Why Merck Has Had Underwhelming Start To 2020

After ending 2019 on an upbeat note, shares of pharma giant Merck & Co., Inc. MRK have faltered in 2020, and an analyst at BofA Securities delved into probable factors that put the brakes on the rally.

The Merck Analyst

Geoff Meacham maintained a Neutral rating and $90 price target for Merck.

The Merck Thesis

Merck shares are off 10% year-to-date compared to a 1% advance by the NYSE Arca Pharmaceutical Index DRG, with the spin-off announced earlier this month likely dragging the stock.

The spin-off, according to Meacham, is a long-term positive, given the anticipated margin improvement beyond 2023. However, investors are concerned near term, especially as Keytruda numbers were uninspiring in the fourth quarter and the slow growth businesses are forecast to see sales declines in 2021.

See Also: Merck To Spin Off Slow-Growing Women's Health, Legacy, Biosimilars Businesses: What You Need To Know

The $6 billion to $6.5 billion revenue gap stemming from the Women's Health/Legacy Brands spin-off will likely result in a 1% year-over-year revenue decline in 2021 and a 2% fall in 2022, as well as EPS declines in 2021.

Meacham sees Keytruda concentration risk ahead of competitor data due in the first half of 2020, as the anti-PD-1 therapy is on track to make up more than 40% of Merck's revenues post-split.

"We still see Merck as having a strong base I/O and vaccine business with what we expect will be continued acceleration from its core Keytruda franchise for years to come," Meacham wrote in the note. BofA remains sidelined due to the unfavorable spin optics and a lack of high-impact events in the next 6-12 months.

MRK Price Action

Merck's stock traded around $82 per share at time of publication.