Merck: A Full Pipeline

11/03/2015 7:00 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Our latest new conservative buy recommendation is a healthcare leader with a full pipeline and potential blockbuster drugs in the works, notes Benjamin Shepherd, editor of Global Income Edge.

Merck & Co. (MRK) is particularly attractive now, because while most of the other majors have posted decent recoveries from the recent market swoon, Merck is still well off its 52-week high of $63.

A big reason for that is Merck hadn’t had any drug breakthroughs in several years, but had focused on selling just a few major drugs rather than casting a wide drug development net.

But a recent management shakeup has increased the company’s commitment to new drug discovery, particularly for diseases with few, or even any, effective treatments.

Another major plus is Merck that is past the worst of its patent expirations. While Merck has dealt with some major losses over the past several years, it only faces a handful of patent losses over the next few years.

Showing blockbuster potential for Merck are its recently launched Januvia for treating diabetes, Keytruda for melanoma, Isentress for HIV, and its Gardasil vaccine used to prevent human papillomavirus.

Its Ebola vaccine, which was developed with NewLink Genetics (NLNK) and still needs to be approved, has been shown to be 100% effective in preventing Ebola infections, an impressive feat.

Its work on the Ebola virus is also representative of Merck’s renewed focus on unmet medical needs.

Despite a strong financial position and its pipeline of 38 drugs in late-stage development, Merck is undervalued relative to its peers, trading at just 14.5 times trailing twelve months earnings.

Part of the reason why Merck is undervalued relative to its peers is its earnings are expected to take a few years to ramp up after its recent new launches.

But that also means this is a good time to pick up shares on the cheap, especially since that earnings ramp up means dividend growth down the line is a strong possibility.

Merck had just over $40 billion in revenue last year and free cash flow over the trailing twelve months amounted to an impressive 14% of total sales.

That helps to support more than $6 billion in annual R&D spending, a driving force behind Merck’s success in launching new drugs.

The company also carries very little debt. Its current quarterly dividend of $0.45, for a yield of 3.6%, is well covered by cash flow and quite secure.

With a dividend that has room for growth, Merck is being added to our Conservative Portfolio as a buy up to $65.

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