Merck Posts Strong Third Quarter

Merck MRK reported third-quarter results that were ahead of both our and S&P CapIQ consensus expectations, partly driven by lower marketing and administrative costs as the pandemic limited spending. However, we don't expect any major changes to our fair value estimate based on the minor outperformance. We continue to view Merck as undervalued, with the market not fully appreciating the firm's strong immuno-oncology platform, especially in early-stage cancers, where we expect clinical data will likely support increased Keytruda use over the next several years. The strong outlook in immuno-oncology combined with continued pipeline development across several therapeutic areas further supports our wide moat rating. In the quarter, total sales increased operationally 2% year over year, driven by growth from the firm's top drug Keytruda, up 21%, representing almost 30% of total sales. We expect continued growth from Keytruda with significant growth opportunities internationally, where the drug launched later relative to the U.S., and in earlier adjuvant lines of therapy (lung cancer in particular, with pivotal data likely in 2021). Offsetting the strong Keytruda sales, the firm's vaccines sales were largely flat, with COVID-19 headwinds hurting wellness visits and related sales from human papillomavirus vaccine Gardasil, but we expect long-term demand for the vaccine will return based on excellent efficacy. On the pipeline front, Merck continues to make measured strides. The firm continues to post strong data for a new pneumococcal vaccine, but a competing and stronger vaccine from Pfizer will likely limit Merck's vaccine potential. Also, Merck continues to make progress in developing COVID-19 vaccines, but slower than competitors. The firm's two vaccines (V591 and V590) still need data from phase 1 studies before moving into phase 3. However, the COVID-19 antiviral molnupiravir has already moved into a phase 2/phase 3 studies based on favorable early-stage data.

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