Pharmaceutical giant Merck (MRK 2.93%) delivered outstanding second-quarter results in July, largely driven by its mainstay cancer blockbuster, Keytruda. The company reported 28% year-over-year total revenue growth and continues to develop Keytruda for new cancer indications.
Under the radar, however, Keytruda returned some bad news in three separate late-stage clinical trials this summer. What does this mean for Merck's oncology franchise?
Clinical program stumbles
Superstar cancer drug Keytruda is currently approved for at least 14 different types of cancers and counting. It has shown itself to be a versatile therapy that is considered a standard-of-care treatment for many cancer indications, either as a stand-alone treatment or in combination with other therapies.
For example, Keytruda can be administered alongside another chemotherapeutic to improve the outcome of treatment. It can also be used as an adjuvant treatment, given before or after surgery, to reduce the size of the tumor or kill any cancer cells that have spread to other places in the body.
However, there are three potential treatments that are now off of the table for Keytruda. This summer Merck announced that the drug failed its primary endpoints in three separate phase 3 clinical trials. In July, negative news came from a head and neck cancer trial. In August, Keytruda failed in separate trials for prostate cancer and liver cancer (as a first-line treatment).
In all three trials, patients who received the drug did show a modest improvement in overall survival than those who did not receive it, but the difference between the two groups was small enough that the data did not meet the criteria for statistical significance established at the start of the study.
Indications keep expanding
The results from these studies may be disappointing for Merck, but they are by no means a deal breaker for the drug. After all, the company has an extensive clinical development program for its top-selling drug, which includes more than 1,750 clinical trials across at least 30 different types of cancer. With so many clinical trials underway, some of them are bound to fail.
The program is certainly chalking up some wins as well. Earlier this week, the company announced positive results from a long-term lung cancer study in which almost twice as many patients who received Keytruda in combination with a chemotherapy were still alive after five years than those who just received the chemotherapy alone. Lung cancer is difficult to treat, and the five-year survival rate is only about 10% with chemotherapy. This is the fourth study to show a long-term benefit of Keytruda in lung cancer.
More label approvals are on the way. Within the U.S., Keytruda was approved as a stand-alone treatment for endometrial cancer in March, and it's also under review as a second-line treatment in liver cancer. The drug also received numerous other approvals and has ongoing regulatory submissions outside of the U.S. as well. All told, Keytruda has more than 30 indications approved, and management expects that number to more than double by 2028.
Expect continued growth
Right now, Keytruda is Merck's top-selling drug, bringing in $17.1 billion, or 35% of the company's revenue, in 2021. The drug's global sales in the first half of 2022 grew 25% from the previous year. And this growth should just keep going as Merck continues to expand its indications. The drug should maintain its reign as one of the world's top-selling drugs for the next several years, with some analysts expecting sales to top $24 billion in 2026.
Keytruda should be a major driver for the company until the end of the decade. Analysts expect Merck's earnings per share to increase in the high single digits through 2028. Later earnings will become harder to predict, since Medicare negotiations will impact pricing for a portion of Keytruda's demographics starting in 2026.
Plus, the drug's patents start to expire in 2028. At that point, declining Keytruda revenue certainly has the potential to drag down the company's overall performance, although Merck still has quite a bit of time to address the upcoming revenue gap by developing its pipeline or through acquisitions.
In the meantime, however, Merck has an attractive valuation with a price-to-earnings ratio of 13 that is near the low end of its pharmaceutical peers. The company also has a nice 3.2% dividend at a sustainable payout ratio of 42%. This is a safe dividend stock, and the company has several years of strong growth ahead of it.
