Merck Posts Soft Q1 Pressured by COVID-19 Headwinds

Merck MRK reported soft first-quarter results below our expectations, but we don’t expect any major changes to our fair value estimate, as we expect a rebound in sales later in the year and long-term projections look on track. We continue to view the stock as undervalued with the investment community underappreciating the firm’s immuno-oncology platform, led by Keytruda as well as a developing pipeline, which reinforces our wide moat rating.

In the quarter, total sales fell 1% operationally as COVID-19 headwinds (negative 5% impact) and the timing of vaccine shipments (negative 2% impact) weighed on growth, but these factors should normalize in the remainder of the year. With close to 70% of Merck’s drug sales delivered via physician administration, the heavy disruptions due to the pandemic are having a disproportionate impact on the company, but these trends should normalize as COVID-19 vaccine utilization increases and year-over-year comparisons improve.

Despite the headwinds, Keytruda (32% of sales) continued to post gains (up 16%), and we expect continued gains based on market expansion in several cancer indications (especially lung cancer in Europe) and new indications (notably in adjuvant lung cancer with potential data later in the year). Further, while human papillomavirus vaccine Gardasil fell 20%, the timing of shipments impacted sales, and we expect strong long-term growth for the vaccine based on strong efficacy, increased manufacturing capacity, and market expansion opportunities in several developing markets.

On the corporate restructuring side, the spin-off of the women’s health division Organon remains on track to separate on June 2 with an investor day planned for May 3. We expect the spin-off to represent close to 10% of our fair value estimate for Merck. Also, with Merck receiving a $9 billion payment from Organon combined with a strong balance sheet, we believe Merck will likely make a significant acquisition over the next 12 months.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.