Politicians on both sides of the aisle, including President Trump, make a habit of bashing drug companies for supposedly fleecing consumers. Some of these allegations have merit; others are hyperbole. Regardless, the rhetoric plays well with the public.

As Big Pharma and other health services companies get pilloried by elected officials for “greed,” investors fear increased government pressure on prices. This apprehension has kept drug stock valuations in check.

The populist grandstanding has grown more strident since the midterm elections, which gave control of the U.S. House of Representatives to the Democrats, the majority of whom skew to the left.

And yet, despite a cooling global economy, the demand for pharmaceuticals remains explosive. Aging populations around the world are clamoring for more health services, including drug treatments.

If you’re looking for exposure to the booming drug industry, a standout name is Merck (NYSE: MRK). Is Merck a good stock to buy in 2019? Or will political and economic headwinds catch up with the company? Let’s find out.

What Is Merck?

Merck (market cap: $212.4 billion) has been a solid performer in the health care field for decades. The company operates in four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances.

Based in Kenilworth, New Jersey, Merck is a leader in producing effective anti-cancer medicines and therapies. A standout drug for Merck is Keytruda, for the treatment of recurrent or metastatic cancer.

The company also offers treatments for cardiovascular diseases, diabetes, asthma, nasal allergy symptoms, chronic hepatitis C, HIV-1 infection, and other ailments.

Merck produces such widely advertised medicines as Vytorin (for treating cholesterol) and Fosamax (for osteoporosis).

How Has Merck Stock Performed?

• Over the past 12 months, Merck has gained 52% compared to a 5.9% gain for the S&P 500.
• Over the past two years, Merck has gained 29.5% compared to a 18.5% gain for the S&P 500.
• Over the past five years, Merck has gained 47%, the S&P 500 has gained 50.7%, and the benchmark iShares U.S. Pharmaceuticals ETF (IHE) has gained 22.6%.

How Has Merck Performed In 2017/2018?

• In 2017, Merck lost 6.4% and the S&P 500 gained 19.4%.
• In 2018, Merck gained 36.1% and the S&P 500 lost 7.5%.

Who Are Merck’s Rivals?

Pfizer (NYSE: PFE)

Based in New York City, Pfizer develops and produces medicines and vaccines in the fields of immunology, oncology, cardiology, endocrinology, and neurology.

Pfizer (market cap: $235.3 billion) makes a wide variety of blockbuster drugs, including Lipitor to lower blood cholesterol; Lyrica for neuropathic pain; Diflucan, an oral antifungal medication; Zithromax, an antibiotic; Celebrex, an anti-inflammatory drug; and Viagra for erectile dysfunction.

The loss of key patents covering Lipitor and Celebrex packed some unwanted punishment to Pfizer’s top and bottom lines. Viagra also is seeing sales erosion due to copy-cat drugs.

Read This Story: Our Pfizer Stock Prediction In 2019 (Buy or Sell?)

Abbott Laboratories (NYSE: ABT)

With a market cap of $21.6 billion, Abbott Laboratories is one of the world’s largest producers of prescription drugs, diagnostic tests and vision care products.

The company’s drug portfolio includes Humira, for rheumatoid arthritis, psoriatic arthritis, Crohn’s disease, and psoriasis; Norvir, for HIV; Depakote, an anticonvulsant; and Synthroid, a synthetic thyroid hormone.

Based in Abbott Park, Illinois, Abbott also offers a wide range of medical devices and diagnostic tests used worldwide by doctor’s offices, hospitals, laboratories, and blood banks to diagnose, monitor and treat diseases such as cancer, HIV, hepatitis, heart failure and metabolic disorders.

Read This Story: Our Abbott Stock Prediction In 2019 (Buy or Sell?)

Bristol-Myers Squibb (NYSE: BMY)

This drug giant (market cap: $10.6 billion) makes a wide range of drug treatments for several diseases and ailments, including cancer, cardiovascular disease, diabetes, hepatitis, rheumatoid arthritis, and HIV/AIDS.

Notably, Bristol-Myers Squibb makes anti-cancer drug Taxol that’s under study for reducing tumor growth.

Taxol is a cancer chemotherapy medication that interferes with the growth of cancer cells and slows their growth and spread in the body.

In January 2019, Bristol-Myers Squibb announced it would acquire Celgene (NSDQ: CELG) for $74 billion, in a deal that would be the largest pharmaceutical company acquisition in history.

Merck faces competition from several other large drug firms as well.

Read This Story: Our AbbVie Stock Prediction in 2019 (Buy or Sell?)

Will Merck Go Up In 2019 (Should You Buy)?

Merck is a Big Pharma player, but it has been adroitly co-opting the competition from small, innovative biotechs.

Notably, Merck in March 2019 exercised its option to extend its strategic collaboration with NGM Biopharmaceuticals, initiated in February 2015, for an additional two-year period from March 2020 to March 2022. NGM is a clinical-stage “disruptor” developing a range of novel therapies for unmet medical needs.

NGM is breaking new ground in immunology. Research surrounding immunotherapy is a hot scientific area, as scientists and physicians try to find a way to get the body to fight diseased by itself.

