We see the narrow-moat firm as slightly undervalued today.
reported first-quarter results in line with our expectations and slightly ahead of consensus expectations, and we don’t expect any changes to our fair value estimate based on the performance. We continue to view Merck as slightly undervalued, with a strong immuno-oncology pipeline portfolio offsetting several major patent losses. The strong pipeline combined with a diverse product portfolio continue to reinforce our wide moat rating.
Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.
In the quarter, new product launches and strong vaccine sales helped offset generic competition to older drugs, leading to overall sales growth of 3% operationally, which should represent growth for Merck through 2017 and 2018. While Keytruda is poised for strong gains and we expect the drug will take the leading share in immuno-oncology, patent losses of close to $5 billion will weigh on growth. Further, we expect sales for HPV vaccine Gardasil to slow as the recommended dosing schedule shifts to two doses from three. Also, we expect the company’s top drug, Januvia (DPP-IV drug for diabetes), will lose market share to the SGTL2 class, which has shown efficacy and weight-loss benefits. Nevertheless, Merck’s immuno-oncology platform looks best positioned, with leadership in the largest indication of non-small cell lung cancer. We expect U.S. approval of Keytruda in first line non-small lung cancer regardless of PDL1 expression in May, opening up a likely full year of a first-mover advantage, which is critical in cancer treatment.
Additionally, while we believe U.S. tax reform is more likely than not to occur during the Trump administration, we don’t expect a major impact on Merck’s tax rate, since the company already enjoys a low tax rate of close to 20%, likely due to strategic geographic placement of intellectual property and geographic earnings stripping to reduce the company’s tax rate.
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