Merck’s Keytruda Win Signals a Big Shift for Big Pharma

Advertisement

Rumors of big pharma R&D’s death have been greatly exaggerated. And investors have Merck (MRK) to thank for recently underscoring that surprising reality.

MRKAs you likely know by now, the iconic drugmaker won the FDA’s approval for a breakthrough melanoma treatment known as pembrolizumab (or its more marketable name, Keytruda). Although Merck stock didn’t soar on the heels of the news, the underlying biotechnology of the drug has the potential to push MRK higher for the long haul. Perhaps more important, the fact that Merck developed this drug from the ground up rather than acquiring it from another biotech player in the latter stages of its development says big pharma may well be getting back to its drug-development roots.

Meet the New and Improved MRK

The idea of inducing a patient’s own immune system to fight a better fight against a disease — immunology — isn’t exactly a new concept. The immunological approach Merck took in developing Keytruda, however, is a new one for the big pharma community. Keytruda is an anti-PD-1 inhibitor therapy. In simplest terms, the drug prevents cancer cells from attaching to a protein that would allow a diseased cell to “look” like a normal, healthy cell to an immune system’s antibodies. With nowhere to hide, an anti-cancer agent can better target cancer (melanoma, in this case) for patients using the MRK drug.

Keytruda’s particulars aren’t the amazing part of the story for MRK shareholders, however. What’s amazing is that the development of Keytruda suggests Merck is willing and able to get its own drugs to market.

It’s quite a turnaround from the MRK we all knew and struggled to love just a few years ago.

Revenue has dwindled every year after peaking at $48 billion in 2011 as Singulair, Cozaar, Propecia, Clarinex, and other drugs lost patent protection and Merck wasn’t able to replace them. The evidence: Prior to Keytruda, it had been seven years since Merck had received FDA approval for anything that even had a shot at becoming a blockbuster drug. Sales are projected to fall to a four-year low of $42.7 billion this fiscal year too. But, with the introduction of Keytruda, Merck stock holders may well start seeing the company’s first revenue growth in a while beginning next year.

As for the reason for the paradigm shift, Merck’s relatively new research director Roger Perlmutter gets the bulk of the credit.

While MRK was restructuring well before Perlmutter was placed in his role last year, there’s little doubt that he made the biggest strides in streamlining the company’s research and development process. Granted, he inherited a breakthrough drug; pembrolizumab was already promising when he was hired. Perlmutter’s industry experience with the FDA was the core of the reason the drug was given a “breakthrough” designation by the FDA, however, which greatly accelerated the approval process. The drug went straight from Phase 1 to the new-drug approval request, effectively skipping Phase 2 and Phase 3 of the development process.

Although Keytruda was the shining star in the MRK pipeline, in Perlmutter’s proven hands, MRK stock owners can look forward to renewed vigor from the company’s R&D arm.

What Keytruda Means for Merck Stock, and Big Pharma

While the media buzz surrounding MRK and the approval of its new anti-PD-1 drug has been overwhelming, it’s also been deserved.

Like any revenue forecast, the one JP Morgan (JPM) offered for Keytruda should be taken with a grain of salt. It’s plausible and reasonable, though. JP Morgan Chase believes the immunotherapy could drive $1.5 billion in sales for MRK by 2020, after it’s approved for cancers beyond melanoma. The bank/broker calculates than every billion in sales Keytruda contributes to the company’s top line by 2020 will lead to an additional 22 cents in earnings per share of Merck stock. For perspective, analysts believe Merck will earn $3.49 per share in 2014. This new drug is a big deal.

On a more symbolic level, the fact that MRK was able to finally get one of its home-grown therapies on the market verifies that big pharma is getting back on its own R&D horse rather than relying on the acquisition of small biopharma outfits to keep its pipelines full. In fact, Bristol-Meyers-Squibb (BMY) is developing its own anti-PD-1 immunotherapy to treat lung cancer … the same drug that’s already been approved in Japan as a treatment for melanoma. Like Merck, Bristol-Meyers-Squibb is aiming to expand the application of its anti-PD-1 platform to other cancers like lung cancer. The two drugs are so similar, in fact, that Bristol-Meyers-Squibb is suing Merck for infringement of its PD-1 patent.

Even outside of anti-PD-1 technologies, however, big pharma is embracing the development of its own pipelines again. Case in point: AstraZeneca (AZN). Two years ago the U.K-based drugmaker didn’t appear to have much of a pipeline. Now Pfizer (PFE) was willing to bid around $100 billion for AstraZeneca, largely because of its pipeline. Namely, Pfizer is eyeing cancer drugs MEDI4736 and AZD9291.

And it wasn’t like AstraZeneca refilled its pipeline just with acquisitions.

While CEO Pascal Soriot nabbed MEDI4736 via the acquisition of MedImmune late last year, it’s done a great deal of development work with MEDI4376 — an immunotherapy — in the meantime. Meanwhile, AZD9291 has been AstraZeneca’s drug since it began development years ago. In fact, Soriot has made a point of steering clear of most acquisitions, preferring instead work with what AstraZeneca already had. He even revived ovarian cancer treatment olaparib. At one point its development had been discontinued, but Soriot put it back on the R&D plate. Now it’s in Phase 3 testing, and shows good promise.

Point being, it’s much easier to believe MRK is serious about its own R&D again when many of its big pharma peers are clearly re-embracing the idea. In the meantime, Merck stock owners should start to see a clear benefit from the effort.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/merck-mrk-stock-keytruda/.

©2024 InvestorPlace Media, LLC