Expiring patents put Merck & Co. under pressure. The pharmaceutical giant wants to strengthen its innovative power with promising acquisitions. Merck’s current valuation should make investors sit up and take notice

Merck & Co. is continuing its shopping spree: the US drug giant is buying the biotech company Prometheus Biosciences, Inc., which specializes in #immune diseases, for almost eleven billion dollars to expand its drug portfolio. Merck paid 200 US dollars per share for the takeover – a premium of 75 percent on the #Prometheus stock price. For #Merck, this is the second billion-dollar takeover within a few months. In November, the company announced that it would buy the bone marrow specialist Imago Biosciences for 1.35 billion US dollars.

Merck has to compensate for many expiring patents for its products in the coming years – among others, the patent protection on its blockbuster cancer drug #Keytruda, which at around 21 billion US dollars is responsible for more than a third of the entire group’s sales, expires in 2028. At the same time, Merck’s Quant IP Patent Activity is significantly lower than it was a few years ago. While this was around 250 ten years ago, it had fallen to around 150 by 2018. Since then, activity has been on the rise again and most recently stood at just under 200. In the Quant IP Technology Benchmarking, which displays how the company was positioned within its peer group over time regarding its innovative output, Merck has also improved by one position to third place. 

Whether Prometheus can further strengthen the innovative power remains to be seen. The company has no approved products so far – but a promising drug for colitis and Crohn’s disease is currently in development. If this is approved, it could pay off: Merck CEO Robert Davis expects “a strong entry into immunology” and sustainable growth thanks to long patent terms. 

This could give the share further long-term impetus. In the past 12 months, the share has gained more than 30 percent thanks to strong business figures. Last year, Merck was able to increase its sales per share by more than 20 percent to 23 dollars. Earnings per share were 5.73 dollars – more than ten percent above the previous year’s earnings per share. At the beginning of this week, the share price climbed to an all-time high. At the same time, the P/E ratio of around 17 is relatively low compared to previous years, where the average price/earnings ratio was between 20 and 40. Another attractive feature for shareholders: Merck reliably pays a dividend and has been increasing it regularly for years. Mercks’s current annual dividend yield is 2.6%.

Conclusion: In view of the comparatively low P/E ratio, the stock is attractive despite its all-time high – especially since the company is constantly trying to buy innovation, as it did most recently with Prometheus.