US Investments And New Product Launches Will Shape Future Markets

Key Takeaways

• Merck's strategic investments and acquisitions have tripled its pipeline, aiming to significantly drive earnings growth through blockbuster potential products.
  
• Robust R&D and new product launches are expected to maintain leadership in oncology, boosting revenue and enhancing long-term margins.
  
• Merck faces challenges with declining GARDASIL sales, potential tariffs, strong competition, KEYTRUDA's exclusivity loss, and pricing pressures in international markets.

Catalysts

Operates as a healthcare company worldwide.

• Merck plans to bring over 20 new growth drivers to market in the coming years, most of which have blockbuster potential, which could significantly boost future revenue.
  
• The company is making strategic investments in manufacturing, including $9 billion in U.S. projects through 2028, which may improve net margins by optimizing supply chains and reducing potential tariff impacts.
  
• With its acquisition and licensing strategy, Merck has nearly tripled its late-phase pipeline since 2021, which is expected to have a potential commercial opportunity of over $50 billion by the mid-2030s, driving earnings growth.
  
• The ongoing strong launches of key new products, such as WINREVAIR and CAPVAXIVE, are positively impacting revenues and are expected to support further growth in the coming years.
  
• Merck's proactive steps in business development, combined with robust R&D efforts, are aimed at maintaining and expanding its leadership in oncology and other therapeutic areas, potentially enhancing long-term earnings and net margins.

Merck Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Merck's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.8% today to 33.7% in 3 years time.
• Analysts expect earnings to reach $24.3 billion (and earnings per share of $9.89) by about September 2028, up from $16.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $20.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, down from 12.9x today. This future PE is lower than the current PE for the GB Pharmaceuticals industry at 19.0x.
• Analysts expect the number of shares outstanding to decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Merck Future Earnings Per Share Growth

Risks

• Merck faces a decline in GARDASIL sales in China, driven by higher channel inventories and soft demand, affecting global revenue growth.
  
• The potential impact of additional tariffs, especially if they target pharmaceuticals, could introduce costs and affect net margins and earnings in the short to medium term.
  
• Strong global competition poses a risk to Merck’s pipeline and revenue streams, particularly if new entrants capture market share before Merck's similar offerings are approved.
  
• The eventual loss of exclusivity (LOE) for KEYTRUDA could lead to significant revenue decline if the pipeline doesn't compensate for this gap.
  
• The disparity between U.S. and global drug prices, coupled with potential changes in international pricing regulations, could pressure Merck’s pricing strategies and revenues in key markets.

Valuation

• The analysts have a consensus price target of $102.333 for Merck based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $141.0, and the most bearish reporting a price target of just $82.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $72.0 billion, earnings will come to $24.3 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 6.8%.
• Given the current share price of $84.61, the analyst price target of $102.33 is 17.3% 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.