Summary
- Keytruda continues to dominate its field, applications in more critical situations could be possible.
- Top selling products continue to deliver strong results, patent life on average gives enough time for innovation with a high potential pipeline underneath.
- Financial health is strong, quantitative risk stats suggest a relatively lower risk for the firm and dividend looks safe and attractive.
- Valuation, combined with market factors indicates that the firm is correctly priced in the market.
Investment Thesis
With a strong portfolio of highly regarded drugs, Merck (MRK) is an excellent player in the industry. Consider the field of cancer immunotherapy, Merck's Keytruda is the market leader. You don't have to take it from me, take it from Exelixis, a potential competitor. In its 10-K filing, Exelixis disclosed that its phase 3 trial of a competing drug failed to reduce the risk of disease progression or death compared to Pembrolizumab (trade name: Keytruda).
To understand the importance of Keytruda, you should know that it had a 19% contribution in Merck's total sales last fiscal year and the contribution is rapidly increasing. Compared to the first quarter the last year, this year's first quarter has seen a 55% increase in Keytruda's sales. Moreover, this month Keytruda was approved for the treatment of small cell lung cancer and head and Neck Squamous cell carcinoma, combining this with the recent approvals in Japan and China, it looks good times are going just going to get better. On top of the growth momentum, the dividends look attractive and safe, and possibly, this year might follow another dividend increase. Combining all the factors, Merck is a buy.
A Highly Regarded Portfolio
Patent protections carry material importance to drug makers. The five drugs that contribute over 48% to the total sales include Keytruda, Januvia/Janumet, Gardasil/Gardasil 8, Proquad/M-M-R II/ Varivax and Zetia/Isentress HD have still maintained their market position. In fact, all 10 of the most important drug in Merck's portfolio have continued to deliver good results in the last three years.
Source: 10-K
Keytruda still has a considerably long patent life in the U.S. and outside. On the other hand, Merck's prescription pills for diabetes, Januvia has only three years of protection in the U.S. Most of its other large-contribution drugs have good patent lives and gives enough opportunity to bring on new drugs in the market.
