Merck & Co. (MRK 0.81%) announced earlier this month that its blockbuster cancer drug Keytruda was approved by the U.S. Food and Drug Administration (FDA) in combination with Eisai's (ESALY 0.30%) Lenvima to treat advanced renal cell carcinoma (RCC, also known as kidney cancer). This comes just weeks after the combo was approved by the FDA to treat patients with certain types of advanced endometrial carcinoma last month.

We'll take a look at what prompted the FDA to approve the Keytruda-Lenvima combination for advanced RCC, as well as how that could translate into growth for Merck in the next few years.

A person looks at a medication box in a pharmacy.

Image Source: Getty Images.

Why the Keytruda-Lenvima combo was approved

The Keytruda-Lenvima combination to treat advanced RCC proved its efficacy against Pfizer's (PFE) established, former-blockbuster drug Sutent.

The Keytruda-Lenvima combo was far superior to Sutent in terms of overall survival (OS), progression-free survival (PFS), and overall response rate (ORR).

OS is a measure of how long patients on a particular treatment regimen live, compared to those in a control group (taking another drug or taking placebo). PFS measures how long a patient receiving treatment lives without their disease worsening, compared to those receiving another treatment or placebo. ORR measures the proportion of patients whose tumors were eradicated or greatly reduced as a result of treatment.

The Keytruda-Lenvima combination lowered the risk of death by 34% compared to Sutent, which indicates that the combo is significantly more effective than Sutent in helping patients to live longer.

The Keytruda-Lenvima pairing reduced the risk of disease progression by 61% compared to Sutent, with a median PFS of 23.9 months against Sutent's 9.2 months. This indicates that patients on the Keytruda-Lenvima combination not only lived longer but were able to achieve stability in their advanced RCC prognosis.

The Keytruda-Lenvima combo led to a 71% ORR, which was notably higher than Sutent's 36% ORR. This further demonstrates the efficacy of the Keytruda-Lenvima combination, which leads me to believe there is huge potential for the combo.

Even more momentum for Keytruda

Before the FDA approval of the Keytruda-Lenvima combination for the treatment of advanced RCC, Keytruda already was growing at an impressive clip. For instance, Keytruda was able to grow its revenue 21% year over year from $6.67 billion in the first half of 2020 to $8.08 billion in the first half of 2021, which accounted for 65.8% of Merck's first-half revenue growth.

The FDA's approval for the Keytruda-Lenvima combo for yet another indication will support even more growth for the second best-selling drug in the world. Grand View Research estimates that the global kidney cancer market will grow at 5.3% annually from 2017 to $6.3 billion by 2022. Assuming that 35% of the total market remains in the U.S. and that Keytruda and Lenvima ultimately capture 15% of the market by 2025 (also, that the kidney cancer market in the U.S. grows in the mid-single digits annually up to that point), that single label expansion would add up to $400 million in annual revenue by 2025.

While that number represents only about 1% of Merck's forecast 2021 revenue of $46.4 billion to $47.4 billion, it's worth noting that the company boasts two other fast-growing businesses: the Gardasil human papillomavirus (HPV) vaccine, and the animal health segment.

Gardasil was able to advance its first-half revenue 22.7% year over year, from $1.75 billion in 2020 to $2.15 billion in 2021. Research company Fortune Business Insights anticipates that the global HPV vaccine market will grow 16.3% annually from $3.8 billion in 2020 to $12.7 billion in revenue by 2027, so Merck's Gardasil should grow in the double digits annually for the foreseeable future.

Merck's animal health business also increased its first-half revenue 24.9% year over year, from $2.31 billion in 2020 to $2.89 billion in 2021. Grand View Research forecasts that the global animal health market will expand 9% annually, from $45.4 billion in 2020 to $88.7 billion by 2028, which will likely help the segment in the years ahead.

Merck is a GARP pick

Keytruda's recent FDA approvals bring it that much closer to soon overtaking AbbVie's Humira as the top-selling drug in the world.

With Keytruda's patent remaining protected and free from competition from biosimilar drugs until 2028, pharma stock Merck has a plenty of time to prepare for that reality.

Merck's vaccine and animal health businesses are top-notch in industries that are set to grow for many years, which should help the company adjust to a post-Keytruda environment as sales gradually fade from the end of this decade into the next.

Considering that Merck's non-GAAP (adjusted) earnings per share (EPS) payout ratio will be 47% to 48% this year, I believe that Merck also offers a safe dividend yield (currently 3.3%) with future growth potential.

At a price-to-earnings-growth (PEG) ratio of 1.1 (current year P/E of 14.2 divided by analyst estimates of 12.8% annual earnings growth for the next five years), Merck provides investors growth at a reasonable price.