Merck Earnings: Strong Results Led by Keytruda and Gardasil as Pipeline Makes Strides

Merck MRK reported strong second-quarter results slightly above our expectations and raised full-year 2023 guidance, but we don’t expect any major changes to Merck’s fair value estimate based on the minor outperformance.

In the quarter, total sales increased 14% operationally (excluding COVID-19 treatment Lagevrio), but we expect this growth to slow as key products increasingly saturate the market. Cancer drug Keytruda (up 21%, representing over 40% of total sales) has room for growth, with likely the most potential in perioperative (early stage) lung cancer armed with leading clinical data. However, we expect the ramp-up of Keytruda sales in earlier-stage cancer settings to be slower than the metastatic stage. Also, human papillomavirus vaccine Gardasil (up 53%, representing over 15% of total sales) is growing well internationally, especially in China where the expanded label to girls and women ages 9-45 is boosting sales. These growth drivers helped offset generic pressures to diabetes drug Januvia.

Merck is making strides in the pipeline to reinforce its wide moat and prepare to mitigate the 2028 Keytruda patent loss. We remain the most bullish on pulmonary arterial hypertension, or PAH, drug sotatercept based on exceptionally strong phase 3 data showing an 84% improvement in event free survival of death or clinical worsening. We expect approval for the drug in 2024 with peak annual sales of over $3 billion. Also, melanoma drug V940 in combination in Keytruda holds the potential to become standard of care if phase 3 data (likely in 2024-25) can replicate phase 2 results.

We expect Merck to continue to redeploy capital toward acquisitions to build on the recent deals for Prometheus (gaining ulcerative colitis drug PRA023) and Acceleron (gaining PAH drug sotatercept). We believe Merck holds the potential to spend over $30 billion in acquisitions before the 2028 patent loss of Keytruda to help offset the eventual biosimilar pressures on the firm’s current key drug.