We believe that the pharmaceutical giant Merck (NYSE: MRK) is currently a better choice than its counterpart, AbbVie shares. MRK stock trades at 14 times forward earnings, compared to 20 times ABBV stock price. We believe this valuation gap will narrow in Merck’s favor in the coming years as the company has better revenue growth and profitability. However, the comparison goes further, and in the following sections we discuss why we believe Merck will outperform AbbVie over the next three years. We compare a number of factors, such as historical revenue growth, returns, and valuation.

1. AbbVie shares have outperformed Merck shares over the past three years

MRK stock has seen strong gains of 65% from $70 in early January 2021 to around $115 now, while ABBV stock has gained about 115% during that time period. In comparison, the S&P 500 is up 50% during that time period. However, MRK and ABBV’s rise has been far from consistent. Returns for MRK stock were 2% in 2021, 49% in 2022, and 1% in 2023, while returns for ABBV were 32%, 24%, and 1%, respectively. In comparison, returns for the S&P 500 during those years were 27%, -19%, and 24%, respectively – suggesting that both MRK and ABBV underperformed the S&P in 2023.

Actually, consistently beats the S&P 500 – in good times and bad – has been difficult for individual stocks in recent years; for heavyweights in the healthcare sector such as UNH and JNJ and even for megacap stars GOOG, TSLA and MSFT. In contrast, the Trefis High Quality Portfolio with a collection of 30 stocks outperformed the S&P 500 every year in the same period. Why is that? As a group, the HQ portfolio stocks delivered better returns with less risk compared to the benchmark index; it was less of a rollercoaster ride, as evidenced by the HQ portfolio’s performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MRK and ABBV find themselves in a similar situation as in 2023 and perform worse than the S&P over the next 12 months – or will they see a sharp jump? We think Merck will outperform AbbVie.

2. Merck’s sales growth is better

Merck recorded an average annual sales increase 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 is 6.5% The increase from $45.8 billion to $54.3 billion was comparatively slower during this period.

Merck’s sales Growth has been driven by the success of Keytruda in recent years. Keytruda’s product range has expanded from non-small cell lung cancer to melanoma, head and neck cancer, cervical cancer, kidney cancer and many more indications, resulting in a 74% increase in sales to $25 billion in 2023, up from $14 billion in 2020. We expect Keytruda to peak at approximately $32 billion in annual sales and then decline as biosimilars are launched. Currently, Samsung Bioepis, Amgen, Sandoz and others are working on developing Keytruda’s biosimilars.

Note that Keytruda accounted for 42% of Merck’s total revenue in 2023 and the loss of market exclusivity will result in a significant drop in revenue. It will be challenging for Merck to fill this gap. For this reason, Merck has targeted inorganic growth and acquired Acceleron Pharma in 2021, Prometheus Biosciences in 2023 and Harpoon Therapeutics this year.

Unlike Keytruda, Merck’s HPV vaccine Gardasil has gained market share and its sales have increased 126% to $8.9 billion in 2023, compared to $3.9 billion in 2020. Similar to Keytruda, Gardasil will lose its market exclusivity in the US in 2028. However, the decline in Gardasil sales is likely to be less profound and painful for Merck than for Keytruda.

AbbVie’s revenue Growth was boosted by the acquisition of Allergan in 2020. The company is best known for its blockbuster drug Humira, which is used to treat rheumatoid arthritis and Crohn’s disease, among other conditions. Humira’s sales peaked at $21.2 billion in 2022 before declining 32.2% year-on-year to $14.4 billion in 2023, due to competition from biosimilars.

AbbVie can offset the revenue loss from Humira to some extent with market share gains in some of its relatively new drugs, most notably Skyrizi and Rinvoq. These drugs are used to treat psoriasis and rheumatoid arthritis. For comparison, these two products generated $11.7 billion in 2023, representing solid 53% year-over-year growth. Sales of the antidepressant Vraylar also rose 35% year-over-year in 2023 to $2.8 billion. In the six-month period ending June 2024, Skyrizi and Rinvoq continued their market share gains, with sales increasing 50% year-over-year to over $7 billion.

AbbVie is also pursuing inorganic growth. After acquiring Allergan in 2020, the company acquired ImmunoGen this year for $10.1 billion, giving it the rights to Elahere – a drug used to treat ovarian cancer – with estimated peak sales of over $2 billion.

3. Merck is more profitable and carries fewer risks

Merck’s operating margin fell from 13.4% in 2020 to 4.9% in 2023, while AbbVie’s operating margin will be 27.8% To 24.9% during this period. The margin decline for Merck in 2023 is due to a $10 billion charge recorded in the second quarter of 2023 for the acquisition of Prometheus. However, looking at the trailing twelve-month period, Merck’s operating margin is 25.7% performs better than 24.9% for AbbVie.

When it comes to financial risk, Merck fares better. 13% The share of debt as equity is lower than 21% for AbbVie. In addition, the cash ratio of 10% to assets is slightly higher than that of AbbVie (9%), which means that Merck has a better debt position and a larger cash cushion.

4. The web of everything

We see that Merck has better revenue growth, is more profitable, and carries less financial risk than AbbVie. Now, looking at the outlook, we believe Merck is the better choice of the two due to its better valuation. At its current level, MRK stock trades at 14 times forward earnings of $8.00 per share and adjusted in 2024. The 14x is largely in line with the average over the past few years, with the exception of 2023. This is because 2023 earnings per share of $1.51 was much lower due to $17.1 billion in R&D costs related to the Prometheus and Imago acquisitions, as well as upfront payments for collaboration agreements with Kelun-Biotech and Daiichi Sankyo.

In comparison, AbbVie stock, at its current price of around $194, trades at nearly 20 times expected 2024 earnings of $9.86 per share. This compares to 12 times the average P/E for ABBV over the past five years. In fact, the average analyst price estimate for ABBV of $178 implies 8% downside potential. On the other hand, the average analyst price estimate for MRK of $140 reflects over 20% upside potential.

Although MRK could surpass ABBV in the next three years, it is helpful to see how Colleagues from Merck Comparisons of important key figures. You can find further valuable comparisons for companies in various industries at Comparisons with other providers.

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