Better Buy for 2022: Merck vs. AstraZeneca

Merck & Co., Inc. (MRK) in Kenilworth, N.J., and London-based AstraZeneca PLC (AZN) are two prominent players in the global pharmaceutical industry. 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. In comparison, AZN discovers, develops, and commercializes prescription medicines in oncology, cardiovascular, renal and metabolism, respiratory, infection, neuroscience, and autoimmunity.

Surging COVID-19 infections derived from the highly transmissible omicron variant, and the continuing need to treat other chronic diseases are helping the pharmaceutical industry gain traction. Furthermore, substantial government investments and private funding have been contributing to the industry’s growth. Along with the industry’s solid growth prospects, the defensive nature of pharma stocks is fostering significant investor attention amid the current market volatility.

Investors’ interest in this space is evidenced by the VanEck Vectors Pharmaceutical ETF’s (PPH) 6.5% gains versus the SPDR S&P 500 Trust ETF’s (SPY) 1.1% loss over the past month. The global pharmaceutical manufacturing market is expected to grow at an 11.3% CAGR to $957.59 billion by 2028. So, both AZN and MRK should benefit. While AZN stock has declined 2.9% in price over the past six months, MRK has surged 5.6%. MRK is also a clear winner with 13.4% gains versus AZN’s 7.2% returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On Dec. 27, 2021, the Japanese Ministry of Health, Labour, and Welfare (MHLW) approved the combination of KEYTRUDA, MRK’s anti-PD-1 therapy, and LENVIMA, an oral multiple receptor tyrosine kinase inhibitor discovered by Japanese pharmaceutical company Eisai Co., Ltd. (ESALY), for treating patients with advanced endometrial carcinoma. Amid the steady increase in the rates of endometrial carcinoma in Japan each year, the companies are looking forward to helping improve overall survival and progression-free survival compared to chemotherapy with this approved combination.

On Jan.7, 2022, AZN’s Rare Disease group, Alexion, and Neurimmune AG, a Swiss-based biopharmaceutical company, signed an exclusive global collaboration and license agreement that grants Alexion the license to develop and commercialize NI006, an investigational human monoclonal antibody for treating transthyretin amyloid cardiomyopathy (ATTR-CM). ATTR-CM is a progressive and fatal condition that leads to progressive heart failure and a high rate of fatality within four years from diagnosis. This license grant will help AZN and Alexion’s pipeline of investigative therapies focused on amyloidosis to grow and address cardiomyopathies that can lead to heart failure.

Recent Financial Results

MRK’s sales for its fiscal 2021 third quarter, ended Sept.30, 2021, increased 20.4% year-over-year to $13.15 billion. The company’s pre-tax income came in at $5.27 billion, indicating a 94.6% increase from the prior-year period. MRK’s non-GAAP net income came in at $4.44 billion, up 27.3% from their year-ago period. And its non-GAAP EPS increased 27.7% year-over-year to $1.75. The company had $10.02 billion in cash and cash equivalents as of Sept. 30, 2021.

For its fiscal 2021 third quarter, ended Sept. 30, 2021, AZN’s total revenue increased 50% year-over-year to $9.87 billion. The company’s gross profit came in at $6.11 billion, representing a 17.3% year-over-year improvement. Its operating loss was $1.67 billion for the quarter, compared to a $1.17 billion operating profit in the prior-year period. AZN’s net loss was $1.65 billion, versus a $651 million net profit in the year-ago period. Its loss per share was $1.10, compared to EPS of $0.49 in the prior-year period. The company had $7.07 billion in cash and cash equivalents as of Sept. 30, 2021.

Past and Expected Financial Performance

MRK’s net income and EPS have increased at a 29.1% and 39.2% CAGR, respectively, over the past three years. The company’s EBITDA has increased at a 14.2% CAGR over the past three years.

MRK’s EPS is expected to rise 27.4% year-over-year in its fiscal year 2021, ended Dec. 31, 2021, and 24.8% in 2022. The company’s revenue is expected to increase 1.4% year-over-year in its fiscal 2021 and 15.6% in 2022. And analysts expect the company’s EPS to grow at a 15.3% rate per annum over the next five years.

In comparison, AZN’s net income and EPS have declined at CAGRs of 15.3% and 17.2%, respectively, over the past three years. The company’s EBITDA has grown at a 9.9% CAGR  over the past three years.

Analysts expect AZN’s EPS to increase 60.2% year-over-year for its fiscal year 2021, ended Dec. 31, 2021, and 20.8% in 2022. Its revenue is expected to grow 36.4% year-over-year in fiscal 2021 and 19.8% in 2022. And the company’s EPS is expected to grow at a 20.6% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, AZN is currently trading at 5.63x, which is 25.1% higher than MRK’s 4.50x. In terms of forward EV/EBITDA, MRK’s 10.99x compares with AZN’s 19.03x.

Profitability

MRK’s trailing-12-month revenue is almost 1.6 times AZN’s. MRK is also more profitable, with a 40% EBITDA margin versus AZN’s 19.3%.

Furthermore, MRK’s 26%, 12.1%, and 18.5% respective ROE, ROA, and ROTC compare with AZN’s 5.5%, 2.4%, and 3.6%.

POWR Ratings

While MRK has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, AZN has an overall C grade, which equates to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both MRK and AZN have a B grade for Sentiment, which is consistent with optimistic analyst estimates. MRK’s EPS is expected to increase 27.4% year-over-year to $5.77 in its fiscal 2021, ended Dec. 31, 2021. AZN’s EPS is expected to be $3.22 for its fiscal year 2021 ended Dec.31, 2021, representing a 60.2% rise from the prior-year period.

MRK has a B grade for Value, which is in sync with its lower-than-industry valuations. MRK has a 10.99x forward EV/EBITDA, which is 29.4% lower than the 15.56x industry average. AZN’s C grade for Value reflects its slightly higher-than-industry valuations. AZN’s 19.03x forward EV/EBITDA is 22.3% higher than the 15.56x industry average.

Among 190 stocks in the Medical - Pharmaceuticals industry, MRK is ranked #1; AZN is ranked #34.

Beyond what we have stated above, our POWR Ratings system has also rated MRK and AZN for Quality, Momentum, Stability, and Growth. Get all MRK ratings here. Also, click here to see the additional POWR Ratings for AZN.

The Winner

Consistent demand and substantial investments in the industry should enable both AZN and MRK to grow. However, its relatively higher profitability and lower valuation 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

MRK shares were trading at $81.69 per share on Tuesday afternoon, down $0.68 (-0.83%). Year-to-date, MRK has gained 6.59%, versus a -1.29% rise in the benchmark S&P 500 index during the same period.

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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