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Merck’s Position Compared with Its Peers

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Jun. 25 2015, Updated 8:05 a.m. ET

How Merck compares with its peers

Based in New Jersey, Merck & Co. (MRK) is a biopharmaceutical giant with operations worldwide. Some of its major competitors in the biopharmaceuticals sector include Novartis AG (NVS), GlaxoSmithKline (GSK), Pfizer (PFE), and Teva Pharmaceuticals (TEVA).

Big Pharma and healthcare companies generally carry high debt on their accounting balance sheets. The EV/EBITDA (or enterprise value to earnings before interest, tax, depreciation, and amortization) is often used to value capital-intensive companies. The following chart shows the forward enterprise multiple (or forward EV/EBIDTA multiple) trend over the past five years for Merck, as well as the Big Pharma average.

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EV/EBIDTA Multiple

The forward EV/EBIDTA multiple for Merck & Co. is nearly 12x, which is much lower than the industry average of around 15x. This is due to the revenue reduction following the expiration of a patent. Companies like Bristol-Myers Squibb (BMY) and Eli Lilly (LLY) have a higher enterprise multiple of over 24x and 17x, respectively.

PE Multiple

The price-to-earnings (or PE) multiple is one of the simplest multiples used for valuations. A forward PE multiple represents the estimates of the PE multiple for the next 12 months. The forward PE ratio for Merck is estimated to be ~17.1x for 2015, while it is expected to be ~18.8x for the industry. The estimate of Merck’s PE-to-growth ratio is 4.20. Merck is trading at an average PE similar to other pharmaceutical companies, and EPS growth does not have much impact on the PE of these companies.

Merck & Co. (MRK), Pfizer (PFE), Gilead Sciences (GILD), and Johnson & Johnson (JNJ) together form over 29% of the total assets of the Healthcare Select Sector SPDR ETF (XLV).

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