Merck: doing the patent-cliff math
One drug is most of the profit, and its patent expires within the decade. The stock trades as if nothing replaces it. The pipeline says otherwise, but pipelines are promises, so I'm sizing this small.
Sample research report used to test the layout. Delete before launch.
Thesis
The market prices the cliff and ignores the pipeline. If half of the late-stage programs succeed, the cliff is mostly filled and the stock is cheap. If none do, it is fairly priced. That is an asymmetric bet worth a small position.
Catalysts
- Late-stage trial readouts through the year.
- Acquisitions that add revenue landing after the expiry.
Risks
- Trial failures, which are common and binary.
- Pricing legislation affecting the main drug earlier than expected.
What would prove me wrong
Two of the three largest late-stage programs failing. Then the cliff is real and the multiple is right.
Position
Small position, sized for the binary outcomes.