Tumors that start in the lungs are relatively uncommon, but they still claim more lives than any others. Keytruda from Merck & Co. (NYSE:MRK) became the second member of its class the FDA approved to treat this underserved group a few years ago, and since then it's impressed oncologists and investors alike.

Keytruda's success has already helped Merck deliver market-thumping gains in recent years, and the next act of its growth story could be even more exciting. Of course, Merck is a big company with lots of moving pieces, and some of the older ones aren't going in the right direction. Let's see if Keytruda has what it takes to offset aging product lines that have already started sliding backward.

A woman with a bandanna on her head lies in a hospital bed and looks at a chart with her doctor.

Image source: Getty Images.

An important first

Keytruda isn't the only drug that gets the immune system to keep hammering away at tumors by inhibiting PD-1, but right now it might as well be. At the moment, Keytruda's the only member of its class approved to treat just about anyone after receiving the first diagnosis for non-small-cell lung cancer (NSCLC), which accounts for at least four-fifths of all lung cancer diagnoses. 

More specifically, Keytruda is approved to treat any NSCLC patients with tumors that have already begun spreading, as long as they can combine it with standard chemo. Keytruda's also available as a relatively tolerable solo treatment for patients with tumors that express lots of PD-1, but these patients must first undergo difficult biopsy procedures and have their samples genetically tested in a manner their insurer approves of.

A doctor's coat shows a stethoscope draped around his neck and a bundle of cash in his pocket.

Image source: Getty Images.

Solid results drive sales through the roof

For decades, newly diagnosed patients with metastatic disease have received some form of chemotherapy, but the old veteran has a muscular new sidekick. Earlier this year, Merck showed us that adding Keytruda to chemo reduced patients' risk of death by 51% compared with the old standard on its own. 

Those attention-getting results helped year-to-year Keytruda sales double during the first nine months of 2018 to reach a stunning $5 billion. Investors hoping there's more room to climb have pushed Merck's stock up 41% in 2018.

Continued dominance in the first-line position could lead to 11-figure Keytruda sales within a couple of short years, but Merck isn't the only drugmaker with deep pockets and an approved PD-1 inhibitor.

Surprisingly safe

Despite an increasingly crowded field of competitors angling for first-line NSCLC approvals, Keytruda's dominant position appears defendable. Opdivo from Bristol-Myers Squibb (NYSE:BMY) was the first PD-1 inhibitor approved to treat NSCLC patients that have already relapsed, which is a much smaller group that generally doesn't remain on treatment as long as new patients.

Although Opdivo charged out of the gate with the second-line indication, it probably won't be joining Keytruda at the front lines. During long-term outcome studies, Opdivo failed to show a significant survival benefit compared with standard care when used on its own, and combining it with Yervoy didn't do the trick either.

Imfinzi from AstraZeneca (NASDAQ:AZN) was another potential contender for the first-line NSCLC indication that recently fell out of the race, but we're still waiting to see if Tecentriq from Roche (OTC:RHHBY) will earn approval to treat first-line non-squamous NSCLC patients in combination with standard chemo. So far, Tecentriq combinations haven't produced the attention-grabbing results that Keytruda has, but approval of a second PD-1 inhibitor could give insurers more negotiating leverage than they have at the moment.

Enough to offset losses?

It looks as if Merck can rely on steadily rising revenue from Keytruda in the years ahead, but will it be enough to offset sagging sales of older drugs that are losing ground? The company's aging Januvia franchise for the treatment of type 2 diabetes still makes up 14% of total revenue, and sales have flatlined this year.

As long as Januvia can hold steady for a few more years, it looks as if Keytruda has more than enough power to drive earnings forward for Merck. Management expects adjusted earnings per share to reach $4.30 this year, a modest 8% increase over last year. 

While it appears Keytruda can help Merck move the needle forward in the years ahead, the stock isn't cheap. Merck shares have run up to an above-average price of 18.3 times forward earnings estimates. That's far above the S&P 500 average, which means the stock has a long way to fall if the company doesn't meet some lofty expectations.

Merck's lead drug has a bright future, but it might be best to wait for this surging pharma stock to settle down to a more attractive price first.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.