Merck Performance Analysis PDF

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Analyze Merk's accounting performance. ...

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Summary This report will recommend a buying opportunity by analyzing financial performance and competitive advantages of two competing companies, Merck & Co and Pfizer. They are two leading companies in the pharmaceutical and biotech industry that develop and manufacture healthcare product worldwide. Both of their global portfolios include medicines, vaccines, as well as many other world-known healthcare products. After a comprehensive analysis of their latest annual statement, I view Merck & Co as an investment opportunity due to its outstanding financial behavior and successful research and development through recent years.

About the Industry The United States has one of the world’s most supportive domestic environments for the development and commercialization of pharmaceuticals. Also, the US is a world leader in medical innovation, and the per capita spending on healthcare is the highest of industrialized countries. Because Merck and Pfizer also have large market share in developing countries, the fast-growing per capita spending on healthcare in developing countries provides even more space for biotech companies to grow. In addition, when lots of industries are negatively influenced by the trade war, the healthcare industry seems like a safe haven for investors because life-saving drugs are unlikely to be levied international tariff. Those are the reasons why I choose to invest in the healthcare industry (Mark Kolakowski, Aug. 7, 2018).

About the Companies Merck & Co primarily operates through four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances. More specifically, Merck helps to address some of the world's unmet medical needs by focusing its research on diabetes, infectious diseases antimicrobial resistance HIV, oncology, and vaccine (Merck.com). Pfizer Inc develops and sells healthcare products worldwide. It offers medicines and vaccines in various therapeutic areas, including internal medicine, vaccines, oncology, inflammation and immunology, and rare diseases (pfizer.com). Pfizer’s goal and credo is to enrich and extend life across all disease areas.

Financial Performance

The data above is retrieved and calculated from two companies’ latest financial reports. For Merck, the net income was 6.19 million in 2018, which has a 150% increase from 2017. Compared to Merck’s surge of increasing net income, Pfizer suffered from a -47.6% decrease of

net income from 2017 to 2018. The growth of Merck is mainly driven by the significant product approval received by the Company in 2018, including Keytruda, Lynparza, etc. (Merck’s annual report). What’s more, Merck’s business in China has grown rapidly in the past few years, and the importance of China to the Company’s overall pharmaceutical and vaccines business has increased accordingly. By comparison, Pfizer’s loss was mainly caused by patent expiration, loss of exclusivity, and certain product impairment (Pfizer’s annual report). As we can see in the table, Merck has higher return on equity and return on assets than Pfizer in 2018. ROA and ROE are two most important ratios to measure companies’ management effectiveness and how investments are generating income. Pfizer’s current ratio and quick ratio are slightly higher than Merck’s, which shows that Pfizer has larger short-term liquidity, or stronger ability to generate enough cash to pay off all debts. The relatively lower current and quick ratio for Merck is because in October 2018, Merck announced its plans to invest approximately $16 billion on new capital projects from 2018-2022, which will largely increase its manufacturing capacity across Merck’s key businesses. Also, Merck continues to pursue the acquisition of businesses and establishment of external alliances to complement its internal research capabilities. These acquisition activities often include upfront payments and large amount of cash outflows that may decrease its cash equivalent. However, it’s long term debt-to-equity ratio is still low and is below the industry average, implying that Merck has been successfully managed its debt levels. Regarding its merging opportunities and pipeline progression, I anticipate its revenue to continuously appreciate. Another important measurement is the Cash Flow from Operations to Total Liabilities Ratio. As we can see from the table, Merck has much higher ratio than Pfizer, which indicates that it is better able to pay back its debt. What’s more, in 2018, Pfizer’s operating cash flow was $3.34 per share, which was only 13.2% above Pfizer's adjusted earnings per share. Therefore, the overall financial situation of Merck is healthier than Pfizer, and there’s no need to worry about liquidity issue. High investment in R&D and acquisition is important for pharmaceutical companies because they need rigorous search for innovations. It can strengthen company’s potential growth and future development.

Company Highlight Merck has been a solid leading company in the industry for decades. Compared to the overall industry index, Merck shares have risen 11.9% this year while the industry has decreased 2.1%. A significant achievement this year has been the strong performance and positive regulatory updates related to its PD-1 inhibitor, Keytruda. It has been the largest product that it generats sales of almost $5.0 billion in the first half of 2019, reflecting a massive 56.6% surge year over year. Another breaking news is that the U.S. Food and Drug Administration (FDA) approved supplemental New Drug Applications (sNDAs) for PIFELTRO and DELSTRIGO (Business wire, Sep 20).

Conclusion Supportive macro environment, Merck’s strong financial profile, and its cutting-edge technology enable it to invest more in research and development, corporate with external alliances, and maximize upcoming launches while providing significant cash returns to shareholders. Based on those reasons, I believe Merck can outperform its peers and I will take a long position in Merck.

References Here's Why Merck (MRK) is Outperforming Its Industry of Late. Retrieved from https://www.zacks.com/stock/news/492641/heres-why-merck-mrk-is-outperforming-itsindustry-of-late Mark Kolakowski, Aug. 7, 2018, Why Health Care Stocks Are Outshining the Techs, Investopedia, Retrieved from https://www.investopedia.com/news/why-health-carestocks-are-outshining-techs/ Pfizer’s Annual Report 2018, Retrieved from https://s21.q4cdn.com/317678438/files/doc_financials/Annual/2018/2018-FinancialReport.pdf Merck & Co’s Annual Report 2018, Retrieved from https://s21.q4cdn.com/488056881/files/doc_financials/2018/Q4/2018-Form-10-K(without-Exhibits)_FINAL_022719.pdf...