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Long Ideas

Is Buffett Right about Merck (MRK)?

Berkshire Hathaway (NYSE: BRK.B) is bullish on Merck (MRK).  Warren Buffett’s company owned 22.4 million shares of the historical pharmaceutical house in November 2020, Barrons estimates.

Berkshire owns Merk & Company (NYSE: MRK) because of the cancer drug Keytruda, Cash Flow Kingdom’s Jonathan Weber speculates. Keytruda or Pembrolizumab is a “humanized antibody” used in cancer immunotherapy. Doctors use Keytruda to treat melanoma, lung cancer, head and neck cancer, Hodgkin lymphoma, and stomach cancer.

Cancer treatment is a growing business in the United States. The National Cancer Institute estimates there will be 1.807 million new cases of cancer in the United States in 2020.

Cancer is a Lucrative Business

Additionally, prostrate lung, and colorectal cancers account for 43% of all cancers diagnosed in America men and 50% of all new cancers diagnosed in American women in 2020. Plus, doctors will diagnose 39.5% of Americans with cancer in their lifetimes, the National Cancer Institute estimates.

Disturbingly cancer is a lucrative business. Americans spent $137.4 billion on cancer care medical expenditures in 2010, the National Cancer Institute estimates.  The institute estimates those expenditures grew to $150.8 billion in 2018.

Worldwide, there were 18.1 million new cancer cases in 2018, the International Agency for Research on Cancer estimates. Those numbers could rise to 29.5 million in 2040.

Merck as a Contrarian Investment in pharmaceuticals

Merck (MRK) can cash in on all that cancer with drugs such as Keytruda. However, Merck’s share price fell from $92.04 on 2 January 2020 to $81.94 on 4 December 2020 to $83.18 on 8 December 2020.

I think Merck’s share price has fallen because it do not have a coronavirus treatment. However, millions of people are still developing cancer. Thus, Merck is a contrarian investment in pharmaceuticals.

Moreover, Merck’s long-term prospects could be better than competitors such as Pfizer (PFE) because a COVID-19 vaccine could end the coronavirus pandemic. The New York Times estimates there were 87 preclinical coronavirus vaccines on 5 December 2020. Astonishingly, researchers are testing 58 of those vaccines in humans on clinical trials.

Can Merck Money without Coronavirus?

Importantly, 13 vaccines were in large-scale efficacy tests and authorities had approved seven vaccines for early or limited use, The Times claims. CNET claims one company, Pfizer (PFE) could produce 50 million coronavirus vaccine doses in 2020 and 1.3 billion vaccine doses in 2021.

Pfizer’s competitor Moderna (MRNA) claims it could manufacture 20 million vaccine doses in 2020 and 500 million to one billion doses in 2021, CNET notes. Thus, we could have enough vaccine to make 2.5 billion people immune to coronavirus in 2020. I think that will end the pandemic, if those arrogant claims are true.

Hence, companies such as Gilead Sciences (NASDAQ: GILD)could lose money on their coronavirus treatments. Gilead could lose money on remdesivir because coronavirus could infect nobody.

Is Merck Making Money?

Merck & Co (MRK) offered some impressive financial numbers on 30 September 2020.

Those financials include $12.551 billion in quarterly revenues, $9.07 billion in quarterly gross profits, and $3.23 billion in quarterly revenues. Those numbers rose from $10.872 billion in quarterly revenues, $7.713 billion in quarterly gross profits, and a quarterly of operating income of $3.212 billion on 30 June 2020.

Merck was growing dramatically before coronavirus. Stockrow estimates Merck’s revenues grew at a rate of 11.47% in the quarter ending on 31 March 2020. However, the quarterly revenue growth fell to -7.55% on 30 June 2020 and 1.24% on 30 September 2020.

Merck Generates Enormous Amounts of Cash

Merck generates cash from its business. Merck reported a quarterly operating cash flow of $2.173 billion on 30 September 2020. However, Merck reported a negative ending cash flow of -$3.746 billion on 30 September 2020.

Notably, Merck’s quarterly operating cash flow is negative because it pays enormous amounts of debt. Merck reported a financing cash flow -$3.851 billion on 30 September, meaning Merck paid $3.851 billion in debts.

Merck can generate enormous amounts of cash. Merck reported a $7.46 billion quarterly ending cash flow on 31 March 2020. The quarterly ending cash flow fell to $3.687 billion cash flow on 30 June 2020.

Consequently, Merck had $7.356 billion in cash and short-term investments on 30 September 2020. The cash and short-term investments fell from $11.103 billion on 30 June 2020.

What Value Does Merck Have?

Merck & Co (MRK) offered enormous value in the form of $89.8 billion in total assets on 30 September 2020. The total assets fell from $90.615 billion on 30 June 2020 and rose from $84.913 billion on 31 March 2020.

I consider Merck an excellent dividend stock because it will pay a quarterly dividend of 65₵ on 8 January 2020. That dividend will rise from 61₵ on 7 October 2020. Overall, Merck offered a forward annualized dividend of $2.60 and an annualized dividend yield of 3.17% on 8 December 2020.

In the final analysis, I think Buffet is right about Merck (MRK). This stock is cheap, the company, and it pays a good dividend. If you want a moneymaking pharmaceutical stock you need to investigate Merck.