2020 wasn’t kind to Merck (NYSE: MRK) shares.
The stock closed out the year with a loss of 11.1%, underperforming the S&P 500 Health Care Sector Index which rose 11.2% last year.
Merck shares were stuck in a sideways trading range for much of the year after falling more than 25% from January through mid-March as the rest of the market slipped into a brief bear market amid the initial outbreak of the coronavirus pandemic in the U.S.
But the beaten-up stock got a boost this week after Citi analyst Andrew Baum said Merck may be “the most undervalued major in global pharma.”
Baum rates Merck a Buy and issued a price target for the stock of $105 – 25% higher than the price as of this writing.
“We believe that 2021 is the year that the market begins to reflect the earnings power and [net present value] of Merck’s burgeoning pipeline,” Baum wrote in a note to clients.
The Citi analyst argued that Merck’s penchant for not highlighting its drugs that are in earlier stages of development has led the market to undervalue the drugs it has in its pipeline, with Baum adding that Merck’s “reticence to talk to its deeper pipeline has created a significant investment opportunity for investors.”
Baum said that much of investors’ worry around the stock is in regards to the company’s current reliance on sales of its cancer immunotherapy blockbuster drug Keytruda.
Keytruda is a first-line treatment for lung cancer and is in clinical trials—with readouts expected this year—to see what other cancers the drug can be used for. The drug grew sales by 21% in the September quarter and accounted for 30% of the company’s revenue, with analysts expecting Keytruda to have accounted for $14.3 billion of Merck’s $48.2 billion in sales in 2020, and to account for nearly half of its sales by 2025.
But Merck’s patent for Keytruda expires in 2028.
Baum argues that the market is underappreciating the other drugs that will drive growth for the company in the future.
“The good news is that quietly Merck has assembled a powerful portfolio of pipeline assets,” Baum wrote. “We believe that material undervaluation of the pipeline… make for a compelling investment thesis.”
The Citi analyst noted that Merck is focusing on renal cancer, lung cancer, and an HIV drug called islatravir, which Baum says could see $10 billion in sales.
Merck is building its oncology franchise by joining with companies like Seagen (NASDAQ: SGEN) on drug-antibody combinations, and Moderna (NASDAQ: MRNA) for messenger-RNA cancer therapies. It will also add in oncology drugs through “bolt-on” acquisitions, like its purchase of ArQule at the beginning of 2020.
The drugmaker will also continue to grow its strong vaccine business, with continued growth expected for its Gardasil shot for preventing infection of the HPV virus. Merck is expected to have clinical trial results this year on its latest generation of vaccines for preventing respiratory infections in babies and the elderly, and should deliver news next year on its new heart-failure drug and new antivirals against HIV.
Merck has two vaccines in development for COVID-19 and recently inked a deal with the U.S. government to provide tens of thousands of doses of its experimental treatment for severe cases of the coronavirus.
“Even with the best vaccines, we still see emergence of disease,” Merck Chief Marketing Officer Michael Nally said, adding that “therapeutics are going to have utility long into the future in this case.”
“Ultimately there’s going to be a lot of people unprotected through 2021 globally, and we need other interventions to ease the pain and suffering of this pandemic,” Nally said.