Why Investors Should Buy the Dip in MRK Stock

The collapse of healthcare stocks, especially drug companies, may have finally abated. Merck (NYSE:MRK) has fallen 12% from its April 3 high. But the MRK freefall seems to have finally leveled off.

The instinctive reaction would be to buy the dip. Merck’s five-year gain is now half that of the average S&P 500 stock, but it’s still up 24% in the last year. And what initially sent MRK stock down was fear of politicians, not changes at the business.

But Merck stock is still not cheap. Its trailing P/E ratio is 32, and the dividend of 55 cents per share still yields just 2.65% — lower than many other dividend stocks. That dividend was just hiked in December, and thus isn’t due to rise again for 8 more months.

Merck is due to report first-quarter earnings on April 30, with $1.05 per share expected on revenue of $10.36 billion. That’s a big jump from last year’s earnings pace, albeit on less revenue. But if MRK stock keeps growing like this, it would justify both a big dividend hike and an increase in its stock buyback, now at $10 billion on a market cap of $192 billion.

The Keytruda Miracle

There are also reasons to find the earnings momentum sustainable.

Keytruda, a cancer drug best known for having kept former President Jimmy Carter alive a few years ago, continues to score big with regulators. It’s now a first-line drug against advanced kidney cancer, in conjunction with Inlyta from Pfizer (NYSE:PFE).

Keytruda is one of three so-called PD-1 inhibitors on the market, alongside Opdivo from Bristol-Myers Squibb (NYSE:BMY) and Libtayo from Regeneron (NASDAQ:REGN). These are monoclonal antibodies that keep cells from attacking one another. Turning off this chemical “off switch” boosts the immune system response to cancer cells. While Opdivo is heavily advertised, it is Keytruda that has been scoring the bigger wins in late-stage studies. The most recent one is Keynote-426, which gave 861 patients two years of the drug, which can cost over $100,000 per year. 

Keytruda was worth over $7 billion to Merck last year.

The Price Backlash

It’s Keytruda’s price, which doesn’t apply in countries that bargain directly for drugs, that caused the healthcare sector’s fall from grace this month.

That pushback takes many forms, from cost-effectiveness studies to state and national legislation. But the industry’s lobbyists still stand strong in Republican Washington.

This includes Merck CEO Ken Frazier, who recently agreed to stay on past his normal retirement age for a $20.9 million pay package.

Frazier is charged with defending the industry against attacks on its profits and diversifying the company’s $42 billion in sales beyond Keytruda, which represents 17% of Merck’s total revenue.

Merck recently won approval for Mavenclad, a potential blockbuster drug for multiple sclerosis, and it made 60 acquisitions during 2018. These include expansion in animal pharmaceuticals and immunotherapy. Its current late-stage drug pipeline has been valued at $13 billion.

The Bottom Line

Merck is due to bounce back at least 10%, as the recent downdraft in health care stocks fades from memory, just as the December fall of tech stocks faded.

Of 18 analysts now following the stock, 13 now have it on their buy lists and confidence is up over three months ago.

A beat on the quarterly earnings estimate should be the catalyst to take Merck to new highs, and its pipeline should keep it profitable no matter what Congress decides to do. This is a dip both speculators and investors will enjoy buying.

Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family https://www.amazon.com/Reluctant-Detective-Finds-Her-Family-ebook/dp/B07FSRDR4Y/, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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