Merck & Co (NYSE:MRK) Stock a Buy: Underrated Big Pharma

Under normal circumstances, pharmaceutical companies are thought to be safer than most industries during periods of economic uncertainty. This year is unique in that the pandemic has led to fewer people going to the doctor and getting prescriptions, which ultimately impacts the sales for big pharma. These circumstances have caused some of the biggest pharmaceutical stocks to underperform while the market has roared back from its March lows. Successful investors are always looking for smart buying opportunities when certain sectors are mispriced, and it seems that there are several such opportunities in the pharmaceutical sector at this time.

For example, Merck & Co (NYSE:MRK) is a big pharma stock that looks very attractive at this time based on its valuation and growth potential in the coming years. As one of the largest pharmaceutical companies in the world, there are several reasons to be bullish on Merck. Let’s take a look at why Merck & Co stock is a buy below.

Global Leader in Biopharmaceuticals

Anytime you can buy a global leader in its respective industry at a discount, it’s worth looking into. That’s exactly the case for Merck, a company with a forward P/E of 13.09 versus a 21.94 forward P/E for the S&P 500. Investors will be reassured to learn that Merck is a member of the Dow Jones Industrial Average and the S&P 500. It is a business that produces a broad range of prescription drugs that are sold all over the world. The company also has a vaccine business and an animal health business, both of which could be in for strong growth in the coming years.

Merck’s top-selling drug is called Keytruda, a cancer drug that accounted for 24% of the company’s sales in 2019 and generated $3.39 billion in Q2 revenue for the company. The drug was first approved for treating melanoma in 2014 but has gained approval for use in several different cancer indications and is now the standard first-line treatment for many lung cancer patients. Keytruda has provided significant earnings growth for Merck over the years and is what many refer to as a “blockbuster drug”. Some of the company’s other top-selling products include Gardasil (HPV vaccine), ProQuad (measles vaccine), and Januvia (Type-2 Diabetes).

The fact that Merck has a diverse set of drugs that are in demand worldwide is great for investors trying to find a company with stable earnings. There’s also some nice upside in the pharmaceutical industry, as the worldwide total prescription drug sales are expected to grow at a compound annual growth rate of 7% from 2019-2024.

Reason for Optimism

As we mentioned earlier, the global pandemic has impacted pharmaceutical companies in a negative way over the first half of the year. Since many people delayed their elective procedures, reduced wellness visits, and socially distanced, Merck’s sales figures suffered. Q2 sales were down 8.8% year-over-year to $10.9 billion, confirming the short-term headwinds from COVID-19. However, there’s still reason to be optimistic about Merck for the rest of the year.

Merck’s management team raised its 2020 guidance during its Q2 earnings report, which means that the company is anticipating a lower impact from the pandemic on earnings going forward. Since physician offices are now reopening and lockdowns are no longer a factor, it makes sense to think that prescription volume will increase going forward.

COVID-19 Vaccine Candidate

Merck tends to fly under the radar with investors that are interested in a company that is producing a COVID-19 vaccine, which is another great reason why it’s a buy at this time. Merck is working on two COVID-19 vaccines and one novel antiviral candidate which are all progressing well. These treatments are either in human trials now or will go through human trials later in 2020. Although Merck is moving slower than other pharma companies that are working on coronavirus vaccines, the fact that the company has 3 different options that are all progressing through various trial phases is an intriguing prospect. 

Final Thoughts

With a strong portfolio of drugs including the blockbuster Keytruda, increased forward guidance in 2020, and a robust dividend yield of 2.95%, Merck looks like one of the best options in the pharmaceutical sector. The company also has a growing pipeline of new drugs and there is a lot of potential with its COVID-19 vaccines. Adding shares of Merck while it is below $85 might end up paying off nicely for long-term investors.