Merck (MRK 0.55%) is up more than 42% over the past year, outdistancing the Dow Jones Industrial Average and most of Merck's pharmaceutical company peers.
The company reported $59.3 billion in revenue in 2022, up 22%, and annual earnings per share (EPS) of $5.71, up 17%. However, there are concerns about Merck because its oncology blockbuster, Keytruda, was responsible for $20.9 billion in sales, slightly more than 35% of the company's overall revenue.
While the company sees a slight drop in revenue next year, to land between $57.2 billion to $58.7 billion, thanks mostly to lower expected sales for COVID-19 therapy Lagevrio, it sees EPS rising to between $5.86 to $6.01.
Of greater concern, at least in the long term, is Keytruda is facing a patent cliff, possibly as soon as 2028, though the company is working to extend Keytruda's exclusivity as it adds indications and possibly a new patent for the drug in a subcutaneous form. The drug is currently given in an intravenous drip solution. Some members of Congress are concerned that Merck's use of Keytruda patents could extend its exclusivity to 2036.
Despite the obvious concerns, I see Merck as an unstoppable revenue stock for three reasons:
1. Steady dividend growth
Merck has been in business for more than 130 years and has offered a dividend since 1970. It has raised that dividend for 12 consecutive years. Over those 12 years, it has raised its quarterly dividend by 92%, including a bump of 5.7%, effective the first quarter of 2023, to $0.73 per share. The company has a payout ratio of 48.9%, giving it plenty of room to continue its dividend growth. Its yield is roughly 2.7%, well above the S&P 500 average of 1.74%.
The combination of the stock's share growth and its increased dividends allowed Merck to deliver better returns than other well-known healthcare dividend payers such as Johnson & Johnson and McKesson over the past decade.
MRK Total Return Level data by YCharts
2. There's plenty in the portfolio besides Keytruda
Merck had 12% growth in 2022 in revenue, even if you take Lagevrio sales out of the picture. The company had six other blockbuster drugs that had more than $1 billion in annual sales. That includes Keytruda, human papillomavirus (HPV) vaccines Gardasil/Gardasil 9; blood-sugar lowering therapies Januvia/Janumet; combination measles, mumps, rubella, and varicella (MMRV) vaccines ProQuad/Varivax; ovarian cancer, fallopian tube cancer, or primary peritoneal cancer therapy Lynparza; and Bridion, given after surgery to counteract muscle relaxers.
The company also has thyroid cancer drug Lenvima, which will likely be a blockbuster this year as it had $876 million in 2022 sales, an improvement of 24% over the prior year.
3. Then there's the pipeline
This is the area most overlooked by Merck naysayers. The company has more than 120 programs in its pipeline, including more than 80 in phase 2 trials and 30 in phase 3 trials, with at least four more therapies moving to phase 3 trials this year.
The company has said that by mid-2030 it expects more than $10 billion in revenue from its cardiovascular and pulmonary portfolio with at least eight new launches.
The most anticipated of those launches is sotatercept, a potential first-in-class fusion protein. Its phase 3 trial results as an add-on therapy to treat pulmonary arterial hypertension (PAH) led analysts to see the under-the-skin injection as being worth as much as $2 billion in peak sales. The drug targets BMPR-II signaling to attempt to treat the underlying cause of PAH.
In its Stellar trial testing 324 patients, the ones on sotatercept showed a significant improvement in a six-minute walk test over those on a placebo after eight months. The drug also fared well in eight of nine secondary outcomes in the trial.
"The results from the secondary efficacy outcomes, including a favorable benefit seen in patients' time to a clinical-worsening event, are especially noteworthy," Dr. Dean Li, Merck's Research Laboratories head, said in a statement. "The results observed in the Stellar study suggest that sotatercept has the potential to transform the treatment of patients with PAH."
Merck recently moved to beef up its hematology pipeline by acquiring Imago Biosciences for $1.35 billion, and with its collaborative agreements with Moderna, Orna Therapeutics, Orion, and Kelun-Biotech. The Imago deal brought Merck the therapy bomedemstat, an oral therapy being examined in phase 2 trials to treat thrombocythemia, myelofibrosis, and polycythemia vera, all cancers of the bone marrow. The therapy is seen to have the potential in peak sales of $1 billion, so the deal could quickly be accretive to Merck. Its $11.5 billion purchase of Acceleron Biosciences in 2021 gave it sotatercept, which has huge potential.
