Merck’s shares began to retreat in early 2024, largely due to concerns about patent expirations for its top-grossing drug.
The trading crowd changed its collective mind a few months ago, sending stocks sharply higher.
Although the stock was lifted by bullish headlines, none of this news was a shock — investors simply connected the dots in a different light.
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Merck(NYSE: MRK ) has taken its shareholders on a wild ride of late — from last March’s record high of $130 back to this May’s low of $76 to its current price of just over $100.
What gives? And more importantly, does the recent rebound signal that the pharmaceutical giant’s stock is a buy? Here’s what you need to know.
Merck is a pharmaceutical manufacturer with more than 40 different products currently on the market, which collectively generate annual revenues of approximately $70 billion. The company is actually one of the biggest players in the pharma industry.
But about half of Merck’s revenue is generated from a single product. That is the oncology drug Ketruda, which has become a miracle drug because of its efficacy and versatility; It is now approved to treat 20 different types of cancer.
This degree of success can be a double-edged sword, though. The drug has thrived since its first approval in 2014, with its patent protection set to expire in 2028. That would allow competitors to make and sell the same drug at a much lower cost, threatening a big chunk of Merck’s top line.
That’s the main reason for the stock’s sharp sell-off last year and the first few months of this year — investors were counting on the company to respond to the threat, but it didn’t.
Except that it did. It took a while to see the market.
There is no single specific catalyst to point to as the driving force behind this stock’s bounce back from its May lows. Rather, there are many contributing factors that ultimately lead to mass critical mass.
One of those factors is the September approval of Keytruda Qlex as a treatment for several solid tumors that Keytruda itself is already approved to treat. It’s only a subcutaneously injected version of the same drug — otherwise administered intravenously — that indirectly extends Keytruda’s patent protection. While it remains to be seen how often oncologists will choose this dosing option as other oncology drugs begin to compete with Merck’s highly successful anti-PD-1 therapy, some doctors will surely choose Keytruda Qlex.
Image source: Getty Images.
It’s also worth mentioning that the results of a phase 3 trial of the pulmonary arterial hypertension treatment Winrevair (released in late September) were very well received. Although the already approved drug is on track to generate slightly less than $1 billion in revenue by 2025, as its utility broadens and interest grows, analysts believe it could generate $8 billion in annual sales in a few years.
In this vein — and it’s part of the story that investors didn’t appreciate until recently — Merck claims that drugs in its current development pipeline could generate more than $50 billion in annual revenue by the mid-2030s. None of that by itself will replace Keytruda’s revenue. Overall, though, they’ll all do more than that.
Then there are the rapid developments that are always going on in the background: acquisitions. In October, Merck completed its acquisition of pulmonary disease specialist Verona Pharma. In November, it announced the acquisition Sidara Therapeutics For a little more than $9 billion, bringing a new flu vaccine candidate into the fold. These are just the pharma company’s most recent deals, of course. Merck has a long history of buying the right drugs at the right time — including Keytruda, which it acquired in its 2009 acquisition of Schering-Plough.
But is the drugmaker’s stock a buy, especially after its 30% run-up just after September’s low? I believe, as it has been for the better part of the past several years. Shares are still bargain-priced, at less than 12 times next year’s estimated earnings per share, and its current forward dividend yield of 3.3% is better than you’ll find with many dividend-paying blue chips.
To be clear, there will never be a high growth investment. However, the pharmaceutical giant is built for steady, steady progress, even if the market sometimes loses sight of this longevity — as it did for a while in the middle of last year, and earlier this year when concerns over Keytruda’s expiring patents turned into panic.
The thing is, Keytruda isn’t Merck’s first drug to lose patent protection, and it won’t be the last. As it always has, the company will continue to find and develop new profit centers like the Keytruda Qlex, some of which will prove surprisingly productive. Don’t fall into the trap of making more than it deserves out of patent rock.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Merck. Motley Fool has a disclosure policy.
Merck’s stock is surging, but is the struggling healthcare giant worth buying? Originally published by Motley Fool
