Because new medicines come with patent protection for lengthy periods of time, the pharmaceutical industry is unsurprisingly a very lucrative one. But successful companies must be careful to not be self-congratulatory.
That is because to stay at the top of the mountain as a drug maker, a company must constantly maintain a combination of innovation and dealmaking. Few companies do these two things better than Merck (MRK 0.44%).
Earlier this month the pharmaceutical giant closed its $1.35 billion, all-cash deal with the oncology company Imago BioSciences. But was it the right move for Merck? Let's look at Imago BioSciences' drug candidate bomedemstat to address this question.
A solid drug candidate
The primary indication that bomedemstat could eventually be approved to treat is essential thrombocythemia (ET). The condition causes an increased number of platelets in the blood, which helps blood to clot. The disease causes no symptoms. When ET does result in symptoms, these can include headaches, slurred speech, and numbness or weakness on one side of the body associated with reduced blood flow to the brain.
Imago BioSciences enrolled 32 ET patients in a phase 2 clinical trial to receive bomedemstat. During the clinical trial, more than half of patients (58.1%) taking the drug experienced a decrease in their total symptom score. This measure provides a baseline of a patient's overall symptoms and disruptions to daily activities before and during treatment. And 93.8% of bomedemstat patients achieved the primary endpoint of a platelet count reduction to less than or equal to 400 per nanoliter without experiencing any thromboembolic events like deep vein thrombosis.
These results demonstrate that the therapy could be a meaningful step forward for patients with ET.
Image source: Getty Images.
Significant sales potential
What could bomedemstat achieve in sales from an eventual indication for ET? Stifel (NYSE: SF) analyst Stephen Willey estimates that the drug could bring in peak annual U.S. sales of $750 million from just an ET indication. That's because the standard-of-care treatment options for the condition are currently limited, and bomedemstat could be a viable option for patients when it hits the market.
Factoring in the potential that secondary indications will be approved for other types of blood disorders like myelofibrosis and polycythemia vera, the drug could surpass $1 billion in annual sales for Merck. Considering the company's relatively modest cash outlay for a potential blockbuster drug, I am inclined to agree with Willey's assessment that Merck got a good asset for a good price.
A stock that has something for everyone
Outside of bomedemstat, Merck has 112 projects currently in its late-stage drug pipeline. Even considering that its crown jewel cancer drug Keytruda will experience a patent expiration as soon as 2028, this should be a strong enough pipeline to maintain robust growth moving forward.
That's why analysts believe that Merck's non-GAAP (adjusted) diluted earnings per share will compound at 11.7% annually over the next five years. Putting this into perspective, that's a much more potent growth forecast than the drug manufacturer industry average of 6.6%.
Yet, the stock's valuation is also attractive. Merck's forward price-to-earnings (P/E) ratio of 14.5 is below the drug manufacturer industry average of 15.1. Topping it all off, the stock's 2.7% dividend yield is far higher than the S&P 500 index's 1.7% yield. And given that the dividend payout ratio will be around 37% in 2022, dividend growth should have no problem continuing.
This makes Merck a unicorn stock that growth investors, value investors, and income investors all may want to consider buying.
