.
Merck missed much in 2020. Despite its strong vaccine program, it remained far behind the leaders of Covid-19 vaccine development— Pfizer, BioNTech, and Moderna —who all built their now-approved vaccines with the new technology of messenger-RNA.
While Merck (ticker: MRK) soldiers along with traditional vaccine technologies, those rivals stand to reap billions in Covid revenues next year and will use m-RNA for other vaccines. Moderna shares (MRNA) jumped over the moon this year, while Merck’s gave up 11% and lagged the market by more than 26 percentage points.
The drug giant chose to play a different game and is now one of Barron’s top 10 stock picks for 2021.
Merck has been expanding its margins in a way unequaled among Big Pharma companies, as it drives sales of cancer drugs like Keytruda and Lynparza. It eked out 2% sales growth in the September quarter, but cash flow rose 10% and earnings per share rose 18% (if you don’t count noncash charges). Margins will expand further after mid-2021, when Merck plans to spin off its women’s health and primary-care drugs into a company that will be called Organon.
The spinoff will heighten Merck’s reliance on Keytruda, which grew sales 21% in the September quarter and accounted for 30% of the company’s revenue. Keytruda is a first-line treatment for the most prevalent of tumors: lung cancer. Other Merck cancer products with strong sales are Lynparza and Lenvima. Clinical trials are steadily expanding the kinds of cancers where these drugs will be used, often in combination with other drugs, and 2021 will be filled with readouts from these studies.
Merck has said it would use its ample cash to build its oncology franchise by joining with firms like Seagen (SGEN) on drug-antibody combinations, and Moderna for messenger-RNA cancer therapies. It will also bring in oncology products through “bolt-on” acquisitions like the purchase of ArQule at the start of 2020.
Vaccines will remain a big business for Merck, with continued growth expected for big sellers like its Gardasil shot for preventing infection by the HPV virus. In 2021 Merck will have clinical trial results on its latest generation of shots for preventing respiratory infections in babies and the elderly, which will be called V114 and V116. Other clinical trials that might deliver good news next year include a heart-failure drug and new antivirals against HIV.
When Merck reports its 2020 results in early February 2021, the consensus estimate at Sentieo.com expects to see earnings of $6 a share on revenue of $48 billion. Analysts have been trying to model the mid-’21 spinoff of Organon and hope to hear guidance in Merck’s February call.
At Guggenheim Securities, Seamus Fernandez figures that 2021 sales will grow 10% for the remaining businesses of Merck, producing 2021 year sales of $46.3 billion. Earnings growth of 15% in those businesses will yield earnings of $5.75 a share, he thinks.
Merck has applied its shares to paying dividends and repurchasing stock. Analysts expect the spun-off Organon will dividend a hunk of its cash back to Merck, which will apply a goodly portion to stock buybacks. And, of course, shareholders will end up owning Organon, too. The combined earnings of the pair will approach $7 a share by 2022, Fernandez bets—convincing him that Merck is a Buy, at its current price of $79.
Write to Bill Alpert at [email protected]
