Is Merck Stock A Better Pick Over AbbVie?

We believe that the pharmaceuticals giant Merck (NYSE: MRK) is currently a better pick over its peer, AbbVie stock (NYSE:ABBV). MRK stock trades at 14x forward earnings, versus 20x for ABBV. We think this gap in valuation will narrow in favor of Merck in the coming years, given its superior revenue growth and profitability. There is more to the comparison, and in the sections below, we discuss why we think Merck will outperform AbbVie in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. AbbVie Stock Has Outperformed Merck In The Last Three Years

MRK stock has seen strong gains of 65% from levels of $70 in early January 2021 to around $115 now, vs. an increase of about 115% for ABBV stock over this period. In comparison, the S&P 500 is up 50% over this period. However, the increase in MRK and ABBV has been far from consistent. Returns for MRK stock were 2% in 2021, 49% in 2022, and 1% in 2023, while that for ABBV were 32%, 24%, and 1%, respectively. In comparison, returns for the S&P 500 have been 27%, -19%, and 24% over these years, respectively — indicating that both MRK and ABBV underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH and JNJ, 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 MRK and ABBV face a similar situation as they did in 2023 and underperform the S&P over the next 12 months — or will they see a strong jump? We think Merck will fare better than AbbVie.

2. Merck’s Revenue Growth Is Better

Merck has seen its revenue rise at an average annual rate of 13.5% from $41.5 billion in 2020 to $60.1 billion in 2023. On the other hand, AbbVie’s average revenue growth rate of 6.5% from $45.8 billion to $54.3 billion over this period has been comparatively slower.

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 74% surge in sales to $25 billion in 2023, versus $14 billion in 2020. 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 result in a meaningful decline in sales, and it will be challenging for Merck to bridge this gap. 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 126% to $8.9 billion in 2023, compared to $3.9 billion in 2020. 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.

AbbVie’s revenue growth has been buoyed by its Allergan acquisition in 2020. The company is best known for its blockbuster drug – Humira – used to treat rheumatoid arthritis and Crohn’s disease, among others. Humira’s sales peaked at $21.2 billion in 2022, before falling 32.2% y-o-y to $14.4 billion in 2023. This can be attributed to the biosimilar competition.

AbbVie, to some extent, can combat the loss of revenue from Humira by market share gains for some of its relatively new drugs, primarily Skyrizi, and Rinvoq. These drugs are used to treat plaque psoriasis and rheumatoid arthritis. For perspective, these two products garnered $11.7 billion in 2023, reflecting a solid 53% y-o-y growth. The sales of its anti-depressant – Vraylar – also spiked 35% y-o-y to $2.8 billion in 2023. For the six-month period ending June 2024, Skyrizi and Rinvoq continued their market share gains, with sales rising 50% y-o-y to over $7 billion.

AbbVie is also looking at inorganic growth. After its acquisition of Allergan in 2020, it acquired ImmunoGen for $10.1 billion this year, giving it rights to Elahere — an ovarian cancer treatment – with estimated peak sales of over $2 billion.

3. Merck Is More Profitable And Offers Lower Risk

Merck’s operating margin fell from 13.4% in 2020 to 4.9% in 2023, while AbbVie’s operating margin contracted from 27.8% to 24.9% over this period. The 2023 margin decline for Merck can be attributed to a $10 billion charge recorded in Q2’23 for the Prometheus acquisition. However, if we look at the last twelve-month period, Merck’s operating margin of 25.7% fares better than 24.9% for AbbVie.

Looking at financial risk, Merck fares better. Its 13% debt as a percentage of equity is lower than 21% for AbbVie. Furthermore, its 10% cash as a percentage of assets is slightly higher than 9% for AbbVie, implying that Merck has a better debt position and more cash cushion.

4. The Net of It All

We see that Merck has seen better revenue growth, is more profitable, and offers lower financial risk than AbbVie. Now, looking at prospects, we believe Merck is the better choice of the two, given its better valuation. At its current levels, MRK stock is trading at 14x forward expected earnings of $8.00 on a per share and adjusted basis in 2024. The 14x figure broadly aligns with the average seen over the past few years, excluding 2023. This is because the 2023 EPS of $1.51 was much lower due to a $17.1 billion R&D charge related to the Prometheus and Imago acquisitions and upfront payments for collaboration agreements with Kelun-Biotech and Daiichi Sankyo.

In comparison, at its current levels of around $194, AbbVie stock trades at close to 20x expected 2024 earnings of $9.86 per share. This compares with the 12x average P/E multiple for ABBV seen over the last five years. In fact, the $178 average of analysts price estimate for ABBV implies a downside of 8%. On the other hand, the $140 average of analysts price estimate for MRK reflects an upside of over 20%.

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

[1] Returns as of 8/19/2024
[2] Cumulative total returns since the end of 2016

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