WINREVAIR And CAPVAXIVE Will Anchor A Solid Future

Key Takeaways

• Slowing GARDASIL demand in China and inventory issues could limit short-term revenue growth amid long-term market challenges.
  
• Transition delays to new markets and products may impact net margins due to broader clinical and commercial investments required.
  
• Merck faces risks in revenue stability due to increased competition, pricing pressures, and uncertainties in China, despite a strong pipeline reliant on late-stage developments.

Catalysts

Operates as a healthcare company worldwide.

• The slowing demand for GARDASIL in China, coupled with inventory issues, could limit short-term revenue growth despite long-term market potential due to the vaccine's recent market challenges.
  
• The transition to new markets and products, such as WINREVAIR and CAPVAXIVE, might take longer than anticipated to offset declines in the flagship KEYTRUDA post-loss of exclusivity, potentially impacting net margins as Merck embarks on broader clinical and commercial investments.
  
• The temporary pause of GARDASIL shipments to China indicates persistent economic and competitive pressures in key markets, possibly constraining earnings growth as the company adjusts its supply chain strategies.
  
• Dependency on successful outcomes from ongoing clinical trials in novel areas like cardiometabolic and oncology could mean future revenue is uncertain if these trials do not meet endpoints or regulatory approval, thereby affecting earnings projections.
  
• Changes in the reimbursement landscape, specifically the implementation of Medicare Part D redesign, could introduce pricing pressures on WINREVAIR and other oral oncology products, negatively impacting overall net sales despite potential volume gains.

Merck Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Merck compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Merck's revenue will grow by 1.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 26.7% today to 30.0% in 3 years time.
• The bearish analysts expect earnings to reach $20.4 billion (and earnings per share of $8.06) by about April 2028, up from $17.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, up from 11.5x today. This future PE is lower than the current PE for the GB Pharmaceuticals industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Merck Future Earnings Per Share Growth

Risks

• Merck's decision to temporarily pause GARDASIL shipments to China due to elevated inventory levels and the slow recovery of demand could adversely affect immediate revenue and even future growth potential if these market conditions persist.
  
• The dependency on a strong performance in oncology, especially with KEYTRUDA amid the increasing competition, highlights risk in sustaining high revenue and margins if competitors launch successful alternatives.
  
• Merck's strategy faces risks from uncertainties related to the economic recovery in China, complicating the ability to achieve revenue targets for products like GARDASIL, impacting revenue projections.
  
• The International Pricing Index Model's potential impact on KEYTRUDA sales starting in 2028 poses a risk to maintaining earnings and revenue stability in the face of pricing pressures.
  
• Merck's robust pipeline and reliance on promising late-stage developments create uncertainties where clinical or regulatory setbacks in key trials could negatively affect projected earnings and future growth drivers.

Valuation

• The assumed bearish price target for Merck is $97.23, which represents one standard deviation below the consensus price target of $110.66. This valuation is based on what can be assumed as the expectations of Merck's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $146.0, and the most bearish reporting a price target of just $89.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $67.9 billion, earnings will come to $20.4 billion, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $78.0, the bearish analyst price target of $97.23 is 19.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.