4 Big Reasons to Buy Merck
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As major news items – ranging from the political ramifications of rising drug costs to the impact of a given FDA finding – affect big pharmaceuticals, deciphering which information is actionable and which is background noise can be challenging.
Despite a solid run of price appreciation that began last June (see chart), Merck & Co. (NYSE: MRK) is well positioned to perform from current levels. What follows are four of the biggest reasons that Merck is a buy:
Approved in 2006, Merck’s Januvia, a type 2 diabetes treatment, is a serious performer. The drug is a DDP-4 inhibitor, which puts it in one of the fastest-growing classes of diabetes drugs on the market. In the simplest terms, the drug targets an insulin-producing hormone in the pancreas and breaks it down to control production. The drug is sold in straight form and in combination with another compound under the name Janumet. Combined, the two drugs account for 75% of the global DDP-4 market, with sales of $3.3 billion and $1.4 billion, respectively. Thus far in 2012, sales of the two drugs have grown on a year-over-year basis by 36% and 28%, respectively.
To put these numbers into some perspective, the second DDP-4 drug was approved in 2009. This drug, called Onglyza, was developed by a collaboration between Bristol-Myers Squibb (NYSE: BMY) and AstraZeneca PLC (NYSE: AZN). In 2011, Onglyza had global sales of $473 million. Other competitors have European approved drugs in this class, but not are likely to threaten Merck’s. With a blockbuster like Januvia early in its useful life, the company is well positioned for the future, even as previous blockbusters like Singulair begin to come off patent.
When considering big pharma, the focus tends to be on the pipeline and the growth opportunities possessed by the company being evaluated. These days, however, the income element offered by major drug companies is an important piece of one’s investment.
At current levels, Merck offers a dividend yield of 4.5%. At a period during which U.S. Treasuries are yielding less than 2%, the availability of this type of return from a company with strong growth characteristics is particularly appealing. To place this dividend in context, the dividend yield on AstraZeneca is 3.8%, the dividend from Bristol-Myers is 4.1% and the dividend offered by Pfizer (NYSE: PFE) is 3.7%.
Insulation against Lost Exclusivity
Making news recently was the positive review received by Abbott Labs (NYSE: ABT) regarding its ulcerative colitis drug, Humira. In a 15-2 recommendation, the FDA advisory committee recommended that the drug be approved as a drug by the FDA. This does not guarantee that the drug, which failed to receive approval last November, will be approved, but it is a positive step.
The news is of some importance to Merck because its drug, Remicade, is currently the leading treatment option. Humira is considered easier for patients to use, but it is important to note that the entire market for this disease is $1.4 billion. Furthermore, Pfizer is on the cusp of launching phase 3 trials of its own treatment that would likely displace both previous versions. The Pfizer drug is an oral treatment, where both Humira and Remicade are injection therapies. While the loss of exclusivity is not ideal, the takeaway message is that Merck is well positioned to absorb these lesser losses, while protecting its blockbusters.
The fourth reason that Merck is a buy at current levels is its continuing ability to make smart acquisitions. The company recently acquired German cell culture media equipment manufacturer Biochrom AG. The equipment made by the company is used to synthesize cell cultures that are critical in the research process. The company believes it should be in a position to file for six or more major drug patents over the next 18 months. This is but a single example of the skill displayed by Merck’s management is guiding the company down a path of continued growth.
The combination of the factors above provides a compelling case for buying Merck at current levels. Despite certain key drugs coming off patent, Merck continues to control key blockbusters. The company offers a strong income element and has demonstrated its ability to both manage its pipeline and make sound strategic acquisitions. For these reasons, Merck is a buy at current levels.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Abbott Laboratories and AstraZeneca plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.