Healthcare Industry - Merck on the spotlight

The healthcare industry is projected to grow by 7% CAGR between 2024-2027, driven by factors such as an aging population, technological advancements, increased focus on health data, and the enduring need for healthcare services. We highlight the best picks to invest in, in order to benefit from the industry growth.

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Healthcare industry – impressive growth potential

The healthcare industry is expected to see significant growth in the coming years. Projections by McKinsey estimate that healthcare profit pools will grow at a compound annual growth rate (CAGR) of 7%, from $583 billion in 2022 to $819 billion in 2027. Employment in healthcare occupations is also projected to grow much faster than the average for all occupations from 2023 to 2032, with about 1.8 million openings expected (Bureau of Labor Statistics).

Healthcare’s forward earnings growth is anticipated to lead all other sectors on a year-over-year basis, with robust sales growth also expected (BlackRock). Furthermore, the compound annual growth rate of data for healthcare is predicted to reach 36% by 2025, outpacing several other key industries.

The healthcare industry offers a diverse range of investment opportunities. Here are some?top healthcare stocks?to consider:

Eli Lilly and Co (LLY): With a market capitalization of?$727 billion, Eli Lilly is a pharmaceutical company known for its innovative drugs and treatments.

Novo Nordisk A/S (NVO): Novo Nordisk, valued at?$562 billion, specializes in diabetes care and other chronic diseases.

UnitedHealth Group Inc (UNH): As a leading health insurance provider, UnitedHealth Group has a market cap of?$422 billion.?It offers a wide range of healthcare services.

Merck & Co Inc (MRK): Merck, valued at?$330 billion, focuses on pharmaceutical research and development.

Thermo Fisher Scientific Inc. (TMO): Thermo Fisher, with a market cap of?$218 billion, provides scientific instruments, reagents, and services for research and diagnostics.

Abbott Laboratories (ABT): Abbott, with a market cap of?$194 billion, produces medical devices, diagnostics, and nutrition products.

Danaher Corp (DHR): Danaher, valued at?$182 billion, operates in the life sciences, diagnostics, and environmental sectors.

Pfizer Inc (PFE): Pfizer, with a market cap of?$156 billion, is a well-known pharmaceutical company.

Merck (MRK) – on the spotlight

Merck (MRK) is set to report its?first-quarter 2024 earnings?on?April 25, 2024, before the market opens.?In the previous quarter, the company delivered an impressive?earnings surprise of 133.3%. Below we summarize some expectations for today:

Total Revenues Estimate:

• Market consensus estimate?for Merck’s total revenues in Q1 2024 is?$15.34 billion.
• Specifically, in the?Pharmaceuticals segment, strong global demand for cancer drug?Keytruda?and HPV vaccine?Gardasil?is likely to have boosted sales growth.?Keytruda alone accounts for around?42%?of the company’s pharmaceutical sales.

Keytruda Sales:

• Keytruda, an oncology drug, is expected to have seen increased uptake across earlier-stage indications globally, such as triple-negative breast cancer and renal cell carcinoma. Its approval for early-stage non-small cell lung cancer (NSCLC) in October 2023 likely contributed to sales growth.
• The?Zacks Consensus Estimate for Keytruda’s sales?is?$6.80 billion, while our estimate is?$6.78 billion.

Diversification Efforts:

• While Keytruda has been a major driver of Merck’s revenue growth, the company recognizes the need to diversify its product lineup. Keytruda stands to lose patent exclusivity post-2028.
• Merck is actively working on strategies to drive the long-term growth of Keytruda, including innovative immuno-oncology combinations and personalized mRNA therapeutic cancer vaccines in partnership with Moderna.

Gardasil Vaccine:

• Ex-U.S. sales of Gardasil are expected to have been driven by strong demand in international markets like China.
• In the United States, higher pricing could have benefited sales.
• The?Zacks Consensus Estimate for Gardasil?is?$2.28 billion, while our estimate is?$2.30 billion.

Merck’s consistent investment in M&A activity to strengthen its pipeline further underscores its commitment to growth.

