Merck Looks Undervalued

We are holding firm to our $63 fair value estimate for

On the top line, mixed product trends led to an overall 4% year-over-year growth rate, which we expect will continue through 2016. The company’s top drug Januvia (16% of sales) posted a better-than-expected 17% growth rate, helped by some inventory buying, but the differentiating cardiovascular benefit of

While its currently marketed drugs face challenges, Merck’s pipeline is growing. Merck’s positive announcement for Keytruda in the lung cancer trial Keynote-010 supports our $4 billion 2018 estimate, as we expect the expansion into the lung cancer market to significantly expand the company's sales opportunities. Turning to the hepatitis C market, we expect that Merck’s new drug, which is set to launch by early 2016, will drive peak sales close to $2 billion. On diabetes, we expect Merck will file the SGLT-2 drug ertugliflozin in 2016, setting up a good defense against Lilly’s Jardiance. On the expense side, Merck is continuing to optimize its cost base while still supporting key product launches and new drug development. However, we believe that the cost-cutting potential will decelerate into 2016, as the majority of cost synergies from mergers will complete by the end of the year.

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