Is Merck a Buy at Current Price Levels?

After a strong recent run, are shares in Merck (NYSE: MRK) still worth buying?

Mar 11, 2014 at 8:58PM

Shares in Merck (NYSE:MRK) have had a strong three months, up 15% while the S&P 500 has posted gains of just under 4%. However, since the bull market of March 2009 kicked off five years ago, Merck is considerably behind the wider index. While the S&P has risen by 174%, Merck is up less than 150%. Can it perform better in the future, making it a "buy" at current price levels?

News flow
Recent news flow for Merck has been very positive. The biggest reason Merck's shares have performed strongly over the past three months is progress on its PD-1 drug, MK-3475. Merck announced plans to partner with three major biopharma companies (Pfizer, Incyte, and Amgen (NASDAQ:AMGN)) in January, with the group moving forward in combining MK-3475 with other drugs in clinical trials. In addition, Merck will also increase its own work on the drug, with the company announcing early stage studies for 20 different PD-L1-positive solid tumor types that have not yet been explored. The results of the trials (and other developments surrounding MK-3475) are likely to be a major catalyst on the share price.

More recently, Merck released an update concerning a phase 2 trial involving a combination of Merck's MK-5172 and MK-8742 to treat patients co-infected with HIV and hepatitis C. The administration of the combination for 12 weeks resulted in robust hepatitis C suppression, which is good news for Merck. Meanwhile, Merck received yet more encouraging news flow regarding a mid-stage study for an oral treatment for house dust mite reactions. In a Phase 2b trial, Merck's MK-8237 improved 24-week nasal symptoms by 49% at its highest dosage, with the drug also delivering promising dose and time dependent reductions compared with placebo at eight and 16 weeks. Merck will now move forward with a phase 3 trial in later in 2014, the outcome of which is likely to be a share price catalyst.

With an EV/EBITDA of 11.3, Merck appears to offer relatively good value for money. For instance, sector peer AbbVie (NYSE:ABBV), has an EV/EBITDA multiple of 12.1, and this is, therefore, slightly less attractive than the equivalent measure for Merck.

However, AbbVie remains a relatively attractive stock and has had some encouraging news flow recently. For instance, AbbVie's hepatitis C combination treatment cured almost 100% of patients in a phase 3 trial. It is one of six late-stage studies that AbbVie conducted to form part of an FDA application, with the company still set to make the submission by the end of June. The outcome could be a major catalyst for AbbVie's share price, since sales projections for the drug aren't included in its most recent set of results.

With an EV/EBITDA ratio of 14.3, Amgen appears to offer the least value for money out of the three stocks. However, it remains a relatively attractive company despite experiencing disappointment this week when a phase 3 trial (in partnership with Bayer) did not meet its primary endpoint of improving recurrence-free survival. The drug in question was Nexavar, an adjuvant treatment for patients with liver cancer, although Amgen has said that it remains committed to ongoing research in all stages of liver cancer. Furthermore, the company has multiple projected milestones for its late-stage pipeline in 2014. As a result, 2014 could yet prove to be a good year for Amgen.

Looking ahead
With Merck having the most attractive EV/EBITDA multiple of the three stocks, it looks all set to deliver strong performance in 2014. That's not to say, of course, that Amgen and AbbVie will not, but Merck does appear to be the most undervalued of the three companies. With the potential for further positive news on MK-3475 expected during 2014, this could act as a catalyst for Merck and, with shares up more than 13% already year to date, it could prove be a great year for Merck.

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