The Dow Jones Industrial Average is a highly exclusive index that includes 30 large and well-established corporations. It has performed comparatively well lately, slightly edging out the two other major U.S. market indexes over the past year.
And among the 30 members of the Dow Jones, one stands out as the best-performing of the bunch by some margin over the trailing-12-month period. That company is none other than Merck (MRK 0.38%), a leading drugmaker. The pharmaceutical giant has a lot going its way, and hence its impressive recent run.
But is Merck stock still a buy at current levels? Let's find out.
Merck is synonymous with this drug
Merck has a presence in several therapeutic areas, but the company's oncology business is its most important. The key asset here is Keytruda, a cancer drug that has racked up numerous indications in the U.S. and abroad. Keytruda is approved to treat non-small cell lung cancer, head and neck cancer, renal cell carcinoma, and melanoma, to name a few.
The medicine has routinely increased its sales at a good clip, which is set to continue for the foreseeable future. According to some estimates, Keytruda will record sales of $26.9 billion by 2026, making it the best-selling drug in the world by then. In 2022, Merck's revenue jumped by 22% year over year to $20.9 billion.
Even AbbVie's immunology drug Humira, the best-selling product in the industry's history, achieved peak annual sales of "only" about $21.2 billion. Keytruda should exceed that number this year. This does raise one problem: What happens when Keytruda runs into patent cliffs, which will happen in 2028?
Even though that's still some ways away, Merck has started to plan. It is doing so by developing a subcutaneous version of its crown jewel. The new formulation would enjoy patent exclusivity beyond the old one if it earns approval. And other than Keytruda, Merck has other promising products under its belt.
There is more to the company's business
Merck performed well on the stock market over the past year because its financial results have been strong, despite the negative impact of foreign currency exchange rates and other economic factors such as inflation. Thankfully, like other drugmakers, Merck's business remains relatively stable regardless of economic conditions since it offers essential products.
In 2022, the company's total sales increased by 22% year over year -- an impressive number for a pharmaceutical giant -- to $59.3 billion. Several of Merck's products other than Keytruda performed well. The company's vaccines that protect against HPV, Gardasil and Gardasil 9, saw their combined sales jump by 22% year over year (27% in constant currency) to $6.9 billion.
Cancer medicine Lynparza racked up sales of $1.1 billion, 13% higher than the year-ago period, or 18% in constant currency. Lenvima, another cancer drug, and Bridion, an injection used after surgery to reverse the effects of medications given during surgery, all saw solid year-over-year increases too.
Merck's animal health business, one of the largest in the world, delivered a decent performance. Sales were flat at about $5.6 billion compared to 2021 but climbed by 6% in constant currency. So although Keytruda is Merck's most important asset, the company boasts other growth drivers. And there are many more on the way.
Merck has more than 30 programs in phase 3 studies and over 80 in phase 2. One promising candidate Merck is working on is sotatercept, a potential treatment for a rare disease called pulmonary arterial hypertension (PAH), which has a 43% five-year mortality, highlighting the importance of new treatment options.
Merck has high hopes for sotatercept. As the company's president of human health U.S., Jannie Oosthuizen, recently said, "We believe that, based on the data, that sotatercept will change the way that PAH is treated. Our aspiration is that sotatercept will become a foundational treatment in PAH." Within its oncology division, Merck expects more than 80 new approvals through 2028.
The company is in an excellent position to continue growing its lineup, revenue, and earnings while still beating the Dow Jones.
Not too late to get in on Merck's stock
Even after its recent run, Merck looks reasonably valued. The company's forward price-to-earnings ratio is about 14.8, compared to 14.2 for the pharmaceutical industry. Merck is merits a premium given its prospects, which is why even at current levels, the stock remains worthwhile for long-term investors.
