Merck & Company Pre-earnings Analysis
As market valuations get stretched to record highs, investors are searching for “undercover” opportunities to take on. The pharmaceutical space is of those “undercover” opportunities that has lagged far behind the market rally, potentially being a good place for investors with a longer time horizon to park capital.
Before getting into the upside, let’s talk about why pharmaceuticals are trading far behind the market:
The most prominent reason pharmaceutical stocks aren’t catching rhythm is because of the ongoing regulatory and pricing pressure from the current administration. In the U.S., there’s a strong policy rhetoric around forcing drug price reductions, creating margin risk for investors. And beyond pricing, tariffs on pharmaceutical imports is also a threat.
For this specific analysis, we’re focusing on Merck, but the threat explained above applies to other pharmaceutical companies.
Merck:
Merck is down more than 40% from its three year highs and has struggled to catch momentum in the past twelve months as revenue flat lined and net income fell. The company cited a decline in its vaccines and immunology business in Q2, even narrowing guidance for the year, which doesn’t help investor confidence. The company is also suffering from cost pressures and foreign exchange prices, adding more drag on margins.
The company’s newer medicines are helping offset some of the losses from the mature ones, but still not enough to give them a big revenue boost. However the company is taking steps and constantly spending on research and development to introduce new therapies. For example, Merck is currently working on expanding their animal health biologics manufacturing, aimed at increasing production capacity starting 2030. While this is a while a way, it circles back to the longer time horizon we mentioned above. Merck’s pipeline for this year also includes candidates for cancer immunotherapy, vaccines, and treatments for such as respiratory syncytial virus and pulmonary arterial hypertension.
Investors must note that introducing new therapies to the market faces a multitude of challenges and must be approved by the FDA, so monitoring drug trials and approvals is critical. A single drug approval can boost revenue significantly.
Looking at the near-term and long-term:
Merck’s revenue is set to remain about flat over the next 12-24 months, meaning there’s no significant reason to believe the stock is on the verge of a turnaround in the short term. However investors should recognize what the overall market is doing right now. Money is flocking to high growth technology stocks while many of these legacy pharmaceutical stocks aren’t receiving much attention. But when tech growth slows and uncertainty arises, investors usually fall back on these “safe” and “predictable” names, because people will always need medicine. So as Merck sits at these lows and trades at a P/E of just 13.5X, it may still be worth adding for those who can hold through the coming years and when capital eventually rotates back into these stocks.
Note: regulatory pressures are still the biggest threat. So investors should keep a close eye on developments about drug pricing. The way the company navigates these changes will be critical to earning investor confidence. Key patent expiration could also impact growth, so Merck must stay agile in producing new drugs and therapies to offset any losses.
Disclaimer: This article is for informational and educational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of capital. Always do your own research or consult with a licensed financial advisor before making investment decisions.