Issue #28

These drug manufacturers thrive on steady demand and innovation, not market moods.

As inflation lingers and interest rates remain elevated, investors are shifting focus to sectors where demand doesn’t flinch — even when the economy does. Healthcare, especially drug manufacturing, stands out as one of the few industries where pricing power and necessity go hand in hand.

👉 One company is a global powerhouse, dominating oncology with billion-dollar blockbusters.
👉 The other is rewriting the rules of innovation with high-margin treatments in rare diseases and specialty care.
👉 Both offer stable cash flow, defensive balance sheets, and long-term growth — no matter the market cycle.

In this edition, we spotlight two pharmaceutical leaders with inelastic demand and inflation-proof fundamentals.

Merck & Co. (NYSE: MRK)

Merck & Co. (MRK) is a global healthcare giant that focuses on discovering, developing, manufacturing, and marketing prescription medicines, vaccines, biologic therapies, and animal health products. Its status as an established pharmaceutical leader, with a portfolio of high-value, patent-protected drugs for critical needs, makes it a resilient, potential "inflation-proof" candidate, as demand for its key therapies remains relatively inelastic to economic cycles.

Business Model and Revenue Streams 📦

Merck's business model is fundamentally driven by innovation and intellectual property protection. The company invests massively in Research and Development (R&D) to create novel, complex, and high-margin drugs and vaccines. Its revenues are primarily generated from two core segments:

• Human Health Pharmaceuticals (Largest Stream): This segment is the dominant revenue generator, led by the blockbuster immuno-oncology drug Keytruda (pembrolizumab), which accounts for a significant portion of total sales. Other key drivers include its vaccine portfolio, notably Gardasil/Gardasil 9 (for HPV), and emerging drugs in areas like cardiovascular and pulmonary treatments (e.g., WINREVAIR). The high gross margins on these patent-protected products provide a strong profit shield.
• Animal Health: This segment provides a diversified, stable income stream from a range of veterinary medicines and vaccines for both livestock and companion animals. This segment often acts as a reliable buffer, providing consistent growth even when the human health segment faces temporary headwinds.

Macroeconomic and Policy Impact 🌎

As a major pharmaceutical company, Merck is not immune to global pressures, but its unique position offers some protection:

The pricing power of patent-protected drugs, especially for life-saving or chronic conditions like cancer, allows Merck to potentially offset rising manufacturing and R&D costs, making it less susceptible to general inflation compared to other sectors. Demand for essential medicines is generally non-cyclical, minimizing the impact of a recession. However, the most significant policy headwind is the US Inflation Reduction Act (IRA), which includes provisions for government negotiation of drug prices. This could pressure long-term revenue and profitability, particularly for high-selling drugs like Keytruda in the future. Merck is actively managing this risk by aggressively diversifying its pipeline.

Recent Performance and Corporate Developments 📈

Merck reported robust financial results for the Third Quarter of 2025 (Q3 2025), beating analyst expectations on both the top and bottom lines.

Q3 2025 Financial Highlights Summary: 💰

• Total Revenue and Profitability Beat: Total revenue grew 4% year-over-year to $17.3 billion, exceeding analyst forecasts. More notably, Non-GAAP EPS soared by 64% to $2.58, comfortably beating consensus estimates.
• Keytruda Dominance: The flagship immuno-oncology drug, Keytruda, remained the primary growth engine, with sales increasing 8% to $8.1 billion.
• New Launch Contributions: New products, including the cardiovascular treatment WINREVAIR and the pneumococcal vaccine CAPVAXIVE, demonstrated strong uptake and made increasing contributions to the top line.
• Gardasil Headwind: Growth was tempered by the vaccine segment, as Gardasil sales fell 24% to $1.75 billion, mainly attributed to reduced demand in the Chinese market.

Strategic Initiatives and Mergers: 🤝

Merck remains committed to augmenting its pipeline through strategic Business Development.

• Mergers/Acquisitions: The company completed the strategic acquisition of Verona Pharma in October 2025. This deal provides Merck with a novel, first-in-class maintenance treatment for chronic obstructive pulmonary disease (COPD), expected to be a multi-billion dollar growth driver into the next decade.
• Pipeline Advancements: The company is actively building its next wave of growth to prepare for Keytruda's eventual loss of exclusivity (Keytruda Cliff). Key late-stage pipeline assets expected to drive future revenue include the cardiovascular drug sotatercept (WINREVAIR) and the investigational oral PCSK9 inhibitor, enlicitide (for cholesterol), both with multi-billion dollar peak sales potential.

