Merck & Co. (MRK) Update

Establishing 2022 and 2023 Estimates, Maintaining Outperform Rating, Setting $85 Price Target

Following the spin-off of Organon, Merck is focused on growing its pharmaceuticals business to offset the looming loss of exclusivity on its $5 billion Januvia/Janumet franchise and others that will follow as the decade progresses.  Investors’ concerns about the impact of LOE contributed to the stock’s underperformance in 21H2.  Some investors worry that Merck’s pipeline will not sustain its revenues and profits.  My estimates anticipate that both will decline slightly in 2023.

Even so, Merck has advanced its pipeline meaningfully and business development activities could further enhance its revenue and earnings prospects.  The spin-off of Organon has increased Merck’s organizational capacity, opening the door wider potentially to larger acquisitions.  In November, Merck acquired Acceleron Pharma for $11.5 billion, its largest in more than a decade.  Merck will likely make additional acquisitions in 2022 and beyond.

Based upon the company’s 2022 financial guidance, I project that Merck will achieve GAAP EPS of $5.83 in 2022, giving the stock a forward multiple of 13.4 times, modestly below the estimated peer group average of 16-17 times.  The discount reflects in part market expectations of modestly lower earnings in 2023, industrywide concerns about drug pricing, concerns about the potential of its pipeline and uncertainty about the impact of acquisitions.

Despite this sentiment, the stock has outperformed during this recent correction and its outlook should improve as Merck showcases its pipeline and announces new business development initiatives.  I am maintaining my outperform rating and setting a price target of $85.  With this price target and the stock’s 3.5% yield, its potential 12-month total return is 12.8%.

This is a summary of my recent update report on Merck & Co., Inc. (MRK). Reach out to me for a copy of the full report.

March 15, 2022

Stephen P. Percoco
Lark Research
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© 2022 by Stephen P. Percoco, Lark Research.   All rights reserved.

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