Is Merck Stock A Buy As It Plans A $1.35 Billion Takeover?

Things are looking up for Merck stock after the Big Pharma bellwether easily topped third-quarter expectations, signed a deal to develop a cancer treatment with Moderna (MRNA) and agreed to a $1.35 billion acquisition of Imago BioSciences (IMGO).

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Shares of Merck (MRK) recently broke out and, on Dec. 6, were extended above their 5% buy zone after announcing the Imago takeover. Imago is working on treatments for bone marrow diseases. Its lead asset is in midstage testing for several conditions.

During the third quarter, two of Merck’s blockbusters, cancer drug Keytruda and human papillomavirus vaccine Gardasil, helped drive the better-than-expected results.

Merck also reported $436 million from Lagevrio, its Ridgeback Biotherapeutics-partnered antiviral pill for Covid treatment. But the strong sales followed a recent study showing Lagevrio didn’t outperform standard drugs in reducing hospitalizations or deaths for Covid patients. However, those that received Lagevrio recovered six days faster.

The company recently reported test results of a drug it acquired alongside Acceleron Pharma. That drug, sotatercept, led to statistically significant improvements in patients with a form of high blood pressure in the lungs.

Investors are also watching for news Merck could be on the lookout for a big acquisition. For months, the prime target looked to be Seagen (SGEN). Seagen makes targeted cancer drugs called antibody drug conjugates, or ADCs. But the companies have been mum on any possible merger despite the recent addition of a permanent CEO at Seagen.

It will be important for Merck to figure out how to stem the losses when Keytruda generics launch. The drug is set to begin losing patent protection in 2028. Merck says its cardiovascular business could be key. The company expects that business to generate $10 billion in annual sales by the mid-2030s. From that pipeline, Merck expects eight approvals over the next decade.

So, all in all, is Merck stock a buy right now?

Merck Stock Fundamentals: Sales, Earnings Pop

During the third quarter, Merck’s adjusted earnings inched 4% higher to $1.85 per share and topped forecasts for $1.72, according to FactSet. Sales climbed 14% to $14.96 billion, above calls for $14.07 billion. In constant currency, sales grew 18%.

But neither metric lined up with CAN SLIM rules for investing. Savvy investors are advised to look for companies with recent quarterly growth of 20%-25% or better. Merck didn’t meet that bar and its sales growth in the third quarter relied heavily on Lagevrio. Excluding Lagevrio’s impact, total sales rose just 10%. It’s important to note, exchange rates are still weighing heavily on sales.

Merck’s adjusted earnings also took a 22-cent hit due to collaboration and licensing agreements with several companies, including Moderna. Merck paid Moderna $250 million as part of a collaboration. The companies are working together on a personalized cancer vaccine for melanoma patients. Rather than prevent cancer, the vaccine induces an immune response to fight tumor cells.

Other bright spots in the quarter included Keytruda and Gardasil. Keytruda sales jumped 20% and revenue from Gardasil advanced 15%.

For the fourth quarter, analysts polled by FactSet expect Merck to report adjusted earnings of $1.53 per share on $13.67 billion in sales. On a year-over-year basis, earnings would dip 15% and sales rise 1%.

What Do Annual Metrics Say About Merck?

Merck stock continues to rising on excitement over its plans to acquire Imago. On Dec. 1, shares hit another fresh high.

Last year, Merck sales climbed 17% to $48.7 billion. That growth accelerated from less than 3% in 2020.

This year, Merck expects $58.5 billion to $59 billion in sales. That’s up from its guidance in July for a midpoint of $58 billion in sales. On a year-over-year basis, sales would surge almost 21%. The company also expects to earn $7.32-$7.37 per share, up 22%.

Merck stock analysts forecast adjusted earnings of $7.39 per share and $59.1 billion in sales.

The pharma stock ranks first by Composite Rating in its industry group of 37 companies. The group itself ranks just No. 122 out of 197 groups that Investor’s Business Daily tracks.

Technical Analysis Of The Pharmaceutical Company

Merck stock has a Composite Rating of 95. The CR is a measure of a stock’s key growth metrics over the past 12 months. This puts Merck stock within the top 5% of all stocks, regardless of industry group.

Shares also have a Relative Strength Rating of 97, reflecting the 12-month performance of Merck stock. This means the pharmaceutical stock performs in the top 3% of stocks on that measure.

It’s also key to watch chart patterns. Merck stock broke out of a flat base with a buy point at 95.82 on Oct. 21. Shares are now well above the high end of the 5% chase zone, which runs from 95.82 to 100.61.

Merck stock is well above its 50-day moving average and 200-day line, according to MarketSmith.com.

Merck Stock News: New Studies And Partnerships

On Nov. 21, Merck stock popped after the company announced its Imago buyout. Imago’s lead drug is in five studies testing it alone or in combinations for diseases and cancers of the bone marrow and blood.

Shares also rose earlier this month after a real-world study of Gardasil showed reductions in some cancers among recipients of the vaccine.

Recently, the European Union’s Committee for Medicinal Products for Human Use issued a positive opinion on a combination using Merck and AstraZeneca‘s (AZN) Lynparza in patients with a form of prostate cancer. This is a key step ahead of approval.

The partnership with Moderna also helped spark Merck stock this month.

Together, the companies will test a personalized cancer vaccine in patients with high-risk melanoma. Unlike traditional vaccines, which aim to prevent diseases, this vaccine will prompt the body to create specialized killer cells that hone in on the cancer’s unique mutations.

Merck stock also gained after announcing the results of Acceleron’s sotatercept in patients with high blood pressure in their lungs, a condition known as pulmonary hypertension, or PAH. After 24 weeks, patients who received sotatercept on top of standard drugs showed improvement in how far they could walk for six minutes. This is a measure of the disease’s severity.

Meanwhile, Merck is working to broaden use of Lagevrio amid new Covid mutations. Analysts hoped the antiviral pills from Merck and Pfizer (PFE) would offer an easier route for patients with less severe forms of the respiratory illness.

But patients often struggle to access the drugs quick enough. Patients must start treatment within days of symptoms appearing. Further, there are lingering questions about their effectiveness. Some patients who take Pfizer’s Paxlovid have reported rebound cases of Covid after finishing treatment.

Paxlovid cut the risk of hospitalization by 89% in unvaccinated patients with at least one risk factor for serious disease. Patients started treatment within three days of symptoms beginning. In Merck’s study, Lagevrio lowered the risk by 30% when patients started treatment in the first five days.

Is Merck Stock A Buy Now?

Based on CAN SLIM rules for investing, no, it’s not time to buy Merck stock. Shares are now well above the 5% buy zone.

On a more bearish note, Merck’s sales and earnings growth weren’t strong enough to meet CAN SLIM guidelines in the third quarter. Analysts expect a repeat performance in the fourth quarter. But big companies like Merck can add stock gains without hitting massive growth streaks.

Keep tabs on more top stocks to buy or sell. Also, check out IBD research for more stocks to buy and watch.

Follow Allison Gatlin on Twitter at @IBD_AGatlin.

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