investors had a particularly bad 2020. Shares of the blue-chip pharmaceutical firm slid 11.1% over the course of the year, while the
S&P 500 Health Care Sector Index
rose 11.2%, and the broader
In a note out Tuesday, Citi analyst Andrew Baum writes that investors have it all wrong. He writes that Merck (ticker: MRK) stock may be “the most undervalued major in global pharma.”
“We believe that 2021 is the year that the market begins to reflect the earnings power and [net present value] of Merck’s burgeoning pipeline,” Baum writes.
Baum argues that Merck’s preference not to highlight drugs in earlier stages of development has led the market to undervalue the drugs it has in development. “[Merck’s] reticence to talk to its deeper pipeline has created a significant investment opportunity for investors,” he writes.
Baum rates Merck stock at Buy with a price target of $105, which is about 31% higher than a recent price of $80.14. Shares closed Monday at $80.96. Barron’s sees Merck as a top 10 stock picks for 2021.
Merck stock trades at 12.9 times earnings expected over the next 12 months, according to FactSet. That’s below the stock’s five-year average of 15 times earnings. Of the 22 analysts who cover the stock tracked by FactSet, 17 rate it at Buy or Overweight, while five rate it at Hold.
In his Tuesday note, Baum writes that much of the investor worry around Merck is tied to the company’s current reliance on sales of its cancer immunotherapy blockbuster Keytruda. Analysts expect the drug to have accounted for $14.3 billion of Merk’s $48.2 billion in sales in 2020, and to account for nearly half its sales by 2025, according to FactSet. Merck is scheduled to lose its exclusive rights to Keytruda in 2028.
But Baum says that the market is undervaluing other drugs that will drive growth for Merck in 2025 and beyond. “The good news is that quietly Merck has assembled a powerful portfolio of pipeline assets,” he writes. “We believe that material undervaluation of the pipeline…make for a compelling investment thesis.”
Among other pipeline drugs, Baum noted promising programs focusing on renal cancer, lung cancer, and an HIV drug called islatravir, which he says could hit $10 billion in sales.
Baum faults Merck for not doing more to salve investor concerns. He says that the sunset of Keytruda creates “significant strategic and operational challenges,” and that Merck needs to create its own drugs, rather than continuing to rely heavily on licensing promising drugs from other developers.
Merck stock is down 1.0% in Tuesday morning trading.
Write to Josh Nathan-Kazis at email@example.com