In this piece, I have evaluated two pharma stocks, Aurora Cannabis Inc. (ACB) and Merck & Co., Inc. (MRK), to determine which holds greater potential for investors. While investors could consider MRK, they should avoid ACB.
But first, let’s take a quick look at the industry landscape.
The global use of medicines rose by 14% over the past five years, and a 12% rise is projected through 2028, bringing annual usage to 3.80 trillion defined daily doses. The growing prevalence of chronic diseases and rising demand for medical care amid the increasing aging population have contributed to the pharma market’s resilience in the future.
Moreover, incorporating advanced technologies would accelerate drug discovery, expedite clinical trials, and enhance supply chain efficiency, fostering innovation in pharmaceuticals. This should bode well for the pharma industry in the future. Consequently, the U.S. pharmacy market is forecasted to reach $708.90 billion by 2030, growing at a CAGR of 3.7%.
Given this backdrop, let’s compare two Medical – Pharmaceuticals stocks, Aurora Cannabis Inc. (ACB) and Merck & Co., Inc. (MRK), to understand why MRK holds a greater potential for investors.
The Case for Aurora Cannabis Stock
Headquartered in Edmonton, Canada, Aurora Cannabis Inc. (ACB) produces, distributes, and sells cannabis and cannabis-derivative products. It operates through three segments: Canadian Cannabis; European Cannabis; and Plant Propagation. Its market cap currently stands at $385.17 million.
ACB’s stock has declined 2.1% intraday to close the last trading session at $7.06.
In terms of forward EV/EBITDA, ACB is trading at 33.32x, 154.6% higher than the industry average of 13.09x.
ACB’s trailing-12-month gross profit margin of 30.91% is 45.8% lower than the industry average of 57.06%. Moreover, its trailing-12-month EBIT and EBITDA margins are negative at 20.14% and 12.08%, compared to industry averages of 1.08% and 5.60%, respectively.
In the fiscal third quarter that ended December 31, 2023, ACB's consumer cannabis net revenue declined 20.6% from the prior-year quarter to CAD11.62 million ($8.60 million), while its net loss from continuing operations stood at CAD25.22 million ($18.66 million).
The company sold 14440 kilograms of dried cannabis, down by 829 kilograms year-over-year. The decrease was mainly due to the decision to allocate product to higher margin markets.
Analysts expect ACB’s EPS for the fiscal year 2024 (ended March 2024) to be negative $1.15, while revenue is expected to be $199.85 million. It failed to surpass the consensus EPS estimates in three of the trailing four quarters.
ACB’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an F grade for Sentiment and a D for Growth and Stability. Within the D-rated Medical - Pharmaceuticals industry, ACB is ranked #109 out of 161 stocks.
To see additional POWR Ratings for Value, Momentum, and Quality for ACB, click here.
The Case for Merck & Co. Stock
Valued at $323.32 billion by market cap, Merck & Co., Inc. (MRK) offers health solutions through its prescription medicines, including biological therapies, vaccines, and animal health products. The company operates through Pharmaceutical and Animal Health segments.
The stock has gained 25% over the past six months to close the last trading session at $127.66. Over the past year, it has gained 17.3%.
MRK has been paying dividends to its shareholders for the past 34 years. Its annualized dividend of $3.08 per share translates to a dividend yield of 2.37% on the current share price. Its four-year average yield is 2.95%. Over the past three and five years, MRK’s dividend payments have grown at CAGRs of 7.7% and 8.8%, respectively.
In terms of forward non-GAAP Price/Earnings, MRK is trading at 14.86x, 23.1% lower than the industry average of 19.33x. The stock’s forward EV/EBITDA multiple of 12.07 is 7.8% lower than the industry average of 13.09 and 63.8% less than ACB on this basis.
MRK’s trailing-12-month asset turnover ratio of 0.56x is 41.5% higher than the industry average of 0.39x. Its trailing-12-month EBIT and levered FCF margins of 7.59% and 3.54% are 601.3% and 254.5% higher than the industry averages of 1.08% and 1.00%, respectively.
In 2023, MRK invested approximately $30 billion in research and development in its ongoing effort to discover, develop, and collaborate to propel the next generation of impactful innovations.
For the fiscal fourth quarter that ended December 31, 2023, MRK’s sales increased 5.8% year-over-year to $14.63 billion. For the same quarter, its non-GAAP net income and non-GAAP EPS stood at $66 million and $0.03, respectively.
MRK projects worldwide sales to be between $62.7 billion and $64.2 billion, while non-GAAP EPS is anticipated to range between $8.44 and $8.59.
Street expects MRK’s revenue and EPS for the fiscal first quarter that ended March 2024 to increase 4.6% and 45.9% year-over-year to $15.15 billion and $2.04, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
MRK’s robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
MRK has a B grade for Growth, Stability, Sentiment, and Quality. It is ranked #5 within the same industry.
Click here for the additional POWR Ratings for MRK (Value and Momentum).
The Winner
The pharmaceutical industry is expected to showcase resilience thanks to the increasing integration of advanced technology and the persistent demand for innovative healthcare solutions. Both ACB and MRK stand to capitalize on these burgeoning industry trends.
However, ACB's elevated valuation, low profitability, bleak financials, and pessimistic outlook favor its competitor, MRK, as the better pharma stock pick. Additionally, MRK's track record of consistent dividend payouts over the past three decades further solidifies its position.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Medical – Pharmaceuticals industry here.
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MRK shares rose $0.21 (+0.16%) in premarket trading Friday. Year-to-date, MRK has gained 18.02%, versus a 8.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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