Is Merck Going To Solve Cancer?

Published on November 22, 2022

After our initial coverage in Merck ($MRK), healthcare and pharmaceutical stocks very quickly became one of the only real games in town during this extended downturn.

Despite heavy supply chain woes and international sales getting hammered by a strong dollar, Merck has managed to hit our price target a whole quarter early! (Check out that article here.)

That's because Merck has had a deeply profitable yet deeply dull year.

While the rest of the Moby pharma roster has been driven by blockbuster results over at Biogen and Eli Lilly -- Merck has slowly plodded ahead and merely expanded where it was already strong. 

Merck's headline cancer treatment, Keytruda, has secured a whole new slew of approvals with dozens more slated for 2023. Gardasil is getting key international approvals and expanding worldwide. Only Lagevrio, Merck's COVID-19 collab with AstraZeneca, looks like it will slow down as vaccination rates rise enough to dent in COVID infections this winter. 

And after a year of brilliant success with Keytruda, Merck's trial pipeline is making them look like an anti-cancer powerhouse in an era where cancer diagnoses are expected to rise. 

And this was cemented yesterday when Merck announced a blockbuster acquisition of Imago Biosciences, a biotech company specializing in blood diseases and blood cancer like Leukemia.

Merck has essentially announced itself as the go-to pharma company at war with all cancer right now. And the market loved this enough to push them over our initial price target. 

There are a lot of small details to cover, but right now everything looks like it's going according to plan👇 

All of Merck's Headline Drugs are Blockbusters: 

There really isn't that much difference from our initial coverage. Merck is still growing off the back of its three key products:

• Lagevrio: A COVID-19 treatment pill that may start to slow down after Q1 of next year

• Gardasil: An HPV vaccine that exploded to $2.3 Billion in revenue this quarter

• Keytruda: A genuinely revolutionary antibody cancer treatment standing on top of the pile with $5.4 Billion in sales. 

Basically, Lagevrio is going to contribute to huge swings in revenue pending how COVID plays out this year, but it's risky because of how many other players are contributing to COVID treatment research. 

But Keytruda is going to be the difference-maker this year as it gets expanded treatment approvals. So let's talk about the once and future king first: 

Keytruda Keeps Getting More Coverage: 

Keytruda is a really amazing new way of treating cancer using antibodies. Basically, cancer cells can camouflage themselves in your body, but Keytruda basically destroys their invisibility shield, allowing your own immune system to attack and destroy the cancer cells. 

Keytruda rocketed to $5.4 Billion in sales during Q3 of 2022 on the back of a half-dozen approvals for different types of cancers. But the bull sentiment is being driven by positive results for stage 3 or higher trials for 10 other kinds of cancer. 

Let me clarify that point: while we think of cancers as like, a single disease, and we talk about finding a single "cure for cancer" -- cancer is a gigantic amalgamation of hundreds of different diseases.

Cancer is a theme in medicine -- not a single disease. So, every time Keytruda gets another approval, they massively expand the TAM for this wildly successful drug.

The key approvals we're watching for in the next six months are Ovarian and Prostate cancers. But the whole portfolio is looking strong moving into next year.

Gardasil's Revenue Isn't Slowing Down:

Merck's key vaccine Gardasil went on an absolute tear internationally, growing revenue to $2.3 billion this quarter. What's really impressive here is that Guaradasil stayed profitable despite the fact that it was growing internationally and having its revenue completely devoured by how strong the US dollar has been.

The lion's share of this growth came from China, as Merck finally managed to get around a few supply hurdles and make the treatment more widely available there. 

Normally, we'd raise our eyebrows at this variety of success, but Merck has managed to only lose ~4% of revenue growth to foreign exchange, keeping revenue growth at a staggering 14% YoY.

That is an insane level of cost management. As Merck keeps supply and sales moving in the right direction, even a mild improvement of the macro environment will only push this stock higher.  

Imago Biosciences is a Huge Game-Changer:

And yesterday, Merck announced a massive acquisition of Imago Biosciences. The deal was cheap enough to send both Merck and Imago stock soaring. Imago is primarily known for an experimental series of treatments for Leukemia and other diseases that affect the bone marrow.

The acquisition itself is potentially a strong proof-positive for Imago's treatments, and the market is surging into buy mode. 

The short of it is simple: Imago has been developing drugs that attack a single molecule that goes haywire in your bone marrow when you get hit with a disease like Leukemia.

While Imago's treatment probably doesn't straight-up cure those diseases, it is a huge step forward in treating them and making them much more survivable. 

The implications for Merck couldn't be better. This acquisition positions Merck's portfolio as a full-spectrum multi-cancer treatment behemoth. And in an environment where cancer rates are only going to rise in the next 15 years, this could not be a better positioning bet for them. 

Merck Outlook:

From our view, this snapshot of Merck is important to help us understand the pharmaceutical thaw currently happening across the market. Stocks like Moderna absolutely ripped through 2020 and 2021 off of the revolutionary mRNA technology powering their COVID vaccine. 

But for the rest of pharma, COVID was as much of a disruptor as anything else. Supply chain issues, labor issues, focus issues, all of that really dragged pharma, in general, down across the last two years.

That's why you see nothing but lateral growth from Merck recently. However, we're seeing lots of great news from Keytruda and other treatments.

Merck's core wheelhouse of treatments are finally getting prescribed normally now that people are starting to go back to the doctor and get treatments for things that aren't COVID. 

Merck is definitely in one of the more interesting positions in big pharma, as they stand to benefit regardless of whether or not COVID goes on another tear this year. On top of diversified growth, Merck is also sitting poised to break through some technical resistance lines that can push even more positive sentiment their way. 

We're excited about this position in Merck, but we want to also caution folks that market sentiment could sour after about 4 years with their patent on Keytruda set to expire at the end of the decade. So it goes for the life cycle at big pharma. 

Price Target: $131 (25% upside)

Current Price: $105

Target Date: Q4 2023

Rating: Overweight

Risk / Reward: Medium / Medium

Ticker: MRK

Market Cap: $267B

Dividend Yield: 2.7%