Summary
- Merck, an international pharmaceutical company, has experienced strong growth of key financial metrics over the last few years driven by the success of some of their key blockbuster including Keytruda.
- This has resulted in a strong growth of Merck's oncology division over the last few years, which has significantly outperformed competitors during the same time period.
- However, most of Merck's other pharmaceutical divisions have experienced broad declines over the last few years, and the company faces potential challenges from their dependence on Keytruda.
- Furthermore, recent challenges covering the dividend with free cash flow and the dividend growth opportunities of other pharmaceutical companies don't necessarily make Merck's dividend very appealing.
- Taken together, I believe that Merck is fairly valued and has the potential to grow, though I believe that there are better dividend growth opportunities in the pharmaceutical industry.
Merck (MRK) is a major international pharmaceutical company with a history of experiencing extended growth and decline phases. From the early 2000s to the mid-2010, Merck faced challenges from settlements, divestitures, and the loss of their exclusivity of key patents. Recently, the success of some of Merck's blockbuster therapeutics, especially Keytruda, has resulted in strong growth of key financial metrics over the last few years. This has led to significant sale increases for Merck's oncology and vaccine divisions over the last five years, with more opportunities for these divisions to expand moving forward. However, Merck faces challenges growing its other pharmaceutical divisions and needs to continue developing its therapeutic pipeline to minimize its dependence on Keytruda. While I believe that Merck has future growth opportunities and is currently fairly valued, these challenges and the more appealing dividend opportunities with competitor pharmaceutical companies make me hesitate to invest in Merck.
Finances
One of the first things that stand out with Merck is the variability of their finances over the last quarter of a century. From 1994 to 2001, Merck had strong growth of key financial metrics, with revenue, gross profit, and net income increasing over 10% on a compounded basis annually. In the early 2000s, Merck spun off Medco and had about $4.85 billion in liabilities due to settlements related to their Vioxx therapeutic, which adversely affected the company's growth during the mid-2000s. By the end of 2009, Merck had successfully acquired Schering-Plough for $41 billion with a significant increase in long-term debt and then experienced broad declines in revenue and gross profit due in part to loss of patent protection of their blockbuster drug Singulair. Finally, by 2017, Merck started experiencing top and bottom line growth driven by sales of some of their key blockbuster therapeutics (more on this below) and ended 2019 with record high gross profit. Looking at the financial history of the company, it's clear that Merck has a history of growth and decline over the last 25 years, with the company currently in a growth phase as of the end of 2019.
Source: Created by author using data from Seeking Alpha and MRK 10-K results.
