There is plenty to like about Merck (MRK -0.25%). It is one of the largest pharmaceutical companies and the owner of the world’s current best-selling drug, cancer medicine Keytruda. Merck generates consistent revenue and profits, has a deep pipeline, and pays a regular dividend.
These are all good things, none of which has stopped the company’s shares from significantly underperforming broader equities this year. Merck’s shares are down by 8% year to date. What’s going on with the healthcare giant?
Let’s consider two reasons investors might be right to sell off Merck’s stock and one reason the drugmaker could still be an excellent long-term investment.
Reason to sell #1: Competition from ivonescimab
Merck’s Keytruda is the company’s biggest growth driver by some margin. In the third quarter, Keytruda’s sales increased by 17% year over year to $7.4 billion. Merck’s total revenue came in at $16.7 billion, 4% higher than the year-ago period. The medicine has an impressive list of approvals in many countries worldwide. It is indicated to treat head and neck cancer, melanoma, gastric cancer, cervical cancer, and the list goes on.
However, none of Keytruda’s markets are as essential as non-small cell lung cancer (NSCLC). Lung cancer is the leading cause of cancer death, and up to 85% of lung cancer patients suffer from the NSCLC variety.
Keytruda has long dominated this market, but that could be coming to an end. A medicine by the name of ivonescimab, developed in the U.S. by Summit Therapeutics, could challenge Keytruda. In a phase 3 clinical trial conducted in China, ivonescimab went up against Keytruda in patients with advanced NSCLC with a PD-L1 protein overexpression. Ivonescimab reduced the risk of disease progression or death by 49% compared to Keytruda.
Sure, there are some caveats to keep in mind. Most notably, the study was performed in China. The same results might not hold in other countries. However, it seems likely that Keytruda will soon have a major competitor in one of its most lucrative markets. Considering how essential the medicine is for Merck, that’s a blow to the company’s prospects.
Reason to sell #2: More potential competition
Ivonescimab isn’t the only potential competitor to Keytruda out there. BioNTech is working on another. More precisely, BioNTech is acquiring a drugmaker that is developing a potential Keytruda competitor. BioNTech is dishing out $800 million upfront and up to $150 million in milestone payments to merge with China-based Biotheus, whose leading candidate is called PM8002.
In a phase 1b/2 clinical trial, PM8002 showed an overall survival rate of 69.7% after 18 months in patients with breast cancer and a PD-L1 protein overexpression. Merck’s Keytruda’s survival rate in the same patient population was 47.8%. As with ivonescimab, there are some important caveats. This was just a phase 1b/2 study.
PM8002 has a long way to go before getting approved, if it gets that far. But it seems the challenges to Keytruda are mounting.
Reason to buy: Merck is on the offensive
Keytruda’s patent expires in 2028, but Merck is working on a subcutaneous version of the medicine that would extend its patent life. If medicines such as PM8002 and ivonescimab hit the market, Merck’s post-2028 plans will be in jeopardy. But the company has more tricks up its sleeves. It recently entered into an agreement with a privately held biotech, LaNova Medicines, to develop LM-299.
This investigational cancer treatment is a bispecific antibody like ivonescimab and PM8002 (Keytruda is a checkpoint inhibitor). It might or might not pan out, but this move shows Merck is actively looking for ways to get around the competition. Merck also has a pipeline with more than 100 programs. True, many are for existing medicines seeking label expansions, but it is working on new products, too. Furthermore, the company will continue to be active in mergers and acquisitions to look for ways to replace Keytruda.
That’s how it got its hands on Winrevair, a medicine for pulmonary arterial hypertension it launched earlier this year. Merck’s vaccine business, led by Gardasil and Gardasil 9, continues to perform well, as does its animal health unit. Lastly, the stock is a great pick for income investors. Merck offers a forward yield of 3.30%, and it has increased its payouts by 80% in the past decade.
Merck will encounter some Keytruda-related issues toward the end of the decade, but the company’s business and pipeline are strong enough to overcome them, in my view. So, Merck remains a top stock for long-term investors to buy.
