Summary
- Merck's EPS growth forecast for 2020-22 is subpar at best vs. the big pharma industry.
- Socialized medicine and drug price controls could become reality next year, if Democrats gain control of the Senate, House and Presidency.
- Weak technical momentum indications are highlighting a poor setup for shareholders the rest of the year.
Over the last few weeks, I have been discussing the problematic future for healthcare insurer Cigna (CI) and overvalued drug company Eli Lilly (LLY) given a Democratic party sweep to power in Washington DC. Assuming Joe Biden wins the Presidency and Democrats take both the Senate and House, little stands in the way of massive changes to healthcare delivery in America. And, this shift will not be welcomed by big pharma names like Merck (MRK).
Price fixing by the government for prescription drugs, especially for the popularly prescribed and high-profit patented-kind developed, manufactured, and offered by Merck would undoubtedly become reality next year. With the odds increasing this summer (based on mainstream voter polls) of an attack on its business model in early 2021, smart investors appear to be running from Merck shares the last month or two. Technical upside momentum has all but disappeared in July, and a turn lower in the stock price during August could bring an onslaught of nervous liquidations into the November election.
Biden was one of the main architects of the Obamacare changes to our health insurance marketplace in 2010. In addition, the odds of Democrats taking both houses of Congress are rising above 50/50, as I pen this article. The Democratic platform in coming weeks will surely include language about increased government participation in the healthcare industry to reduce overall costs (profits for drug companies) and expand coverage for more Americans.
The Kansas primary battle next week for an important Senate seat being vacated by retiring Republican Pat Roberts illustrates the difficulties Republicans will have retaining control of Congress. The party is split between conservatives with personal and voting issues beating up each other, pitted against a moderate Democrat with high levels of popularity and voter confidence. Other races across the country could easily move into the Democratic column in 93 days, if the coronavirus pandemic worsens or new stresses for the U.S. economy pop up. Only a small turnover of 4 seats in the Senate will alter the levers of power in that chamber.
For the purpose of this article and Merck’s trading future, I am assuming Democrats take control of Washington. If you believe Republicans will keep the White House and Senate, I fully understand an argument to keep your holdings in the healthcare and biotech/pharmaceutical areas. However, if a worst-case scenario for government meddling in big pharma sales and income is around the corner, which names should investors avoid (all of them is another good answer)?
Merck’s Low Growth Future
Global pharmaceutical revenues at the company fell -6% in Q2 ended in June, with total sales backtracking -8%. The COVID-19 pandemic has greatly affected the writing of new prescriptions, and many consumers have let minor medical condition fixes lapse. This past week’s Q2 cash earnings beat was largely an accounting function of accelerated depreciation and lower head counts from layoffs (Table 1A and 2A from the Earnings Supplement).
