Is Johnson & Johnson Stock A Better Pick Over Merck?

We believe that the pharmaceuticals bellwether Johnson & Johnson (NYSE: JNJ) is currently a better pick over its peer Merck (NYSE: MRK). Although Merck trades at a higher valuation of 5.5x trailing revenues, compared to 4.2x for J&J, we think that this valuation gap will likely narrow over the coming years in favor of J&J, given its superior profitability and better prospects. In the sections below, we discuss why we think JNJ will outperform MRK in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. Merck Stock Has Outperformed J&J In The Last Three Years

JNJ stock has seen little change, moving slightly from levels of $155 in early January 2021 to around $150 now, while MRK stock has seen strong gains of 65% from levels of $80 to around $130 over the same period. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.

Overall, the performance of JNJ and MRK with respect to the index has been quite volatile. Returns for JNJ were 9% in 2021, 3% in 2022, and -11% in 2023, while that for Merck were -6% in 2021, 45% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that JNJ and MRK underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector including LLY, UNH, and MRK, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could JNJ and MRK face a similar situation as they did in 2021 and 2023 and underperform the S&P over the next 12 months — or will they see a strong jump? We think JNJ will fare better than MRK in the next three years.

2. Merck’s Revenue Growth Is Better

Merck has seen its revenue rise 23% between 2021 and 2023, compared to an 8% increase for J&J.

Johnson & Johnson’s revenue growth was led by a 5% rise in its pharmaceuticals business and a 12% rise in the medical devices business over this period. J&J’s multiple myeloma treatment – Darzalex – and the autoimmune drug – Stelara – have been the key growth drivers for the company’s pharmaceuticals business in the recent past. Some of the company’s new drugs, including Carvykti – a multiple myeloma treatment, and Spravato – an antidepressant – have been gaining market share.

On the other hand, J&J also has some relatively older drugs that face generic competition and have seen their sales fall. For example, Remicade sales have declined by 48% between 2021 and 2023. Beyond pharmaceuticals, the company’s medical devices business has been doing well, primarily the Cardiovascular Care, which has benefited from the Abiomed acquisition (J&J acquired Abiomed in 2022). For J&J, pharmaceuticals sales growth will be weighed down in coming years due to the loss of the U.S. market exclusivity for Stelara in 2025. However, we think the growth in its Medical Devices business will likely offset the loss in sales from generic competition for Stelara.

Merck’s revenue growth has been driven by the success of Keytruda over the recent years. Keytruda has seen its label expand from Non-Small Cell Lung Cancer to Melanoma, Head & Neck, Cervical, Renal, and many more indications, resulting in a stellar 46% surge in sales to $25 billion in 2023, versus $17 billion in 2021. We think Keytruda will peak at around $32 billion in annual sales and decline thereafter with biosimilars entering the market. Currently, Samsung Bioepis, Amgen, Sandoz, and others are working on development of Keytruda’s biosimilars.

Note that Keytruda accounted for 42% of total Merck’s sales in 2023 and its loss of market exclusivity will likely result in a meaningful decline in sales, that will be challenging to bridge. As such, Merck has been looking at inorganic growth, with acquisitions of Acceleron Pharma in 2021, Prometheus Biosciences in 2023, and Harpoon Therapeutics this year.

Other than Keytruda, Merck’s HPV vaccine – Gardasil – has been gaining market share and has seen its sales rise 57% to $8.9 billion in 2023, compared to $5.7 billion in 2021. Similar to Keytruda, Gardasil will also lose market exclusivity in the U.S. in 2028. However, the decline in Gardasil sales is expected to be less profound and hurting for Merck as opposed to Keytruda.

3. J&J Is More Profitable 

J&J’s operating margin has slid slightly from 26.6% in 2021 to 25.8% in 2023, while Merck’s operating margin fell from 13.4% to 4.9% over this period. However, the 2023 margin decline for Merck can be attributed to a $10 billion charge recorded in Q2’23 for the Prometheus acquisition. Looking at the last twelve months period, J&J’s operating margin of 27% fares much better than 8% for Merck.

Looking at financial risk, J&J fares better than Merck, with its 8% debt as a percentage of equity being marginally lower than 9% for Merck. Moreover, its 14% cash as a percentage of assets is higher than 7% for Merck, implying that J&J has a better debt position and more cash cushion.

4. The Net of It All

We see that J&J is more profitable and has a better financial position. Still, it trades at a lower valuation multiple than Merck.  Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe JNJ is the better choice of the two, given its lower valuation and better prospects. If we compare the current valuation multiples to the historical averages, JNJ fares better, with its stock currently trading at 4.2x trailing revenues vs. the last five-year average of 4.4x. In contrast, Merck stock trades at 5.5x trailing revenues, vs. the last five-year average of 4.5x.

Overall, we think J&J is better placed with an attractive valuation and robust demand for its medical devices business. It’s likely that Merck may continue to see better revenue growth in the near term due to continued market share gains for Keytruda. However, its stock may still see a downward adjustment to its valuation multiple, as investors account for the Keytruda’s loss of market exclusivity in 2028.

While JNJ may outperform MRK in the next three years, it is helpful to see how Johnson & Johnson’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 5/13/2024
[2] Cumulative total returns since the end of 2016

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