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Leading drugmaker Merck & Co., Inc. (NYSE:MRK) is facing multiple, significant challenges over the longer term, including likely meaningful competition to and increased regulatory scrutiny of its blockbuster cancer treatment, Keytruda.
And the sales of its Januvia diabetes drug are likely to tumble after it agreed to reduce the amount radically that it charges Medicare for the treatment. Meanwhile, the revenue growth of the company’s Gardasil, a vaccine for HPV, slowed sharply last quarter, apparently driven by developments in China. And the valuation of MRK stock is not very far below the sector average.
Given all of these points, although the drugmaker does have major, potential opportunities over the longer term, I view the name as a sell for now.
Keytruda May Face Tougher Competition in Lung Cancer
Drugs.com lists about 25 types of cancers for which Keytruda, a checkpoint inhibitor, is commonly used. My research suggests that the drug may soon face increased competition in at least three of these major indications: lung cancer, endometrial cancer, and bladder cancer.
In NSCLC, one of the most common types of cancer, Keytruda could face tougher competition from a drug developed by Summit Therapeutics Inc. (SMMT) and China-based Akeso. In a China-based Phase 3 trial involving non-small cell lung cancer patients who took the challengers’ ivonescimab drug, the patients had statistically better progression-free survival results than Keytruda has generated among NSCLC patients, according to Fierce Pharma.
The FDA would likely require Summit and Akeso to prove that the drug improves the overall survival rates of NSCLC patients, and it may be challenging to get the treatment approved by the agency based only on data from China. Still, over the longer term, ivonescimab could take away a portion of Keytruda’s NSCLC revenue.
Another longer-term, potential threat to Keytruda is posed by ImmunityBio, Inc.’s (IBRX) Anktiva. In April, the company announced that Anktiva had almost, compared to standard chemotherapy, doubled the overall survival of NSCLC patients whose cancer had not responded to checkpoint inhibitors, including Keytruda. More specifically, these NSCLC patients, who took a checkpoint inhibitor and Anktiva, had nearly double the overall survival rate of those who received standard chemotherapy.
Last month, ImmunityBio noted that it had met with the FDA to discuss seeking approval for Anktiva in combination with checkpoint inhibitors as a treatment for NSCLC. The company indicated that the agency had requested more information and would require the firm to conduct an additional trial of Anktiva as a treatment for NSCLC.
Still, in the not-too-distant future, it may be determined that Anktiva works best with a checkpoint inhibitor other than Keytruda or a study could show that Anktiva is just as effective alone without any checkpoint inhibitor. Such a scenario could significantly reduce Keytruda’s sales.
Bladder Cancer and Endometrial Cancer
Anktiva poses a tougher threat to Keytruda in some patients with bladder cancer, where the drug has already obtained FDA approval. Moreover, ImmunityBio disclosed that insurers covering over 100 million Americans had agreed to cover Anktiva. Impressively, 62% of the 77 bladder cancer patients who took Anktiva in a trial had complete responses. That was well above the 41% complete response rate for Keytruda among the same patient population in 2020.
In endometrial cancer, UK-based GSK plc’s (GSK) drug, Jemperli, was approved by the FDA last month for all “adult patients with primary advanced or recurrent” cases of the disease. What’s more, Jemperli, which was previously approved to treat a much smaller percentage of those with the disease, may have an important edge over Keytruda. That’s because the overall survival rate of endometrial cancer patients who received Jemperli was 16.4 months higher than those who received only chemotherapy in a trial. Conversely, Merck, as of August 2, had not yet produced “mature” overall survival data for Keytruda among endometrial cancer patients, and my research suggests that it had not unveiled such data as of September 2.
Merck’s Regulatory Issues
Outside advisors to the FDA are slated to meet on Sept. 26 to decide whether to recommend that the use of Keytruda, along with two other checkpoint inhibitors, should be restricted for stomach cancer patients. In 2017, a study reportedly found that up to 90% of patients who received checkpoint inhibitors had “significant immune-related adverse events.” The fact that the FDA is convening a panel to discuss whether to curtail the use of these drugs by stomach cancer patients may suggest that worries about their side effects, in general, are growing among healthcare professionals.
Also on the regulatory front, Merck, under pressure from the Biden administration, agreed to slash the price that it charges under Medicare for a 30-day supply of its diabetes drug, Januvia, to $113 from $527. In the second quarter, Januvia generated $629 million of Merck’s $16.1 billion of revenue.
Gardasil Is Having a China Problem
In Q2, the revenue generated by Merck’s HPV vaccine, Gardasil, increased just 1% versus the same period a year earlier to $2.48 billion. The company blamed the “timing of shipments” in China. But CEO Rob Davis noted that the market for HPV vaccines in China “experienced this step down” in Q2. This statement suggests that the market for HPV shots in the country could be declining significantly, and such a trend could continue to weigh on Merck’s financial results going forward.
Estimating the Potential Impact of the Keytruda, Gardasil Threats
If Keytruda sales decline 10% from Q2 levels, that would equate to a decline of $727 million. China reportedly accounts for about 50% of Merck’s total revenue from Gardasil. If the drug’s sales in China decline 10% from Q2 levels, that would equate to roughly a 5% decline in total Q2 Gardasil revenue of $2.5 billion or about $125 million. Taken together, the potential declines would come in at about $850 million. That would add up to a significant drop of 5.3% of the company’s total Q2 sales of $16.1 billion.
Positive Catalysts
Merck does have a number of positive catalysts, and these are certainly risks to my sell thesis. First, Keytruda is frequently being approved for new indications. For example, in June it was approved as a treatment for “adult patients with primary advanced or recurrent endometrial cancer.” So not surprisingly, its sales continue to grow substantially. What’s more, last year, Merck licensed three cancer drugs from Japan’s Daiichi Sankyo, and the FDA agreed to evaluate one of the drugs for use as a third-line treatment for some NSCLC patients.
And in March, JPMorgan estimated that the peak annual sales of Merck’s pulmonary arterial hypertension drug, Winrevair, could reach as high as $4 billion. The drug generated just $70 million in sales last quarter.
Meanwhile, Merck is partnering with Moderna, Inc. (MRNA) on an advanced melanoma treatment, V940. In combination with Keytruda, v940 has reportedly “shown promising phase 2 data” for use in post-surgery melanoma patients. Finally, Merck had $11.35 billion of cash and short-term investments, along with just $3.07 billion of short-term debt, as of the end of last quarter.
Consequently, even though it did have $34.7 billion of long-term debt, it can likely always carry out acquisitions that can significantly improve its outlook.
Valuation Is Mixed
Merck’s non-GAAP trailing price-to-earnings ratio is 18.2, 11% below the sector median of 20.5 times. On the other hand, its trailing price-to-cash flow ratio is 18, just 3.67% below the sector mean of 18.7 times. In any case, given the major threats that the firm is facing, I don’t believe that the stock’s relatively low discount to the sector averages makes the shares attractive.
