Merck’s Spinoff Plans Place a Big Bet on Cancer-Fighting Keytruda

When it comes to cancer, immunology is the story of the decade.

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James Allison and Tasuku Honjo shared the 2018 Nobel Prize in Medicine for their discovery that the immune system could be tuned up to fight cancer. Merck’s (NYSE:MRK) Keytruda became a blockbuster drug on the strength of that science.

Keytruda’s 2019 sales of $11.1 billion are expected to double in five years, to $22.2 billion, so Merck CEO Ken Frazier thinks it makes sense to spin out slower growing Merck units and spend the resulting cash on expanding the cancer franchise.

The announcement, however, came inside an earnings release that drew a thumbs-down from analysts. Net income of $2.4 billion, 92 cents per share, on revenue of $11.9 billion sent shares down 3%.

The Keytruda Plan

Merck shares opened for trade Feb. 6 at $86 each, a price-to-earnings ratio of 24, but the 61 cent per share dividend yields almost 2.8%. The market capitalization is $221 billion. With 30-year government bonds yielding just 2%, that looks like a bargain, especially if Frazier can also deliver top-line growth.

That’s what Keytruda, the company’s anti-cancer blockbuster, has been doing. Sales for the drug rose 55% for all of 2019, reaching $11.1 billion. During the fourth quarter, Keytruda represented 26% of Merck’s sales. It is expected to soon become the best-selling drug in the world, topping Humira, the immunosuppressant from AbbVie (NYSE:ABBV) often used to treat arthritis.

Among the products being spun out into a new company, under veteran Merck executive Kevin Ali, are its women’s health line, cholesterol drugs like Vytorin and Zetia, vaccines like Gardasil and some older cancer drugs. The new company will put between $8 billion and $9 billion back into Merck, with which it will use to expand Keytruda sales.

For now, Keytruda is going from strength to strength. It’s now a first-line treatment for some lung cancers and forms of bladder cancer. It competes with other PD-1 inhibitors from Bristol-Myers (NYSE:BMY) and Regeneron (NASDAQ:REGN), and there are other such drugs coming.

Thus, Frazier thinks Merck needs to focus on expanding the range of conditions Keytruda can act against. He also wants to find other, similar compounds. The products being spun out represented sales of $6.5 billion in 2019.

The Risks

Keytruda is the best-known drug in its field thanks to patients like former President Jimmy Carter, whose cancer has been in remission for four years since taking the drug. Merck has over 1,000 trials underway, some using Keytruda alone, others using it in conjunction with chemotherapy or surgery.

But there is a lot of competition in the space. Bristol-Myers’ Opdivo, new compounds still being tested and even off-label drugs made in China could reduce Keytruda’s future haul.

Frazier, 65, says he is staying on during the transition. He is considered a legend in the business, but a reputation is no guarantee when it comes to science, either.

The Bottom Line on Merck Stock

Doubling down on Keytruda makes strategic sense, because it is the fastest-growing part of Merck’s business.

That doesn’t mean sales will double in five years, as Merck expects. It not only faces increased competition in its space, but there remains the rising specter of healthcare reform. Action against drug prices could hit even leading-edge therapy makers hard.

The company being spun out, meanwhile, has low-cost therapies with established niches. Frazier is taking off Merck’s seat belt and betting its oncology line can continue to beat cancer, the competition and efforts to contain drug costs.

It’s a reasonable risk for income investors, but it still is a risk.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

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