Merck (MRK 3.56%) is one of the top healthcare companies in the world. Last year it reported close to $50 billion in revenue, and its stock pays a solid dividend that yields 3% per year. The only thing missing from the business is a big growth catalyst; sales over the past three years have only increased by 15%.
But now, Merck is rumored to be looking at potentially acquiring cancer-treatment company Seagen (SGEN +0.00%). If that happens, it could be a game-changer for Merck. Let's see why.
NYSE: MRK
Key Data Points
The companies are reportedly meeting this week
According to The Wall Street Journal, Merck and Seagen are meeting this week to discuss a possible deal. Merck has been rumored to be looking to acquire the company in an effort to bolster its portfolio. With a market cap of more than $32 billion, Seagen won't be a cheap buy, and other companies are supposedly interested in acquiring it as well. However, it's a deal that Merck should definitely pursue.
Why Seagen is an attractive target for Merck
One of the best growth stocks to own in the healthcare sector is Seagen. Revenue from its products doubled in just two years to $1.4 billion in 2021.
Sales of Adcetris, which treats Hodgkin's lymphoma and is the company's more developed cancer treatment (its revenue topped $706 million), grew at a rate of 7% last year. However, sales from Padcev (bladder cancer) and Tukysa (breast cancer) soared by 53% and 179%, respectively. Each contributed more than $330 million to the company's top line. And Seagen still has a relatively new cervical cancer treatment, Tivdak, that's already generating revenue ($6 million last year) -- and at its peak could bring in over $1 billion in sales.
All of these products could give Merck's financials a boost, making it more attractive for growth investors.
Could this be a match made in heaven?
Merck needs growth and Seagen could use some better cash flow; last year, it used up nearly $500 million just to fund its day-to-day operations. Although the company has more than $2.1 billion in cash and short-term investments, a bigger pool of cash would undoubtedly help Seagen fund more growth opportunities without needing to dilute shareholders through share offerings or having to take on debt.
NASDAQ: SGEN
Key Data Points
Merck generated $4.8 billion from its operations in just the first three months of this year. And its cash balance was a healthy $8.6 billion at the end of March. Throw in another $372 million in short-term investments, and that's close to $9 billion that it has available.
Income investors worried about its ability to support the dividend should know that it's also safe; Merck made dividend payments totaling $1.7 billion last quarter, which were easily supported by its cash flow. And Merck's payout ratio based on income is around 50%. Even if it needs to issue a combination of shares or cash to acquire Seagen, that shouldn't impact Merck's payout.
These two companies could give investors an incredibly well-rounded business that pays a dividend, has strong fundamentals and cash flow, and has some fast-growing and exciting products.
Should you buy Merck today?
It's too early to tell if a deal will happen between Merck and Seagen. Plus, it would need the approval of regulators, which isn't a certainty. And the acquiring company's shares normally fall after an announcement is made (while shares of the acquired company usually rise). Seagen's stock has already gotten a boost off this news, and what valuation the companies ultimately settle on (assuming a deal is reached) will determine how high its price might rise.
It can be risky to speculate on a potential deal. Merck is a good buy whether or not this deal happens, but if having Seagen as part of the equation is a necessity, you're better off waiting until the deal is completed. At that point, shares of Merck may be cheaper and you won't have to worry about the transaction falling through.
For now, this is a development worth keeping an eye on but not necessarily acting on yet.
