Pharma giant Merck & Co. (MRK) just got an 8% boost after competitor data fell short of investor expectations. Last week, investors were underwhelmed when Chinese data revealed that the ivonescimab has not yet achieved overall survival benefit (a major clinical outcome in cancer trials), suggesting that ivonescimab remains a ways away from dethroning Keytruda in NSCLC. However, MRK is already looking for fresh money-spinning alternatives to replace its flagship, namely, a new cholesterol drug.
Merck’s immunotherapy, Keytruda (pembrolizumab), is a blockbuster drug that targets PD-1 and is approved to treat a variety of cancers. However, its stock, down 30% in the past year, is struggling ahead of Keytruda’s loss of exclusivity, expected in 2028. The loss threatens a significant portion of the company’s total revenue.
While failing competition is a positive development for Merck, I’m afraid it doesn’t spell an end to Keytruda’s vulnerabilities, leaving me neutral on MRK. Competition is another concern, too. Summit Therapeutics’ (SMMT) ivonescimab is considered a top competitor to Keytruda pending U.S. data.
The Twin Threats of Competition and Patent Expiration
Drugs face two significant threats within the pharmaceutical industry: competition and market exclusivity. Being a “biologic,” Keytruda was awarded 12 years of market exclusivity after being FDA approved in 2014 and hasn’t faced much competition, particularly in NSCLC, which represents approximately 30% of its revenue share. In 2024, Keytruda’s revenues grew 18% to reach $29.5 billion. Keytruda represents over 40% of Merck’s current revenue, so extending its dominance is the primary strategy for the $275 billion-capped drugmaker.
Several companies are currently testing a PD-1 and VEGF bispecific antibody for NSCLC. Summit’s PD-1/VEGF bispecific antibody, ivonescimab, is already approved in China to treat certain patients with second-line NSCLC after data revealed that it may be superior to Keytruda.
Moreover, the bispecific is viewed as a major threat to Keytruda and is furthest along in development among other PD-1/VEGFs. Still, ivonescimab faces major hurdles. For starters, sparkling Chinese data must translate overseas, and the drug must prove its ability to improve overall survival.
Statistical Significance Still Pending for Ivonescimab
Last week, Summit Therapeutics revealed interim overall survival analysis. While ivonescimab shows a positive overall survival trend, implying a potential 22% reduction in the risk of death compared to pembrolizumab, it has not yet reached statistical significance.
The keyword is “yet.” As Summit notes, the data was conducted at 39% maturity, suggesting that the trend could eventually achieve statistical significance, boosting its adoption in the NSCLC and competing with Merck. While it extends the timeline, ivonescimab, and other PD-1/VEGFs, remain on a path towards utilization in NSCLC barring any major disappointments. Besides, this isn’t Merck’s biggest problem.
In its Q1 results published last week, Merck reported a 2% decrease from the previous year. Key products like KEYTRUDA saw a 4% increase in sales, while GARDASIL/GARDASIL 9 experienced a significant 41% decline due to lower demand in China.
Merck’s Post-Keytruda Strategy
As alluded to earlier, Keytruda is nearing its 2028 loss of exclusivity. While this doesn’t necessarily mean that Keytruda revenues will immediately drop from $29.5 billion to zero, it will undoubtedly slow its growth and lead to gradual declines in the coming years. Merck, a large pharmaceutical company, is no stranger to these risks and has had plenty of planning time.
The first port of call is animal health. MRK’s revenue in this segment grew 4% in 2024 to almost $6 billion. Meanwhile, previous acquisitions, like the Acceleron Pharma $11.5 billion buyout in 2021, are beginning to pay off. Winrevair, for the treatment of pulmonary artery hypertension, despite earning approval just last year, already generated $419 million and is widely expected to become a blockbuster drug.
Moreover, Merck has several internally developed drug candidates up its sleeves. Still, there probably isn’t a drug out there that can replace Keytruda, which is one of the best revenue-generating drugs of all time. Merck’s strategy is to extend Keytruda’s market exclusivity by developing a subcutaneous version, allowing a more convenient administration than intravenous Keytruda.
However, some have expressed skepticism about the subcutaneous version’s clinical value. This is particularly relevant because when intravenous Keytruda biosimilars hit the market, subcutaneous Keytruda’s increased costs must be justified for its adoption. Lastly, other companies are also exploring subcutaneous PD-1s. For instance, Roche’s Tecentriq was approved for subcutaneous injection in NSCLC, melanoma, and liver cancer in September 2024.
Is Merck a Good Stock to Buy Today?
On Wall Street, Merck has a Moderate Buy rating based on 12 Buy, seven Hold, and zero Sell ratings in the past three months. Its average price target of $105.29 implies a ~24% upside in the next twelve months.
Last week, analyst Daina Graybosch of Leerink Partners maintained a Buy rating on MRK with a price target of $115. The analyst expressed optimism over Merck’s “strategic efforts to mitigate macroeconomic risks and uncertainties despite concerns over the Keytruda 2028 loss-of-exclusivity.” In particular, the analyst is looking forward to Merck’s Phase 3 drug candidate, enlicitide, an orally administered PCSK9 inhibitor for cholesterol management. Its differentiated oral administration could be attractive within the multi-billion-dollar global PCSK9 inhibitor market if successful in late-stage trials and approved.
In addition, BMO Capital analyst Evan Seigerman says Merck’s (MRK) Keytruda “still reigns” after the interim analysis for Akeso and Summit Therapeutics’s PD-1/VEGF “muddies the outlook” for a potential ivonescimab survival benefit in non-small cell lung cancer.
MRK Must Reinvent Itself to Stay Relevant
While delayed competitor success uplifted Merck’s stock, Keytruda’s looming loss of exclusivity weighs heavily. I doubt its subcutaneous Keytruda strategy will be enough to ward off the pricing pressures and subsequent revenue decline associated with biosimilar competition.
While approved drugs like Winrevair and speculative ones like enlicitide show promise, it pales in comparison to Keytruda’s peak performance. Subsequently, despite strong earnings potential and generous dividend yield of 3.82% that may appeal to value investors, I believe that Merck’s stock will continue to be limited by Keytruda’s vulnerabilities.