Merck & Co., Inc. (MRK) offers health solutions through its prescription medicines, vaccines, biologic therapies and consumer care products. The company operates through two segments—Pharmaceutical and Animal Health. Its products are marketed directly and through its joint ventures to drug wholesalers and retailers, hospitals, government agencies and managed health care providers.
Sanofi (SNY) is a healthcare company based in France that researches, develops, manufactures, and markets therapeutic solutions internationally. The company operates through three segments—Pharmaceuticals, Vaccines, and Consumer Healthcare. It also develops cardiovascular, thrombosis, metabolic disorder, central nervous system, and oncology medicines and drugs.
Because COVID-19 is almost under control in several countries, the pharmaceutical industry, which garnered significant attention because of its role in fighting the virus, may have little additional upside to offer investors based on COVID-19 related products and solutions. However, the continuing efforts of pharma companies in finding cures for other critical diseases should keep driving the industry’s growth. Consequently, the global pharmaceuticals market is expected to grow at an 8% CAGR to hit $1.70 trillion by 2025.
Investor optimism about the pharmaceutical industry is evident in the Invesco Dynamic Pharmaceuticals ETF’s (PJP) 2.6% returns over the past month compared to the SPDR S&P 500 Trust ETF’s (SPY) 1.8% returns. Both MRK and SNY are well-positioned to capitalize on the industry tailwinds.
While SNY’s share price declined 1.4% over the past month, MRK surged 1.7%. In terms of their past year’s performance, SNY is a winner with 3.2% gains versus MRK’s 1.4% returns. But, which of these stocks is a better pick now? Let’s find out.
Click here to checkout our Healthcare Sector Report for 2021
Latest Movements
On June 29, 2021, the European Commission (EC) approved MRK’s anti-PD-1 therapy KEYTRUDA in combination with platinum- and fluoropyrimidine-based chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic carcinoma of the esophagus or HER2-negative gastroesophageal junction (GEJ) adenocarcinoma in adults whose tumors express PD-L1. Showing significant improvements in progression-free and overall survival, MRK’s KEYTRUDA plus chemotherapy becomes the first anti-PD1 therapy approved in Europe in this first-line setting. The company hopes to achieve expanded market reach of this product in the near-term.
On June 24, AstraZeneca (AZN) and MRK’s LYNPARZA were granted conditional approval in China as monotherapy for the treatment of adult patients with germline or somatic BRCA-mutated metastatic castration-resistant prostate cancer. Prostate cancer is the sixth most prevalent cancer in China, so LYNPARZA is likely to see good sales in the coming months.
As part of SNY’s ongoing efforts to reduce the complexity of its Consumer Healthcare portfolio and accelerate its growth trajectory, the company has signed an agreement with STADA Arzneimittel AG (XFRA), a German-based pharmaceutical company, for the divestiture of its 16 Consumer Healthcare products commercialized in Europe. The agreement with STADA ensures that SNY's divested products will continue to be available to consumers.
On June 25, 2021, the European Commission (EC) approved Regeneron Pharmaceuticals, Inc. (REGN) and SNY’s PD-1 inhibitor Libtayo to treat adults with locally advanced or metastatic basal cell carcinoma (BCC) who have progressed on or are intolerant to a hedgehog pathway inhibitor (HHI). Because BCC is the most common type of skin cancer and is increasing across many European countries, this approval is expected to generate good sales in the near-term.
Recent Financial Results
MRK's total sales from the pharmaceutical segment for the first quarter, ended March 31, 2021, increased marginally year-over-year to $10.68 billion. Its sales from its animal health segment increased 16.8% year-over-year to $1.42 billion. The company’s pre-tax income came in at $3.46 billion, up 9.8% from the prior-year period. MRK's non-GAAP net income is reported at $3.56 billion for the quarter, which represents a 7.7% year-over-year decline. Its non-GAAP EPS decreased 7.3% year-over-year to $1.40. As of March 31, 2021, the company had $7.02 billion in cash, cash equivalents and restricted cash of.
For the first quarter ended March 31, 2021, SNY’s net sales decreased 4.3% year-over-year to €8.59 billion ($10.22 billion). The company’s net sales from the pharmaceutical segment decreased 3% year-over-year to €6.56 billion ($7.81 billion). Its pre-tax income improved marginally year-over-year to €1.97 billion ($2.35 billion). SNY’s business net income (non-GAAP) increased 5.1% year-over-year to €2.02 billion ($2.40 billion). Its business EPS (non-GAAP) increased 5.2% year-over-year to €1.61 ($1.21). The company had €13.95 billion ($10.46 billion) in cash and cash equivalents as of March 31, 2021.
Past and Expected Financial Performance
MRK’s revenue and net income grew at 5.6% and 64.5% CAGRs, respectively, over the past three years. The company’s EPS has increased at a 68.8% CAGR over the past three years.
Analysts expect MRK’s revenue to increase 7.3% year-over-year in the current quarter (ending June 30, 2021), marginally in 2021 and 11.8% next year. Its EPS is expected to increase 7.2% in the current quarter, but decline marginally for the current year, and then increase 5% next year. The stock’s EPS is expected to grow at a 9.2% rate per annum over the next five years.
In comparison, SNY’s revenue and net income grew at 1.4% and 48.1% CAGRs, respectively, over the past three years. The company’s EPS has increased at a 51.2% CAGR over the past three years.
Analysts expect SNY’s revenue to increase 4.6% year-over-year in the current quarter (ending June 30, 2021), 1.7% year-over-year in 2021 and 5% next year. Its EPS is expected to increase 15.5% in the current quarter, 9.4% in the current year and 40% next year. However, analysts expect the stock’s EPS to grow at 7.5% rate per annum over the next five years.
Profitability
MRK's trailing-12-month revenue is 1.1 times what SNY generates. MRK is also more profitable with a 38.7% EBITDA margin versus SNY’s 28.6%.
Also, MRK’s ROE and ROTC values of 26.4% and 16.8%, respectively, compare favorably with SNY’s 20.2% and 5.7%.
Valuation
In terms of non-GAAP forward P/E, SNY is currently trading at 13.73x, which is 6% higher than MRK’s 12.95x.
However, in terms of forward EV/EBITDA, MRK’s 10.93x is 5.3% higher than SNY’s 10.38x.
POWR Ratings
While SNY has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, MRK has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both the stocks have C grades for Sentiment, which is reflective of their marginal revenue growth potential.
MRK has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. The company’s 38.7% trailing-12-month EBITDA Margin is 573.6% higher than the 5.8% industry average. In comparison, SNY’s C grade for Quality is in sync with its relatively lower profit margins. The company’s 28.6% trailing-12-month EBITDA margin is 398.3% lower than the 5.8% industry average. Of the 225 stocks in the Medical - Pharmaceuticals industry, MRK is ranked #14, while SNY is ranked #38.
Beyond what we’ve stated above, our POWR Ratings system has also rated both MRK and SNY for Growth, Momentum, Stability, and Value. To see more of SNY’s component grades, click here. Also, click here to see the additional POWR Ratings for MRK.
The Winner
We think the pharma industry’s solid growth prospects with increasing spending on R&D and rising demand from an aging population should benefit both MRK and SNY in the coming quarters. However, favorable analyst sentiment and better profitability ratios make MRK a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical - Pharmaceuticals industry.
Click here to checkout our Healthcare Sector Report for 2021
MRK shares were trading at $77.98 per share on Wednesday afternoon, up $0.77 (+1.00%). Year-to-date, MRK has declined -3.01%, versus a 15.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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