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Is Merck Still a Strong Buy?

By Rachel Warren - Updated Jan 29, 2020 at 4:10PM

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Merck shares rose by nearly 19% in 2019. Do the recent regulatory snags with Merck’s cancer-fighting drug Keytruda pose a threat to the company’s future financial health?

Merck (MRK 0.83%) has long been the apple of investors' eyes, both for its excellent financials and solid dividend payouts. The company enjoyed monumental sales growth in Q3, with aggregate profits reaching $12.4 billion and an overall revenue surge of 15%. 

Surpassing analysts' expectations, Merck elevated its full-year earnings outlook to the $46.5 billion to $47 billion range, a notable rise from the anticipated profits of $45.2 billion to $46.2 billion. While Merck is known for a variety of pharmaceutical products, there was one drug in particular that accounted for the better part of its profits and forecast boost in Q3: its blockbuster anti-cancer drug Keytruda. 

Stethoscope on money

Image Source: Getty Images

Keytruda is an immunotherapy drug used to treat a wide range of cancers including melanoma, classical Hodgkin lymphoma, and non-small cell lung cancer. Keytruda accounted for $3.1 billion of Merck's sales in Q3, representing a 62% increase in year-over- year revenue. Over the first three quarters of 2019, Keytruda brought in nearly $8 billion in total revenue for Merck.

Keytruda has hit some roadblocks to label expansion of late. Considering that the drug has played and continues to play such an integral role in Merck's financial performance, you're not alone if you've been wondering whether now is still a good time to buy this stock. 

Here's what you need to know. 

Merck shares dipped after lung cancer study disappointment, but it's no cause for alarm

On Jan. 6, Merck announced that Keytruda had failed to meet one of its clinical markers in an important end-phase small cell lung cancer study. Merck shares slumped accordingly in the second and third weeks of January, but subsequently bounced back to roughly the same price they had before the news broke.

While the study showed that using Keytruda alongside chemotherapy could slow the growth of small-cell lung cancer, the results did not indicate that the drug would notably decrease the patient mortality rate. 

Let's put these study results in perspective. Small cell lung cancer comprises approximately 1/10 of all instances of lung cancer, with only about six percent of patients reaching the five-year mark after being diagnosed. 

Moreover, Keytruda is currently part of more than 1,000 studies testing the drug's efficacy for various indications. The drug has already received the green light for the treatment of a dozen different tumor types following its first approval for melanoma almost six years ago. 

Earlier in January, Merck achieved a landmark win when the FDA approved the use of Keytruda to treat a rare, high-risk form of non-muscle invasive bladder cancer that does not respond to conventional treatments.

While I'm not dismissing the market's initial reaction, at this point, there's no reason to think that Merck has been dealt a blow it can't recover from.

Recent licensing deals could mean billions in revenue for Merck

At the beginning of January, Merck announced that it had entered a groundbreaking licensing and research partnership with Astex Pharmaceuticals and Taiho Pharmaceuticals. Merck shelled out $50 million in return for sole worldwide licensing rights to Taiho and Astex's small-molecule inhibitor candidates, with the agreement that approximately $2.5 billion more in conditional payments be made based on product, trial, and regulatory performance.

The partnership is targeting inhibitors of KRAS, a common type of oncogene mutation in cancer.

Taiho's managing director Tehruhiro Utsugi, Ph.D. stated the following in the company's press release, "Taiho has used its unique and proprietary drug discovery platform to generate a number of small molecule inhibitors. This alliance builds on our KRAS research up to now, and together with MSD [Merck] it allows us to combine expertise to significantly accelerate the global research, development, and commercialization of a number of our mutant KRAS programs by accessing external talent and resources."

The small molecule oncology drug market is a multi-billion dollar business. Merck's collaboration will see it merging pre-clinical candidates and findings with Taiho and Astex to create a global research and product development powerhouse. As such, this strategic oncology alliance will likely bring a significant return on Merck's investment in the years to come.

Merck is in a strong financial position -- for now 

Given Merck's healthy profits on a year-over-year basis and excellent Q3 results, the company appears to be in a strong financial position at present. Keep an eye out for Q4 earnings, which will be released in early February.

Merck's growing regulatory approvals for Keytruda are encouraging, despite the slight setback with its lung cancer study. Clearly, the greatest risk Merck may face is relying too heavily on Keytruda to fuel future growth.

However, Merck's most recent partnership with Astex and Taiho is a solid step toward diversification in the highly lucrative small-molecule inhibitor sector. Right now, the future looks bright for this company, and its stock remains a viable buy.


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