If 2017 ended right now, it would be the worst year for Merck & Co. (MRK 0.31%) stock since the financial crisis of 2008. There are still several weeks remaining before the year ends, of course, but the big pharma stock is down at a time when most of its peers are performing quite well.
While some declines in stock valuations reflect long-term problems, others are only temporary. Which is the case for Merck? Here are arguments for and against buying the stock right now -- and which argument is stronger.
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The case for Merck
It's important to note that Merck stock performed relatively well for most of 2017. The drugmaker's third-quarter results, though, kicked off a recent sell-off. However, there were several bright spots in those results.
Most important, cancer drug Keytruda continues to post impressive sales growth. The drug is on track to generate revenue of more than $3.5 billion this year. At least one analyst thinks that Keytruda could reach peak annual sales of close to $16 billion.
Keytruda has won regulatory approval for treating several types of cancer. Its status as the only anti-PD-1 drug approved as a first-line treatment for non-small cell lung cancer is a key factor behind the current sales growth. Merck is also evaluating Keytruda in treating multiple other types of cancer, both as a standalone therapy and in combination with other drugs.
The company's animal-health business is also booming. Two factors have been key to rising sales for the animal-health unit. Merck continues to enjoy strong demand for companion animal products and vaccines. The company's acquisition of Brazilian animal health products company Vallee S.A. is also contributing to the unit's growth.
Merck's pipeline includes 12 late-stage drugs and vaccines. The company and its partner, Pfizer (PFE 1.02%), await approvals for promising diabetes drug ertugliflozin as a monotherapy and in combination with other drugs.
Income investors will like Merck's dividend yield of over 3.4%. And bargain hunters might find the stock attractive as well. Merck stock currently trades at a little over 13 times expected earnings.
The case against Merck
Now, let's look at the argument against buying Merck. First, the company faces problems for many of its drugs other than Keytruda. Sales for cardiovascular drugs Zetia and Vytorin are tanking because of loss of exclusivity. Revenue continues to drop for several other older drugs, particularly Singulair. While Merck's No. 2 product, diabetes drug Januvia, posted year-over-year sales gain in the third quarter, its combined revenue for the first three quarters of 2017 is below the level posted in the same quarters last year.
Even what appears at first glance to be a positive for Merck isn't so great after a closer look. The company's hepatitis C drug Zepatier has enjoyed solid sales growth so far this year. However, Merck acknowledges that increased competition and declining patient volumes are likely to put a dent in sales.
A deeper dive into Merck's pipeline also reveals some potential reasons for worry. One late-stage candidate, Alzheimer's disease drug verubecestat, already failed in another late-stage clinical study. Heart-failure drug vericiguat didn't meet its primary endpoint in phase 2 testing, but Merck and partner Bayer (BAYRY 1.88%) went ahead with a late-stage study anyway.
And while Merck's dividend yield looks great, the drugmaker is currently spending more on funding its dividend program than it's earning. The dividend isn't in trouble, but that's not a scenario that can continue indefinitely.
Is it a buy?
I don't think a cloud of doom and gloom hangs over Merck. Keytruda has so much potential that the drugmaker should continue to increase overall sales and earnings for years to come. The stock has been beaten down enough that my view is Merck will bounce back once it has some good news to report.
Overall, I don't think Merck is a bad stock to buy. However, I don't think it's the best, either. In my opinion, there are quite a few stocks -- including drug stocks -- with better growth prospects, better valuations, and even better dividends. For example, Pfizer, Merck's partner on ertugliflozin, ranks higher than Merck in all three categories. Merck will no doubt have better years ahead than 2017. I suspect shareholders would be better off, though, looking elsewhere.
