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Choose Merck over Pfizer, says Gordon Reid

Pharma and biotech stocks have underperformed for a while now but for investors currently sifting through the sector for ideas, your money may be better spent on Merck (Merck & Company Stock Quote, Charts, News, Analysts, Financials NYSE:MRK) rather than Pfizer (Pfizer Stock Quote, Charts, News, Analysts, Financials NYSE:PFE), according to portfolio manager Gordon Reid.

“I think you have to parse the healthcare sector into pieces — some parts are really struggling and I would reference the biotechs, in particular, and some parts of the pharmaceuticals, but others are doing quite well,” said Reid, CEO of Goodreid Investment Counsel, who spoke on BNN Bloomberg on Wednesday. 

“In particular Pfizer is a company you have to do a deep dive on because its results have been highly influenced by its success in the introduction of their COVID vaccine,” said Reid.

A clear example of that success is in Pfizer’s financials for the past year. 2021 saw the company’s COVID business boost revenue tremendously, with the company posting a full-year topline of $81.288 billion, which was almost double 2020’s total of $41.651 billion. Earnings were even more pronounced, with 2021’s net income at $21.979 billion compared to 2020’s $9.159 billion. (All figures in US dollars.)

That trend has continued this year, with Pfizer’s first quarter 2022, delivered last month, showing revenue up 77 per cent to $25.661 billion and net income up 61 per cent to $7.864 billion.

“We continue to supply the world with Comirnaty, which remains a critical tool for helping patients and societies avoid the worst impacts of the COVID-19 pandemic, and we are on track to fulfill our commitment to deliver at least 2 billion doses to low- and middle-income countries in 2021 and 2022, including at least 1 billion doses this year,” said Pfizer Chairman and CEO Albert Bourla in a press release. “In addition, we are delivering on our production commitments for Paxlovid, which is already having a profound impact on the lives of patients.”

The super-strong results seemed to have helped buoy PFE’s share price, too, where the stock has gone from a pre-pandemic range of $40-$45 to now roughly $50-$55, with a dividend yield of currently about three per cent.

But as far as non-COVID money-makers, Reid likes Merck’s pipeline better.

“The spike that we saw in [Pfizer’s] profitability in 2021 may wane a little bit going forward, so don’t get caught up too much in the current multiple because you might have a bit of a stagnant earnings picture going forward,” Reid said.

“Our choice in that area is Merck. We think that it trades at a very reasonable and sustainable multiple of about 12x and its major drug Keytruda is patent protected at least until 2026 — and I say at least because these drugs are highly complex and there are multiple patents on them, and some will expire at different times. So, [Keytruda’s] expiration is generally between 2026 and 2033, so a fairly long runway there,” he said.

“They’ve got a lot of great drugs in the pipeline, a lot of good opportunities on the Phase 3 drugs that have yet to be monetized. So, we would go towards Merck over Pfizer. It also pays a very very good dividend,” Reid said.

Merck has announced this year a number of positive developments in relation to its oncology immunotherapy drug Keytruda including clinical trial results, a US FDA approval of Keytruda as a single agent for the treatment of advanced endometrial carcinoma and expansions for the drug’s use in Japan and the European Union.

Merck’s first quarter 2022 results showed Keytruda revenues up 23 per cent to $4.809 billion and and revenues for HPV vaccine Gardasil up 59 per cent to $1.460 billion. The quarter saw Merck’s topline rise by 53 per cent year-over-year to $15.901 billion and net income increase to $5.429 billion compared to $2.947 billion a year earlier. Year-to-date, Merck’s share price is currently up 16 per cent.

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