Path to Sustained Value and Fair Price 🎯

Merck is a highly profitable company, and its path to sustained value is focused on successfully transitioning its growth drivers beyond the Keytruda era.

The company's valuation appears fair to attractive, trading at a Price-to-Earnings (P/E) ratio notably below the US Pharmaceuticals industry average, suggesting it may be undervalued relative to its consistent profitability and strong free cash flow (FCF). The key to long-term price appreciation rests on the successful commercialization of its deep, late-stage pipeline.

• Analyst Estimates and Ratings:
• Consensus Rating: The strong majority of analysts maintain a "Buy" or "Outperform" rating. Recent ratings show approximately 13 Buys and 13 Holds, with no Sell ratings reported, demonstrating high conviction in its stability.
• Price Target: The average 12-month price target is approximately $102.00, indicating a substantial potential upside from its recent trading price around the mid-$80s. This suggests analysts believe the current valuation does not fully reflect the pipeline's future value.

Investor-Focused Takeaway: Is MRK a True Inflation-Proof Stock?

Merck's business model—centered on essential, patent-protected drugs with high margins—gives it significant pricing power and resilience against general inflation and economic downturns. The strong Q3 2025 performance, combined with aggressive pipeline expansion and strategic acquisitions, demonstrates a clear strategy to evolve beyond its current top-seller.

Recommendation

Merck (MRK) is viewed as a strong long-term investment, backed by a clear path for growth that is supported by strong analyst consensus. Its ability to maintain high margins on essential, non-discretionary products solidifies its position as a compelling inflation-resistant investment for a diversified long-term portfolio.

AstraZeneca (NASDAQ: AZN)

AstraZeneca (AZN) is a multinational pharmaceutical and biotechnology company focused on transforming care across three key therapeutic areas: Oncology, BioPharmaceuticals (Cardiovascular, Renal, and Metabolism (CVRM) and Respiratory & Immunology (R&I)), and Rare Disease (via its Alexion acquisition). Its success is driven by a deep, productive pipeline and a geographic footprint that includes fast-growing emerging markets, establishing it as a highly resilient, inflation-resistant investment.

Business Model and Revenue Streams 📦

AstraZeneca’s business model is centered on a high-risk, high-reward strategy that prioritizes scientific innovation and proprietary intellectual property. The company commits heavily to Research and Development (R&D), which consistently runs in the low-to-mid 20s percentage range of total revenue, to develop novel, complex, and patented treatments.

• Primary Revenue Streams:
  • Oncology (Largest Stream): Home to blockbuster drugs like Tagrisso, Imfinzi, and Lynparza, oncology is the largest and fastest-growing segment, providing high-margin, life-saving therapies with inelastic demand.
  • BioPharmaceuticals (CVRM & R&I): Key drugs like Farxiga (diabetes/cardiovascular) and Symbicort/Fasenra (respiratory) provide foundational, durable revenue from chronic conditions.
  • Rare Disease (Alexion): The acquisition of Alexion in 2021 significantly diversified revenue with specialized, ultra-high-margin treatments (e.g., Soliris/Ultomiris) that address areas of high unmet medical need.

Macroeconomic and Policy Impact 🌎

Like Merck, AstraZeneca's business is fundamentally non-cyclical, providing a natural hedge against general economic inflation and recessionary environments.

• Inflation and Recession Resilience: The demand for the company's patented, critical-care medicines (especially in cancer and rare diseases) is inelastic. Patients require these drugs regardless of the economic climate, allowing AZN to maintain strong pricing power and gross margins, which currently hover around 82% (adjusted basis).
• Policy and Legislative Pressure: The company faces policy headwinds, particularly the US Inflation Reduction Act (IRA), which will impact drug pricing over the long term. AZN is mitigating this by:
  1. Accelerated R&D and Launches: Pushing to launch new, high-value drugs before they become eligible for price negotiation.
  2. Geographic Diversification: Strong growth in Europe, China, and Emerging Markets reduces dependence on the evolving US policy landscape.

Recent Performance and Corporate Developments 📈

AstraZeneca continues to deliver on its ambitious growth strategy, highlighted by strong performance and strategic pipeline updates.

