Pharmaceutical giant Merck (MRK 0.37%) has delivered excellent returns to its shareholders over the past 12 months, as last year's downturn did little to slow the drugmaker. The company's solid financial results are partly driving its recent performance. However, it isn't too late to invest in Merck's stock -- far from it. It can still deliver market-beating returns from here on out.
Let's consider three reasons why.
1. Keytruda's momentum won't slow -- at least for now
Merck's top-selling medicine for years has been Keytruda. The cancer drug has racked up dozens of indications and continues to improve its sales. In the second quarter, Merck's total revenue came in at $15 billion, a 3% year-over-year increase. Excluding the company's COVID-19 medicine, Lagevrio, Merck's sales jumped by a more impressive 11% year over year.
Keytruda was among the best performers, with sales of $6.3 billion, 19% higher than the prior-year period. Keytruda will lose patent protection in 2028, but until then, its sales should continue moving in the right direction.
Keytruda is projected to become the best-selling drug in the world this year after AbbVie's Humira ran out of patent exclusivity in the U.S. and COVID-19 products lost steam as the pandemic receded. Keytruda will hold that title at least until 2028 when its sales should exceed $30 billion, according to projections. For context, it generated sales of $20.9 billion in 2022.
In other words, Merck still has some breathing room before it has to find ways to replace its crown jewel although it has been quietly working on a subcutaneous version of it that could help stave off some generic competition. Merck is also looking elsewhere for growth, though, with some success.
2. A highly promising new product
In November 2021, Merck completed the acquisition of Acceleron Pharma for $11.5 billion in cash. The key asset from that transaction was sotatercept, a potential therapy for pulmonary arterial hypertension (PAH), or high blood pressure that narrows or blocks blood vessels in the lungs, leading to such symptoms as shortness of breath and difficulty performing physical exercise, etc.
PAH can be life-threatening. Treatments for the condition exist, but Merck argues there is a dire need for new ones. Sotatercept proved effective in clinical trials and is currently under review for approval in the U.S. The research company Evaluate Pharma deems it the most promising R&D project in the pharmaceutical industry, with projected annual sales of $2.6 billion by 2028.
That's a far cry from replacing Humira's revenue, but sotatercept should continue growing long after this decade's end.
3. The dividend looks secure
Merck's business extends beyond Keytruda and sotatercept. The company has other products that should perform well in the midterm, including its HPV vaccines, Gardasil and Gardasil 9. It also owns one of the largest animal health businesses in the world. That's to say nothing of Merck's pipeline, which features several dozen programs, at least some of which could yield brand-new approvals before Keytruda's anticipated patent cliff.
In other words, the company's business looks pretty solid, as does its dividend. In the past 10 years, Merck has increased its payouts by nearly 66%, a respectable level of growth in that time frame. The stock's current yield tops 2.70%, compared to the S&P 500's average of 1.54%. Merck's cash payout ratio of 67% is a bit on the high side but still leaves room for more dividend hikes.
Thus, Merck's great dividend program, supported by its resilient business, is another reason this stock can continue to reward shareholders with outsize returns.
