Merck (MRK -0.10%) stock has been a longtime winner for investors, returning 72% in the past five years. A major factor in this pharmaceutical giant's success is its Keytruda immunotherapy drug, recognized as a global standard of care for various cancers.
On the other hand, investors must assess some uncertainty regarding the Keytruda platform, which could lose its patent exclusivity by the end of this decade, forcing Merck to find a new growth driver.
Let's discuss where the stock might be five years from now.
The importance of Keytruda for Merck
The Food and Drug Administration's (FDA's) approval of pembrolizumab, the generic name for Keytruda, in 2014 marked a breakthrough for cancer treatments by demonstrating an impressive ability to increase patient survival rates and long-term disease control.
For Merck, the drug has been a game-changer, posting $26.3 billion in sales over the past year, now representing 50% of its pharmaceutical business. In the second quarter, Keytruda sales climbed 16% year over year to $7.3 billion, benefiting from accelerating uptake. The result helped Q2 revenue increase by 7% over the same period.
Merck has a broader product portfolio with more than 52 drugs covering categories like vaccines, hospital acute care, cardiology, virology, and diabetes, but it's clear that Keytruda has led the momentum.
Its next largest product is the Gardasil human papillomavirus (HPV) vaccine with 1% sales growth in Q2, contributing about 17% to pharmaceutical revenues. The group's smaller animal health segment adds a layer of diversification but is less than 10% of the overall business.
Keytruda playing such a prominent role in the portfolio becomes an issue for investors as the pembrolizumab-formulation patent expires in 2028. Even as that time line could still be extended, or come with various exemptions, the challenge for Merck will be to find its next blockbuster.
In the meantime, the outlook remains constructive. Merck is forecasting 2024 revenue to climb by 5% to 7% over the 2023 result, while its earnings-per-share (EPS) target of $7.94 to $8.04 represent a midpoint increase of 7% from the company record in 2022.
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Uncertainties over the next decade
Merck's strategy is centered on securing new indications for its existing pharmaceuticals while advancing an extensive pipeline of novel candidates. There is a lot of optimism for the recently approved Capvaxive as the first pneumococcal-disease vaccine designed for adults. Similarly, the initial launch of Winrevair to treat pulmonary-arterial hypertension is seeing a strong reception in the field.
Still, it remains unclear if the company will manage to find a replacement for Keytruda as competition from biosimilars emerges over the next decade. There is also some concern that alternative treatments could begin to take market share away from Merck sooner.
Indeed, that was one of the takeaways of the recently announced phase 3 results from the biotech Summit Therapeutics, showing its ivonescimab lung cancer drug candidate slashed the risk of disease progression by 49% compared to Keytruda. Notably, shares of Summit surged by more than 60% on the report.
While the single readout covering just one indication does not impact Merck's near-term growth trajectory as it could be a few years before ivonescimab is approved in the United States, it does highlight the risk that the company's leadership position in this category of PD-1 protein inhibitors could be chipped away.
In terms of valuation, Merck stock is trading at a forward price-to-earnings (P/E) ratio of 14, which is near a peer-group average of 15 among pharmaceutical leaders like Johnson & Johnson, Pfizer, Novartis, and Sanofi. The stock doesn't jump out as overvalued or undervalued but at a fair level that balances the current financial strength with the longer-term question marks.
MRK PE Ratio (Forward) data by YCharts.
Where will Merck Stock be in 2029?
The ability of companies to generate profitable growth through challenges and uncertainties is often a key catalyst for equity prices to climb over the long run. Investors confident Merck's management will navigate the many moving parts of its drug portfolio have a good reason to stay bullish on the stock. I believe Merck remains well-positioned to continue rewarding shareholders, with a good chance the stock will trade higher five years from now.
