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Merck (MRK) Up This Year So Far: Will the Momentum Continue?

Kinjel Shah

Merck & Co., Inc. MRK shares have performed well this year so far.  Merck’s shares have risen 6.2% this year so far compared with the industry’s increase of 0.7%.

 

 

Earnings estimates for 2019 and 2020 have risen 1.5% and 0.6%, respectively, over the past 60 days.

What’s Behind the Rally?

Like 2018, 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 already approved for use in 15 indications across 10 different tumor types in the United States.

Keytruda, the largest product in Merck’s portfolio, generated sales of $2.27 billion in the first quarter of 2019, up around 5.6% sequentially and 55% year over year. Sales were driven by the launch of indications globally. Keytruda sales are gaining particularly from strong momentum in first-line lung cancer indication both as monotherapy and with the rollout of the chemo combo in both non-squamous and squamous NSCLC.

Following approval to include data from KEYNOTE-407 study in October 2018, the company witnessed strong uptake in squamous non-small cell lung cancer in the United States in the past two quarters. In March, European Commission granted marketing approval to Keytruda for the same indication. In fact, in the first quarter, Keytruda was approved by the FDA as an adjuvant therapy for high-risk stage III melanoma and for five new cancer line extensions in Japan.

In April, the FDA gave approval to Keytruda in combination with Pfizer’s PFE Inlyta for the first-line treatment of advanced renal cell carcinoma (RCC) as well as for an expanded first-line lung cancer patient population. All these label expansion approvals should drive sales of Keytruda higher in future quarters of 2019.

The Keytruda development program is also progressing well and 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 separately for the evaluation of Keytruda in combination with other regimens.

Several regulatory decisions for new indications in the United States as well as in Europe are pending in 2019, which, if approved, can further boost sales of Keytruda. In June, FDA decisions are expected on regulatory applications looking for label expansion of Keytruda for previously treated advanced small-cell lung cancer (SCLC) and first-line treatment of recurrent or metastatic HNSCC.

Other than that, in April, Merck and partner AstraZeneca’s AZN Lynparza gained approval in Europe as a monotherapy for the treatment of certain adult patients with advanced breast cancer. Merck also announced positive data from several late-stage studies this year, mainly evaluating Keytruda for further line extensions in 2019 so far.

Merck has also been on a strong footing was far as collaborations and M&A activity is concerned. In the year, Merck bought small cancer focused biotech, Immune Design and privately held Europe’s animal health technology provider, Antelliq Group. This month, Merck also announced a definitive agreement to buy small private cancer biotech, Peloton Therapeutics for an upfront payment of $1.05 billion in cash. The acquisition will add Peloton’s novel late-stage renal cell carcinoma (RCC) candidate, PT2977 to Merck’s oncology pipeline.

Conclusion

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), Zepatier (HCV) and Zostavax (vaccine)

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 two new products this year, a vaccine for Ebola Zaire, V920 and an anti-bacterial medicine, MK-7655A which is a fixed combination of relebactam with imipenem/cilastatin. Meanwhile, Merck will also continue to focus on cost-cutting initiatives, which should drive its bottom line.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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