Merck Just Announced a $10 Billion Deal That Will Help Diversify Its Business

Key Points

• Merck aims to boost its business by buying Verona Pharma for $10 billion.

• Through the deal, it will add Ohtuvayre -- a treatment for COPD -- to its portfolio.

• With the stock valued at only 12 times earnings and yielding over 4%, it's a steal of a deal.

• 10 stocks we like better than Merck ›

One of the biggest concerns with healthcare giant Merck (NYSE: MRK) is its dependence on top-selling cancer drug Keytruda. While it has been a beast for the business over the years, generating billions in revenue, investors are always concerned about what else is ahead for the business in the long run and how strong the company's growth prospects will be, especially as patents run out.

Recently, Merck announced an important acquisition, which may alleviate some of those concerns around its future growth. For the price of $10 billion, it's acquiring Verona Pharma (NASDAQ: VRNA). Here's what that might mean for Merck's operations, and whether it makes the stock a no-brainer buy right now.

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Image source: Getty Images.

What Merck gets with the Verona Pharma deal

For $10 billion, Merck is acquiring a promising healthcare company which is in the early stages of its growth. Key to its potential is Ohtuvayre, a blockbuster drug that regulators approved last year as a treatment for chronic obstructive pulmonary disease (COPD). Analysts estimate that it could generate $1 billion in annual revenue by 2029.

Verona has already been generating strong results of late. Sales through the first three months of the year for Ohtuvayre totaled $71.3 million, which was nearly double what it generated in the previous period. The product's growth has been exciting, and that's ultimately the big hope for Merck -- that Ohtuvayre becomes a key pillar for its overall growth.

Verona's CEO, David Zaccardelli, believes that with the help of Merck, Ohtuvayre could take off. He said: "We believe Merck's commercial footprint and industry-leading clinical capabilities will help accelerate the potential of Ohtuvayre to reach more patients living with COPD."

There is hope that Ohtuvayre may be a possible treatment option for other indications as well, with Verona involved in multiple other trials for the drug, including as a treatment for cystic fibrosis and asthma.

Merck expects the deal to close before the end of the year.

Merck could use another growth catalyst

A key problem for Merck is that its business simply hasn't been generating strong growth in recent years. In its most recent quarter (ended in March), sales were down by nearly 2% year over year.

MRK Operating Revenue (Quarterly YoY Growth) data by YCharts.

The good news is that with Winrevair, which is approved for pulmonary arterial hypertension, still in its early stages and now with potentially Ohtuvayre in the mix, Merck's top line may receive a boost on multiple fronts in the near future. A new injectable version of Keytruda may soon become available as well (Keytruda is currently administered intravenously).

While Merck may not have been an exciting growth stock to own of late, its future does appear to be getting brighter, especially as it diversifies its operations.

Has Merck become a no-brainer buy?

Merck's business is stronger with the acquisition of Verona, and with the stock trading at only 12 times its trailing earnings, it's one of the best healthcare stocks you can buy right now. Not only is it cheap, but with underrated growth prospects and a dividend that yields more than 4%, it may be a steal of a deal.

The stock was arguably a good buy even before the Verona acquisition news, and it's an even better-looking buy right now. Although shares of Merck are down 16% this year and there are headwinds facing drugmakers today due to tariffs and trade wars, if you're in it for the long haul, buying and holding Merck stock could pay off significantly in the years ahead.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.