Merck should benefit from its latest developments

Phase 3 Clinical Trial of MK-1084:

• Merck has initiated a?Phase 3 clinical trial?for?MK-1084, an investigational oral?KRAS G12C inhibitor. This trial aims to evaluate its combination with?KEYTRUDA? (pembrolizumab)?as a first-line treatment for certain patients with?metastatic non-small cell lung cancer.

REJOICE-Ovarian01 Trial:

• Merck has initiated a?Phase 2/3 trial?of?raludotatug deruxtecan?in patients with?platinum-resistant ovarian cancer.

European Commission Approval for KEYTRUDA?:

• The?European Commission?has approved Merck’s?KEYTRUDA? (pembrolizumab)?in combination with chemotherapy as neoadjuvant treatment, followed by monotherapy as adjuvant treatment for?resectable non-small cell lung cancer (NSCLC)?at high risk of recurrence in adults.

FDA Approval for WINREVAIR?:

• The?FDA?has approved Merck’s?WINREVAIR? (sotatercept-csrk), a first-in-class treatment for adults with?pulmonary arterial hypertension (PAH, WHO Group 1).

Positive Data on V116 Vaccine:

• Merck announced positive data on?V116, an investigational?21-valent pneumococcal conjugate vaccine?specifically designed for adults, demonstrating immune responses in adults.

KEYTRUDA? Improving Overall Survival in Cervical Cancer:

• Merck’s?KEYTRUDA? (pembrolizumab), in combination with chemoradiotherapy, significantly improved overall survival in patients with newly diagnosed high-risk locally advanced cervical cancer.

Clinical Trials for Novel HPV Vaccine and GARDASIL?9:

• Merck plans to conduct clinical trials for a novel investigational?multi-valent human papillomavirus (HPV) vaccine?and a single-dose regimen for?GARDASIL?9.

Acquisition of Harpoon Therapeutics, Inc.:

• Merck has completed the acquisition of?Harpoon Therapeutics, Inc.

Our View on Merck

Merck is an attractive option for investors looking for a combination of income, growth potential, and resilience in the pharmaceutical industry. Merck should continue delivering strong sales of key products such as Keytruda and Gardasil. Additionally, Lagevrio should provide a significant contribution to the company’s performance.

Merck completed the acquisition of?Harpoon Therapeutics, Inc.?on?March 11, 2024. Harpoon is now a wholly-owned subsidiary of Merck. Via this acquisition Merck gains access to Harpoon’s portfolio of novel?T-cell engagers, including?MK-6070 (formerly known as HPN328), which targets?delta-like ligand 3 (DLL3). This broadens Merck’s oncology pipeline and allows for the development of innovative therapies in the future. By acquiring Harpoon, Merck further diversifies its offerings in the oncology space and gets access to Harpoon’s scientific expertise and research capabilities. We also expect that new treatment modalities may emerge from this collaboration, potentially addressing unmet medical needs.

Market sentiment on Merck – positive; Price Target suggests upside

The current market sentiment on Merck appears to be positive, with a consensus rating of BUY from analysts. The average rating score is based on 58 buy ratings, 15 hold ratings, and 1 sell rating (Business Insider). The activity of 725,996 investors in the recent quarter shows a mixture of buying and selling, indicating diverse sentiment among individual investors (TipRanks).

Furthermore, the 74 analysts offering price forecasts have a median target of $121.43, with a high estimate of $148.00 and a low estimate of $87.00, which suggests a generally optimistic outlook on the stock’s future performance. Specifically, Wall Street analysts have set a 12-month average price target of $135.28 for Merck, with a high forecast of $148.00 and a low forecast of $104.00(Business Insider).

According to our valuation and estimates the fair price for Merck stays at $138 per share suggesting 8.8% upside potential for the stock. Since the beginning of the year Merck’s share price gained 16.4%. Forward P/E ratio stays at 14.8x with dividend yield of 2.43%. Overall, we believe that Merck is a good addition to an investment portfolio for the mid- and long-term. The company has solid fundamentals in addition to continuously expanding product line with additional revenue streams.

For more detailed in-depth analysis please contact us.