Merck & Co., Inc. (NYSE:MRK) mustered an earnings beat for its fourth quarter, which — despite falling short of revenue estimates — was enough to sate shareholders. Although Merck stock fell a bit following the report, it could have been worse than the 1% setback shares suffered. Remember, the broad market lost ground that day as well.
The big story for Merck right now is Keytruda, which has become a revenue beast of a relatively new drug. Cancer treatment Keytruda saw revenue growth of 169% on a year-over-year basis last quarter, catapulting it to the company’s second-place spot in terms of sales.
For better or worse, the future of MRK stock will largely be driven by the versatile Keytruda.
What Is Keytruda?
The drugmaker’s best-selling pharmaceutical is still the diabetes Januvia. It generated $1.52 billion worth of business for Merck last quarter. Keytruda is now a close second, however, driving $1.3 billion worth of business during the fourth quarter. The next-nearest drug in its portfolio isn’t actually anywhere “near” — Gardasil only did $633 million worth of sales in Q4.
Keytruda accounted for 12% of last quarter’s business, and given enough time, Keytruda will surpass Januvia as the big breadwinner.
Keytruda is a cancer immunotherapy. Immunotherapies tweak a cancer patient’s own immune system in a way that allows it to recognize and kill cancerous cells when it may not otherwise be able to do so. Though the approach is no longer a new one, the pharmaceutical industry is far from perfecting it.
What’s so compelling about Keytruda is its versatility.
Cancer is, in its simplest terms, a mass of cells that shouldn’t be there. Generally, the body has a number of mechanisms to keep such cells from reproducing, but for cancer to develop, one or more of these mechanisms must be bypassed.
One of these mechanisms is the PD-1 pathway. The PD-1, or programmed death receptor-1, is found on immune cells. When triggered, PD-1 destroys cells. The PD-L1 is a receptor found on healthy body cells that tells immune cells not to destroy it. However, sometimes cancerous cells have PD-L1, which stops the immune system from destroying them like it should.
Keytruda stops the PD-1 pathway, so the body destroys cells that have PD-L1. Keytruda has been successful in treating cancers with PD-L1. But the drawback is that the body’s immune system might destroy healthy cells as a result.
Keytruda Is Expanding Its Market
It’s not a cure-all for all cancers that have PD-L1, however. In December, Merck announced the drug failed to effectively treat advanced gastric adenocarcinoma. It’s also been rejected as a therapy for recurrent or metastatic cancers in types of cancer Keytruda can treat on first occurrence.
More failures are likely in the cards, but this isn’t uncommon. Cancer is a group of diseases, not one disease and no one drug can treat all kinds.
By and large though, Merck is finding more hits than misses — at least for the indications it knows are worth targeting — with Keytruda. That bodes well for the two phase-3 trials of Keytruda Merck made mention of in its most recent earnings release.
More tests are underway as well. Some won’t work. Some will. Enough of them likely will, however, to make MRK stock a name worth considering for investors that haven’t yet.
Looking Ahead for MRK Stock
Merck would do well to steer clear of putting all its eggs in the Keytruda basket.
The dangers of concentrated portfolios are all-too-well documented. Pfizer Inc. (NYSE:PFE) doesn’t seem to have ever really gotten over the 2012 loss of its patent on cholesterol-fighting drug Lipitor, which at one point drove about a fifth of the company’s revenue.
Investors should also note that AstraZeneca plc (ADR) (NYSE:AZN) and Bristol-Myers Squibb Co (NYSE:BMY) are working on therapies that seek to utilize the PD-1 pathway. So this market is hardly Merck’s to keep — without a fight.
Still, for better or worse, Merck is doing quite well with Keytruda, and right now they have several other high-revenue drugs in their portfolio.
But at least in the near term, the future of the company and MRK stock, mostly hinge on how well Keytruda continues to grow.
Only time will tell if that’s an upside or a downside, but at least you know what matters most.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.