Merck & Co., Inc. MRK shares have risen 11.9% this year so far against the industry’s decrease of 2.1%.
Earnings estimates for 2019 and 2020 have risen 3.2% and 1.1%, respectively over the past 30 days.
What’s Behind the Rally?
A significant part of Merck’s outperformance this year so far has been driven by strong performance and positive regulatory updates related to its PD-1 inhibitor, Keytruda. In a short span of time, Keytruda has become Merck’s biggest product. It is now already approved for use in 20 cancer indications across 12 different tumor types in the United States. The drug generated sales of almost $5.0 billion in the first half of 2019, reflecting a massive 56.6% surge year over year.
Keytruda is continuously growing and expanding into new indications and markets globally. Strong momentum in first-line lung cancer indication and recent launch in newer indications — renal cell carcinoma and adjuvant melanoma — are driving Keytruda sales.
The Keytruda development program is also progressing well with Merck spending billions for research and development of this medicine to secure more approvals in earlier lines of treatment. The drug is being studied for more than 30 types of cancer in more than 1000 studies, including more than 600 combination studies. Merck is collaborating with several companies including Amgen AMGN, Incyte, Glaxo and Pfizer PFE separately for the evaluation of Keytruda in combination with other regimens.
This year so far, Keytruda has gained several label expansion approvals. In July, Keytruda was approved by the FDA as a monotherapy for advanced esophageal cancer. In June, it was approved by the FDA for first-line treatment of recurrent or metastatic head and neck squamous cell cancer and for previously treated advanced small-cell lung cancer. In April, the FDA gave approval to Keytruda in combination with Pfizer’s Inlyta for the first-line treatment of advanced renal cell carcinoma as well as for an expanded first-line lung cancer patient population. In the first quarter, it was approved by the FDA as an adjuvant therapy for high-risk stage III melanoma and for five new cancer line extensions in Japan. All these label expansion approvals should drive sales of Keytruda higher in the future quarters.
Several regulatory decisions for new indications in the United States as well as in Europe are due this year. A regulatory nod will further boost sales.
Other than that, this year Merck gained FDA approval for its new combination antibacterial injection, Recarbrio (MK-7655A), a fixed combination of relebactam with imipenem/cilastatin, and a new indication — two types of pneumonia infections — for its antibacterial medicine, Zerbaxa. It also gained several label expansion approvals for its and partner AstraZeneca’s AZN PARP inhibitor Lynparza including in front-line ovarian cancer in EU and Japan and for advanced breast cancer in the EU.
Merck has also been on a strong footing as far as collaborations and M&A activity are concerned. In this year, Merck bought small cancer focused biotech, Immune Design and privately held Europe’s animal health technology provider, Antelliq Group. In May and June, it announced dealsto buy small private biotechs, Peloton Therapeutics and Tilos Therapeutics for around $1.05 billion and 773 million, respectively. These deals should close later in the year.
Merck, which carries a Zacks Rank #2 (Buy), has its share of challenges in the form of generic competition for several drugs, pricing pressure and rising competitive pressure on the diabetes franchise and on products like Isentress (HIV) and Zepatier (HCV).
Nonetheless, going forward, new products like Keytruda, Lynparza, and Bridion should continue to contribute meaningfully to the top line. Animal health and vaccine products are also performing strongly and remain core growth drivers for Merck.
Also, Merck can gain approval for its vaccine for Ebola Zaire, V920 and further line extensions for Keytruda and Lynparza in the second half of 2019. Meanwhile, Merck is expected to continue its cost-cutting initiatives, which should drive its bottom line.
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