Company Overview: Merck & Co., Inc. (NYSE: MRK) is a global healthcare company that develops drugs, vaccines, biologics, and animal health products. Its operating segments are 1) Pharmaceutical, consisting of human health pharmaceutical (therapeutic and preventive agents for the treatment of human disorders) and vaccine products (preventive paediatric, adolescent, and adult vaccines) and 2) Animal Health, engaged in the development and providing of veterinary medications, vaccinations, and health management services.

MRK Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Double-Digit Growth in Revenue: In Q3FY21, the company's total revenue amounted to USD 13.15 billion, representing a 20.36% increase year-over-year from USD 10.93 billion in Q3FY20.
• Surge in Net Income: The company's net income increased to USD 4.57 billion in Q3FY21 from USD 2.94 billion in Q3FY20, representing diluted EPS of USD 1.80 in Q3FY21.
• Expansion of Net Margin: MRK reported a net profit of USD 4.57 billion for the current quarter, representing a significantly higher net margin of 34.7% vs. 23.5% for Q3FY20, attributable to a 1,179-bps reduction in total operating expense ratio.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On December 01, 2021, US Food and Drug Administration (FDA) has accepted a supplemental Biologics License Application (sBLA) for VAXNEUVANCE (Pneumococcal 15-valent Conjugate Vaccine) for the prevention of invasive pneumococcal disease in children aged six weeks to 17 years old. In addition, the FDA has designated April 1, 2022, as the Prescription Drug User Fee Act (PDUFA).
• Concurrently, MRK and Ridgeback Biotherapeutics, a biotechnology company focused on emerging infectious diseases, stated after the FDA Antimicrobial Drugs Advisory Committee (AMDAC) regarding the Emergency Use Authorization (EUA) application for molnupiravir (MK-4482, EIDD-2801), an investigational oral antiviral medicine, for the treatment of mild to moderate COVID-19 in adults with positive results of direct SARS-CoV-2 viral testing. The AMDAC suggested that the known and potential advantages of molnupiravir for treating mild to moderate COVID-19 in high-risk adult patients within five days of symptom onset exceed the known and potential dangers.
• On November 30, 2021, the company declared a quarterly dividend of USD 0.69 per common share for Q1FY22, payable on January 07, 2022, to shareholders of record on December 15, 2021.
• On November 22, 2021, MRK completed the acquisition of Acceleron Pharma Inc., a listed biopharmaceutical company, for cash consideration of USD 180 per share, amounting to the equity value of USD 11.5 billion. The acquisition is intended to further the MRK's cardiovascular portfolio and pipeline.

Segment Wise Results Q3FY21

• Pharmaceutical – This segment accounted for 40% of the total revenue in Q3FY21, reported YoY growth of 18.34% to USD 11.50 billion, attributable to 22.05% growth in the Oncology segment complemented by a 67.90% increase in the Vaccine segment.
• Animal Health – This segment accounted for 77% of the total revenue in Q3FY21, expanded by 16.15% YoY to USD 1.42 billion, due to YoY growth of 13.80% in Livestock 19.70% in Companion Animals segments.

Balance Sheet & Liquidity Position

• Increased Cash Balance: The company exited Q3FY21 with total cash and cash equivalents of USD 10.02 billion, significantly higher than USD 8.05 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in Q3FY21 increased to USD 9.08 billion from USD 6.25 billion in the prior corresponding period.
• Reduction in Debt: MRK reported total outstanding debt of USD 26.44 billion as of September 30, 2021, lower than USD 31.79 billion as of FY20 end.

Key Metrics: In Q3FY21, MRK's EBITDA and net margins were 47.0% and 34.7%, higher than the industry median of 26.8% and 7.2%, respectively. ROE stood at 13.2%, 1,180 bps more than the industry median. Debt/Equity was 0.74x as of September 30, 2021, lower than 0.98x on September 30, 2020.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 26.58% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. hold the maximum stake in the company at 8.33% and 5.0%, respectively, as also highlighted in the chart below: 

 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Product Concentration Risk: Most of the company's income is derived from a few primary products: Keytruda, Gardasil/Gardasil 9, Januvia/Janumet, and Bridion. Any downturn in sales or pricing for these products could harm the company's operating and financial performance.
• Regulatory Risk: MRK operates in a highly regulated industry and is subject to strict regulatory norms, both within and outside the U.S., non-observance of which could lead to delay, recall, or even suspension of approvals.
• Competition Risk: MRK operates in the healthcare industry and faces direct competition from new products and low-cost generic products from the competitors. Hence, competitors' development of superior products or weak patent protection laws in countries where the company operates could harm its financials.
• Exchange Rate Fluctuation Risk: In Q3FY21, 52.29% of the company's revenue was in currencies other than USD, thus exposing it to currency fluctuations. However, to mitigate the exchange rate risk, MRK started entering into foreign currency derivative contracts. While the derivative contracts reduce this risk, they do not eliminate the financial impact of movements in the exchange rate.

Outlook

• Looking forward, MRK expects strong demand across its and segments and expects a YoY growth of 14% - 15% (including forex gains of ~1.5%) in revenue to USD 47.4 – 47.9 billion in FY21.
• In % terms, it anticipates a YoY decline of mid-single digits in FY21 operating expenses.
• For FY21, MRK anticipates its GAAP EPS to range between USD 4.71 – 4.76, along with a non-GAAP EPS of USD 5.65 – 5.70.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the past month, MRK's share price has corrected 15.27%. The stock is currently leaning towards the lower end of its 52-week range of USD 68.38 to USD 91.40. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its market dominance, strong margins, and global presence. We have taken peers like Pfizer, Inc. (NYSE: PFE) and Bristol-Myers Squibb Co. (NYSE: BMY). Considering the strong topline performance, strong profitability margins, growth across segments, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 74.44, down 0.63% as of December 01, 2021.

MRK Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.  

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