Image source: Merck & Co.

For shareholders of pharmaceutical giant Merck (NYSE:MRK), it's been a year to forget. With the overall market relatively flat for the year, Merck shares have underperformed, declining a tad more than 5% through Thursday, Dec. 10.

Merck faced big challenges in 2015
Like most Big Pharma companies, Merck has been dealing with the loss of patent exclusivity on key drugs. Merck lost its exclusivity on blockbuster asthma and allergy drug Singulair in 2012, and it's been clawing its way back ever since. Adding more bricks to the wall Merck has to climb is the emergence of tough competition to DPP4-inhibiting type 2 diabetes drug Januvia (known as Janumet overseas).

In Merck's most-recent quarterly results, the company recorded a 17% increase in operational growth for Januvia/Janumet. Operational growth excludes the effect currency moves have on results, and gives us a truer look at product demand and pricing power. Merck has been able to achieve these results through heavy marketing investments and price increases for Januvia/Janumet. However, waiting in the wings are SGLT2 drug developers.

Image source: Boehringer Ingelheim.

SGLT2 type 2 diabetes drugs work by blocking glucose absorption in the kidneys, as opposed to prior standards of care, which worked via the pancreas and/or liver. Doing so allows patients to remove excess glucose through their urine.

But the real advantage of these drugs could be their long-term safety. Eli Lilly (NYSE:LLY) and collaborative partner Boehringer Ingelheim reported in August, and followed up with more detail in September, that their SGLT2 inhibitor, Jardiance, led to a statistically significant risk of death reduction in patients at high risk for a cardiovascular event in a long-term study. The assumption here is that Eli Lilly and its partner should see a substantial uptick in demand due to this long-term study.

Merck's best drug in 2015
In terms of sales, Januvia/Janumet continues to take the cake for Merck. Through the first nine months of 2015, sales of the drug have totaled $4.57 billion, and appear well on their way to topping $6 billion. For context, both drugs combined for exactly $6 billion in sales in 2014.

However, I wouldn't quantify Januvia/Janumet as Merck's "best" drug of 2015. Instead, I'd proclaim cancer immunotherapy Keytruda as Merck's best drug this year.

The acceleration in sales for Keytruda has been truly phenomenal. Approved in September 2014, Merck sold just $4 million of the product in Q3 2014. Since then, sales have increased to $50 million, $83 million, $110 million, and $159 million in the last four quarters. Pretty much one year into approval, Keytruda is already on pace for more than $635 million in extrapolated annual revenue.

Image source: Merck & Co. 

Keytruda was first approved as a treatment for a specific mutation observed in certain metastatic melanoma patients. In Merck's Q3 conference call, Adam Schechter, Merck's President of Global Human Health, announced that Keytruda is currently sporting 70% of anti-PD1 market share in eligible metastatic melanoma patients thus far.

The real allure for Keytruda is the potential for label expansion. Merck is studying Keytruda as a monotherapy, and as part of a combination therapy in around 30 clinical trials. The fruits of its continued pursuit of improving patient quality can be seen in the Food and Drug Administration's approved label expansion in October into advanced non-small cell lung cancer patients.

Specifically, Keytruda is approved to treat patients who have advanced on prior treatment, and whose tumors have a high expression of PD-L1. Whereas the normal response rate in NSCLC for patients who've progressed on at least one drug is often around 25%, Keytruda has been in the neighborhood of double the normal response rate for PD-L1 high-expressing patients.

What's next for Keytruda? A number of phase 3 studies are in planning, enrollment, or ongoing for bladder cancer, breast cancer, gastric cancer, head and neck cancer, and NSCLC in Europe. A phase 2 study for Hodgkin lymphoma and colorectal cancer is also underway.

Finally, Merck also has a big PR win in its hip pocket. Former President Jimmy Carter recently announced he was cancer free despite having melanoma spread to his liver and brain. The drug Carter took was Keytruda.

Image source: Merck & Co.

What to watch in 2016
What should Merck's shareholders be eyeing in 2016? For starters, you'll want to pay close attention to any clinical updates regarding Keytruda. Merck has no shortage of combination studies ongoing both in-house and with collaborative partners.

In sum, there should be plenty of clinical data in 2016, even if it is of the phase 1 variety. On a similar token, look for Merck to strike a few more collaborative partnerships for Keytruda next year.

You'll also want to take note of Januvia/Janumet sales in 2016. Growth has reaccelerated of late, but it remains to be seen if Eli Lilly's and Boehringer's Jardiance sees soaring demand -- and if so, whether that weighs on DPP4's, of which Merck controls most of the market share.

Merck isn't giving investors a reason to be overly excited with its near-term growth prospects considering the aforementioned competition concerns regarding Januvia/Janumet, and the ongoing negative effect of generic drugs competing against mature branded products. But Merck isn't a particularly expensive company, either, with a forward P/E of 14, and a market-topping 3.4% dividend yield.

Investors holding for the very long term are likely to benefit from the company's stabilizing cash flow and the growth of Keytruda, which has the potential to reach between $4 billion and $5 billion in peak annual sales.