There’s a lot to like here.
No matter how well the stock market is performing, investors can always find some companies that aren’t keeping pace with broader equities. This year, pharmaceutical giant Merck (MRK -1.79%) is it: The drugmaker’s shares are down by 2% in 2024 while the broader S&P 500 is up by 21%.
Even when we zoom out, Merck hasn’t performed particularly well in recent years. The company has significantly trailed the S&P 500 over the past decade.
Does that mean investors should stay away from Merck? Maybe not. Let’s look at how it might perform in the next half-decade.
The dreaded patent cliff
Merck’s most important product is Keytruda, a cancer drug that has won approval to treat scores of indications. Keytruda has been the best-selling medicine in the world since last year, when it generated $25 billion in sales. Merck’s total revenue for the year was $60.1 billion, so Keytruda accounted for about 41.5% of the company’s top line.
What will Keytruda’s trajectory look like through 2029? The medicine’s sales should continue growing until 2028, when it will hit peak sales above $30 billion, according to some estimates. However, Merck will then lose patent exclusivity for its cash cow, so Keytruda’s sales will drop off a cliff, likely dragging Merck’s entire revenue along with it.
Thankfully, Merck has a plan. The company is developing a subcutaneous version of Keytruda, whose target population it thinks will be about 50% of Keytruda’s 2028 total patient pool.
It remains to be seen how many of them would actually switch to the subcutaneous version, whose patent exclusivity would extend beyond 2028. But by the end of the decade, the company should be on its way to replacing Keytruda as its now sold with a new formulation of the medicine.
And Merck’s business extends beyond this single product. The company recently earned approval for Winrevair, a therapy for pulmonary arterial hypertension with a new mechanism of action. According to some analysts, Winrevair could hit sales of $3.9 billion by 2029, so it should help Merck replace lost Keytruda sales. There are other products in the drugmaker’s portfolio that should continue performing well at least through 2028, such as its pair of HPV vaccines, Gardasil and Gardasil 9.
Further, the company has a deep pipeline, with more than 80 programs in phase 2 studies and more than 30 in phase 3 trials. Not everything will make it to market, but I expect many brand-new approvals and label expansions through 2029.
Beware of the competition
There is one crucial headwind Merck could face in the coming years: Summit Therapeutics, a clinical-stage biotech, is developing a cancer medicine called ivonescimab. Summit licensed ivonescimab from the drug’s original creator, China-based Akeso Biopharma.
Summit now owns the rights to the therapy in North America and many other regions worldwide. Though ivonescimab isn’t yet approved in Summit’s licensed territories, it is in China.
Further, Akeso recently reported positive phase 3 results for ivonescimab in treating non-small cell lung cancer (NSCLC) patients with a PD-L1 protein overexpression. The medicine beat Keytruda in this study, marking the first time a cancer medicine performed better than Merck’s superstar in a late-stage trial in NSCLC, which is one of Keytruda’s most important indications.
Ivonescimab could present a serious challenge to Merck. However, the medicine hasn’t started phase 3 studies in the U.S. yet. It could be a couple of years (or more) before Summit is ready to launch ivonescimab. The medicine will take even longer to earn approvals across the many indications it is targeting.
Ivonescimab could somewhat disrupt Keytruda’s (or its subcutaneous version) progress, but Merck’s much deeper pockets, larger footprints, and wider sales force should help it maintain a decent share of the NSCLC market. Further, the company will continue to develop new drugs that will mitigate this risk.
Is Merck stock a buy?
Merck has long been a leader in the pharmaceutical industry. The past five years hardly represent the company’s potential. The company’s strong underlying business, innovative abilities, and robust dividend program make it an excellent stock worth considering.
On that last point, Merck has increased its payout by a decent 71% in the past five years and offers a dividend yield of 2.8% currently, which is above the S&P 500’s average of 1.3%. With dividends reinvested, Merck could deliver strong performances in the next five years and beyond. The stock is still an excellent option for long-term investors.
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