Shares of Merck & Co., Inc. MRK have rallied 11.7% this year so far compared with the industry’s increase of 6.2%.
Its earnings estimates have risen almost 4.9% for 2019 and 2% for 2020 over the past 60 days.
What’s Behind the Rally?
A significant part of Merck’s outperformance this year has been owing to strong performance and positive regulatory updates related to its PD-1 inhibitor Keytruda. The medicine is Merck’s biggest product now. It is already approved for use in 20 indications across 12 different tumor types in the United States. Keytruda generated sales of almost $8 billion in the first nine months 2019, up around 63% year over year. The drug’s sales are driven by the launch of new indications globally and a strong momentum in the indication of first-line lung cancer.
The drug gained several label expansion approvals from the FDA this year so far. These are as an adjuvant therapy for high-risk stage III melanoma, first-line head/neck cancer, previously treated advanced small-cell lung cancer, advanced esophageal cancer, as a Keytruda+Lenvima combo for endometrial carcinoma and Keytruda + Inlyta combo for first-line advanced renal cell carcinoma (RCC).
Keytruda also won the nod for five new cancer line extensions in Japan, first-line advanced non-small cell lung cancer (NSCLC) in China and first-line head/neck cancer andas Keytruda + Inlyta combo for first-line advanced RCC in the EU. All these label expansion approvals are boosting the product sales higher with the trend expected to continue in 2020.
Several regulatory decisions for new indications in the United States as well as in Europe are pending in 2020, which if approved, can further improve sales.
The Keytruda development program is also progressing well with Merck spending billions on 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 above 1000 studies including 600 plus 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.
Undoubtedly, Keytruda’s solid growth prospects are based on increased utilization, approval for new indications and expectation of additional approvals worldwide.
This apart, Merck clinched FDA nod 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 received several label expansion approvals for PARP inhibitor Lynparza, which it shares with partner AstraZeneca’s AZN including front-line ovarian cancer in the EU and Japan as well as for advanced breast cancer in the EU. Merck’s investigational vaccine V920 for Ebola Zaire disease was also approved in the EU this month.
Merck has also been on a firm footing as far as collaborations and M&A activity are concerned. This year, the company bought small cancer focused biotech Immune Design and privately held Europe’s animal health technology provider Antelliq Group. It also purchased small private biotechs Peloton Therapeutics and Tilos Therapeutics. All these acquisitions strengthened its pipeline.
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 increased competitive pressure on its diabetes franchise and products like Isentress (HIV) and Zepatier (HCV).
Nonetheless, new products, namely Keytruda, Lynparza and Bridion should continue to contribute meaningfully to the company’s top line going forward. Animal health and vaccine products are also witnessing a solid uptake and remain core growth drivers for Merck.
Also, the company can gain approval for V920 and MEK 1/2 inhibitor selumetinib to treat pediatric neurofibromatosis type 1 in the United States and further line extensions for Keytruda and Lynparza in 2020. Also, Merck is expected to maintain its cost-cutting initiatives, which would drive its bottom line.
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