Q3 2025 Financial Highlights Summary (Estimated): 💰

• Total Revenue is expected to grow by a mid-to-high single-digit percentage, driven by strong double-digit growth in its core Oncology and CVRM segments.
• Core EPS is projected to be approximately $1.14, with consensus estimates predicting an over 9% year-over-year increase, reflecting continued operating leverage.
• Oncology Sales are expected to show continued double-digit growth, with blockbusters like Tagrisso and its cutting-edge Antibody-Drug Conjugates (ADCs) remaining central growth drivers.
• Rare Disease (Alexion) segment performance is anticipated to be strong, with an expected return to double-digit growth, stabilizing this crucial high-margin revenue base.

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Strategic Initiatives and Mergers: 🤝

AstraZeneca is aggressively using M&A and partnerships to expand its therapeutic reach and prepare for its $80 billion revenue target by 2030.

• Pipeline Augmentation: The company recently announced significant partnerships, including collaborations in AI-powered precision medicine and new deals to bolster its Antibody-Drug Conjugate (ADC) platform, which is considered a next-generation cancer treatment.
• Acquisition Focus: While no massive, recent mergers were reported in the last quarter, AZN continues its strategy of bolt-on acquisitions (e.g., Amolyt Pharma earlier in the year) to acquire mid-stage rare disease and specialty assets, further diversifying revenue and deepening its pipeline.
• Strategic Listing Change: The company recently announced plans to harmonize its share listing structure across the LSE, Nasdaq Stockholm, and NYSE. This is a strategic move to access a broader mix of global investors and enhance liquidity.

Path to Sustained Value and Fair Price 🎯

AstraZeneca is a highly profitable, growth-focused company, and its value proposition is tied to its exceptional pipeline delivery.

• Sustained Profitability: AZN's path to value is underpinned by successfully launching 20 new molecular entities (NMEs) by 2030 to achieve its $80 billion revenue goal. High R&D spend is accepted by the market because it fuels this future, high-margin revenue.
• Valuation and Fair Value: On traditional metrics, AZN trades at a slight premium with a P/E ratio of approximately 30.6x, above the industry average. However, when accounting for its high-growth trajectory (as measured by its PEG ratio), many analysts view the stock as fairly valued to undervalued because the current price may not fully reflect the potential of its rich, late-stage pipeline, particularly in oncology and weight-management therapies.
• Analyst Estimates and Ratings:
  • Consensus Rating: The consensus rating is a "Strong Buy". In the last 30 days, the vast majority of analyst actions have been Buy or Outperform, confirming its status as a highly favored stock among professional analysts.
  • Price Target: The average 12-month price target is approximately $89.73 (USD), suggesting a significant potential upside from the current price. Some high-end targets place the fair value well over $100.

Investor-Focused Takeaway: Is AZN a True Inflation-Proof Stock?

AstraZeneca offers a compelling mix of pharmaceutical defensive stability and aggressive, innovation-driven growth. Its high-margin, patent-protected drugs in non-cyclical sectors like oncology and rare diseases provide a near-perfect hedge against inflation and economic downturns. The company's commitment to strategic M&A and pipeline development ensures a solid foundation for long-term shareholder value.

🧬 Final Take: Two Inflation-Proof Pharma Giants Built for Long-Term Growth

In an era where market volatility, inflation, and rising rates continue to challenge investors, Merck (MRK) and AstraZeneca (AZN) shine as dependable anchors in any portfolio. Both companies are global leaders in life-saving therapies with pricing power, patent protection, and a steady stream of innovation—making them resilient in any macroeconomic environment.

💊 Merck (MRK) – A Defensive Powerhouse with Blockbuster Strength
✔ Keytruda dominance + pipeline diversification for post-LOE growth
✔ 64% EPS growth in Q3 and a deep bench of cardiovascular + oncology launches
✔ Strong analyst backing with ~20% upside from current levels
➤ Best for: Income and value-focused investors seeking healthcare stability, essential product demand, and consistent cash flow.

🧪 AstraZeneca (AZN) – The Innovation-Led Growth Engine in Rare Disease and Oncology
✔ World-class pipeline with 20+ NMEs targeted by 2030
✔ High-margin rare disease portfolio + cutting-edge ADC oncology assets
✔ PEG-adjusted valuation suggests room to run, with high-end targets over $100
➤ Best for: Growth-minded investors looking for inflation-resistant exposure to the next wave of biopharma breakthroughs.

Investor Insight:

🧱 Want a low-volatility, dividend-paying pharma giant with blockbuster cash flows and defensive margins? → MRK
​ 🚀 Want a high-R&D-growth biotech hybrid poised for breakout therapies and aggressive global expansion? → AZN

In a world of uncertainty, these two names offer certainty of purpose—and a long runway of opportunity.

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Happy Trading
​— Team Premium Stock Alerts