Merck’s underlying financial numbers are solid, including a long-term debt-to-equity ratio of 0.74, most recent quarter (MRQ), roughly in line with the industry average of 0.73 and lower than the S&P 500 average of 0.95. Most important for a drug maker, Merck’s research pipeline has a strong track record. In 2018, Merck spent $9.7 billion on research.

A robust pipeline is vital for pharmaceutical companies, because it can take about 20 years and $1 billion to create a new drug and usher it through the byzantine testing and approval process.

According to research firm Evaluate, worldwide prescription drug sales are projected to grow 6.4% annually through 2024, to reach $1.2 trillion.

Meanwhile, the broad drug manufacturing sector is in the throes of sweeping consolidation, as companies seek economies of scale, ready-made products, and quick access to new markets. Drug companies also must contend with cost containment measures in the U.S. and western Europe that weigh on pricing.

Merck is benefiting from proactive management that’s forging expansion strategies, especially through acquisitions that bring the company into new global markets and drug treatment categories.

In this video, Merck CEO Kenneth Frazier discusses trends in the drug and health services industry and his company’s strategic plans.

Merck boasts a strong balance sheet, with $8.8 billion in cash on hand (MRQ). That’s a powerful war chest with which to play offense in a rapidly consolidating industry. Free cash flow in 2018 came to a robust $8.3 billion, a considerable jump from the $4.5 billion generated in 2017.

Which brings me to the stock’s dividend. It’s from free cash flow that dividends are paid and MRK currently boasts a dividend yield of 2.68%, well above the S&P 500 average of 1.89%.

Merck’s forward 12-month price-to-earnings ratio (FPE) is 15.7, lower than the S&P 500’s FPE of 17.5, roughly in line with the FPE of Pfizer (13.7), and a modest premium to Abbott (10.8) and Bristol-Myers Squibb (10.8).

Merck pays out more of its earnings in the form of dividends than its major competitors, even while keeping debt low and funding a large research and development (R&D) program. Merck spent $9.7 billion in 2018 on R&D, a driving force behind the company’s success in launching new drugs.

Will Merck Go Down In 2019 (Should You Sell)?

The bear case against Merck applies to its peers as well.

The largest drug companies in the U.S. continue to struggle through the process of drug-patent expirations.

Growth in the U.S. generics market is slowing because fewer branded drugs are coming off patent. Drug companies also face pricing pressure in the U.S. and western Europe.

The broad pharmaceutical sector continues to experience consolidation, as cash-rich giants wield their financial wherewithal to gobble up competitors. Mega-cap firms sometimes make strategic missteps and overpay for companies that don’t pan out.

Meanwhile, all it takes is a negative ruling from the U.S. Food and Drug Administration (FDA) to tank a drug company’s stock. Last year, pharmaceutical stocks under-performed, due to unexpected clinical trial failures of seemingly promising drugs.

Overall Merck Forecast And Prediction For 2019

For starters, will rising political heat scorch Merck and its peers this year? Very unlikely.

As a journalist, I’ve covered lawmakers for decades. I’ve even worked on Capitol Hill as a press secretary to a congressman. And here’s what I’ve learned about the politicos in both parties: Watch what they do, not what they say.

Since Trump’s surprise election as president in 2016, there has been nothing in the way of meaningful legislation or regulations to control the drug industry. Nada. Bloviating on TV gabfests is one thing; passing laws is another.

You can expect the government’s hands-off attitude toward the pharmaceutical industry (toward all industries, actually) to remain intact into the foreseeable future, which is manna for Big Pharma.

A crucial catalyst for global drug growth is a rising middle class in emerging markets that’s increasing spending on the quality of life. And for quality of life, what ranks higher than health care, other than food and shelter?

Merck’s top sellers and a strong pipeline of new drugs are offsetting most losses from patent expirations. At the same time, Merck’s renewed focus on unmet medical needs should pay off handsomely down the road.

Merck also is making forays into the latest drug development fields, such as immunology, through acquisition. In late February, Merck and Immune Design (NSDQ: IMDZ) announced that the companies have entered into a definitive agreement under which Merck will acquire Immune Design in a deal worth $300 million. Immune Design is a late-stage immunotherapy company.

The average analyst expectation is for Merck to generate year-over-year earnings growth of 12% next year. Over the next five years, Merck’s earnings are expected to grow 9.8%, on an annualized basis.

Some of Merck’s big-cap rivals are worthy investments right now, especially industry leader Pfizer. However, Merck stands apart from the pack in terms of financial strength, new potential blockbusters, and earnings growth potential.

In the drug business, market-dominating ideas are everything, since the “marginal cost” of making one more pill is trivial. Merck has an outstanding track record of developing those ideas, such as its blockbuster Keytruda.

In 2018, regulators approved six new Keytruda indications in the U.S, five in Japan, and three in the European Union. In fiscal 2018, Merck delivered 5% revenue growth and 11% earnings per share growth, on a year-over-year basis. Keytruda sales were a major growth driver. More potential blockbuster drugs are now wending their way through Merck’s developmental pipeline.

For investors in 2019 and beyond, Merck is positioned to remain a money-making machine.

John Persinos is the managing editor of Investing Daily.