There is mounting pressure on the company’s most prized franchise.
Anyone crafting a bull case for the pharmaceutical giant Merck (MRK 0.53%) should include Keytruda as the company’s best asset. The cancer drug has been Merck’s top-selling medicine and its biggest growth driver — by a mile. And last year, it became the best-selling drug worldwide, taking over from the immunology superstar Humira. However, Keytruda won’t hold that title forever. What will happen if Merck’s most important cash cow runs into stiff competition?
Recent developments suggest that it might, and that’s not to mention a fast-approaching patent cliff. Let’s look further into the dangers threatening Merck’s crown jewel and decide whether the company’s shares are worth buying anyway.
Could this medicine unseat Keytruda?
To see how vital Keytruda is to Merck, it’s important to look at the company’s financial results. In the second quarter, the drugmaker reported revenue of $16.1 billion, up 7% year over year. Keytruda’s sales came in at $7.3 billion, increasing 16% compared to the year-ago period. So, Keytruda made up about 45% of Merck’s top line. While the medicine has earned scores of indications, it can be safely assumed that a high percentage of Keytruda’s sales come from non-small cell lung cancer (NSCLC) patients.
Why? Three reasons. First, as of 2020, lung cancer was the second most common type of cancer in the world and the leading cause of cancer death. Second, NSCLC makes up roughly 85% of lung cancer cases. Third, advanced NSCLC that expresses the PD-L1 protein was Keytruda’s second-approved indication in the U.S., in 2015. So Keytruda has had more time to make headway into this market than in almost any others where it is approved. Since then, it has earned about seven more indications in treating various types of NSCLC in the U.S.
Now, here’s the problem. Summit Therapeutics is a mid-cap biotech that recently reported that its leading candidate, ivonescimab, bested Keytruda in a phase 3 study conducted in China in treating first-line advanced lung cancer that expresses the PD-L1 protein. Ivonescimab is the first therapy to do better than Keytruda in a phase 3 study for this indication. If ivonescimab goes on to earn approval, it could take some market share away from Keytruda. However, ivonescimab still has a long way to go before challenging Keytruda for all NSCLC indications in which the latter is approved.
It hasn’t even earned this one yet. The recent ivonescimab study in China won’t be the basis for approval in the U.S. The U.S. Food and Drug Administration (FDA) will demand a U.S.-based phase 3 study, possibly multiple such trials. That could take a couple more years — or more. So in the immediate future, ivonescimab shouldn’t be too much of a problem for Merck’s Keytruda even if it earns approval in China for this indication.
What about the patent cliff?
Here is another problem: Keytruda will lose patent exclusivity in the U.S., its most important market, in 2028. We can expect the medicine’s sales to fall off a cliff once it does. Can Merck get around this obstacle? The company’s plan to do so includes a subcutaneous formulation of Keytruda. This version won’t cover all of the medicine’s previous indications, but it will help smooth out its losses. According to some analysts, the subcutaneous version of Keytruda could generate as much as $8 billion in revenue by 2030.
That’s only slightly more than what Keytruda brings in every quarter, so Merck will have to make up the difference. Some of the company’s recent brand-new approvals will help. That includes Winrevair, a medicine for pulmonary arterial hypertension that earned the green light in March. Merck will launch other new medicines. It has more than 30 programs in phase 2 and over 80 in phase 3. Even a modest 20% success rate should allow it to improve its lineup in the next four years.
Expect Merck’s revenue to grow at a good clip through 2028. It will likely lose steam once Keytruda’s patent expires, but the pharmaceutical giant should recover eventually and deliver solid financial results long after. In my view, Merck’s shares still look attractive for long-term investors.