Merck: Marches Forward, One Of The Best Big Pharma Picks Of 2023

Summary:

• Q1 2023 earnings exceeded expectations, bolstered by blockbuster drugs Keytruda and Gardasil, with a raised FY23 outlook.
• Keytruda demonstrated 20.5% YoY growth, while Gardasil reported 35% YoY growth, driven by international launch and strong sales in China.
• Merck’s clinical pipeline shows promise with advancing candidates, including Sotatercept and oral PCSK9 inhibitor MK-0616.
• Despite risks like patent expirations and competition, Merck’s buy rating is maintained due to EPS growth prospects and late-stage candidates’ positive developments.

Post earnings update to thesis

We maintain a buy rating on Merck (NYSE: MRK) after Q1 2023 earnings that exceeded our expectations, showcasing robust growth and progress in its clinical candidates. Merck’s strong Q1 earnings, with a raised FY23 outlook, reaffirm our positive stance on the company’s growth potential, driven by blockbuster drugs Keytruda and Gardasil.

Keytruda, the cancer drug, experienced a 20.5% YoY growth to approximately $5.8B. Adjuvant lung indications are expected to be the next major growth driver for Keytruda, with steady uptake forecasted through 2024.

Gardasil, the HPV vaccine, reported a 35% YoY growth to around $1.97B. Its international launch, particularly in China, is progressing well, with sales increasing by 43% YoY. Looking at the trajectory, we foresee continued growth for Gardasil, potentially exceeding the company’s $11B forecast by 2030.

Furthermore, we highlight that Merck’s pipeline continues to advance with promising clinical candidates, such as the PCV program, sotatercept, Oral PCSK9, SubQ Keytruda, and PRA023. Given the progress in its internal pipeline, we believe Merck will actively pursue business development opportunities and prioritize late-stage, phase 2/3 assets. This strategy and the company’s significant cash generation allow for potential buybacks despite the RXDX deal and potential upcoming deals.

In terms of the $10Bn Prometheus deal, albeit expensive, we were pleased to see Merck’s concerted efforts to invest in immunology, cardiology, and oncology, both in business development and internal research, which we believe has a great strategic fit with Merck’s current and upcoming pipeline. Of note, Prometheus is a biotech that is developing a lead candidate, PRA023, targeting TL1A protein, which we believe could be the first biomarker in ulcerative colitis and other inflammatory conditions based on strong phase 2 data.

ACC 2023 data adds to our confidence

As we predicted in our previous initiation article, Merck announced highly compelling data on Sotatercept and oral PCSK9s. The key updates and our takes are summarized below:

Compelling Sotatercept PAH data

On March 6th, 2023, Merck presented Sotatercept’s phase 3 data. The primary objective of the Stellar trial was to assess exercise capacity by evaluating the mean change from baseline at week 24 in the six-minute walk distance (6MWD).

Sotatercept-treated patients outpaced the placebo group by 40.8 meters, exceeding the highest predictions of approximately 30 meters. The median difference in 6MWD with sotatercept, adjusted for placebo, was 34.4 meters, while Tyvaso, the top PAH drug, only showed a 20-meter difference after 12 weeks of treatment. We note that the study employed the Hodges-Lehmann estimate, a distinct statistical analysis that accounts for outliers and fills in missing data, such as from participants who passed away before the trial’s conclusion. We believe this should serve as a valid foundation for the FDA’s approval decision. Impressively, sotatercept met eight of the nine sequentially analyzed secondary efficacy endpoints, with time to death or clinical worsening being among the most vital. The 0.16 hazard ratio corresponds to an 84% reduction in time to death or the first non-fatal clinical worsening occurrence, which we believe is an impressive improvement not observed in other PAH studies. Furthermore, the safety profile was deemed acceptable, with a higher rate of treatment-related adverse events in the sotatercept group, 47.2% vs. 26.9% (placebo), albiet there was a marginally greater incidence of serious adverse events related to treatment in the placebo group, which is not clinically meaningful in our view considering the risk/benefit of having a new PAH drug with a novel mechanism of action. Adverse events more frequently observed with sotatercept were nosebleeds, dizziness, and spider veins.

On the back of this positive data, we expect approval of the sotatercept to happen during 2H of 2023. We believe Sotatercept will significantly boost Merck’s EPS, considering sales are expected to be>$2bn in 2033.

Positive data from oral PCKS9

We believe Merck’s focus on its cardiovascular portfolio, specifically the oral PCSK9 inhibitor MK-0616, can be a new growth driver for Merck, potentially plugging the gap in Keytruda’s decline in sales.

During the American College of Cardiology meeting, MK-0616’s phase 2 study fulfilled our previous expectations. In phase 2 dose-ranging trial, MK-0616 showcased a 41.2-60.9% placebo-adjusted LDL-C reduction, displaying a dose response and comparability with other PCSK9 inhibitors. Furthermore, in terms of safety, the treatment-related discontinuation rate for MK-0616-treated patients was 2% vs. 1% in the placebo group, achieving the target of below 3%. The company noted that despite a higher number of serious adverse events with MK-0616, none were attributed to the drug, and we are not worried about it, albiet larger phase 3 trial data’s safety would be pivotal for approval considering that the drug will be targeting a huge population similar to statins.

Moving forward, Merck plans to initiate pivotal development for MK-0616 in the latter half of 2023, launching a cholesterol-lowering trial to support a filing and a simultaneous cardiovascular outcomes trial. If successful, we expect MK-0616 could be a multi-blockbuster drug that offers an attractive oral lipid-lowering option that patients can take, like statins, without taking subcutaneous infusions like other PCKS9s (Praluent, Repatha, and Leqvio).

Of note, Credit Suisse predicts ~5Bn in peak sales, which we believe is highly achievable depending on how the company positions the drug’s pricing (not disclosed yet).

LDL lowering with PCSK9-targeting therapies:

Product/project	Company	Description	Study	LDL lowering
MK-0616	Merck & Co	Oral PCSK9	Ph2	6mg: 41%12mg: 56%18mg: 59%30mg: 61%
Praluent	Sanofi/Regeneron	SC PCSK9 MAb	Odyssey Long Term	58%
Repatha	Amgen	SC PCSK9 MAb	Descartes	55%
Leqvio (inclisiran)	Novartis	SC PCSK9 RNAi therapy	Orion-10 & 11	51-52%
All data placebo adjusted; Repatha, Praluent & Leqvio + background statins, MK-0616 + range of statin therapy (~60% of pts on statins); SC=subcutaneous;

Click to enlarge

Source: Evaluate pharma, product labels & ACC.

Risks

1. Patent expirations and generic competition, which could erode market share and profitability.
2. Regulatory and clinical trial setbacks that could impact growth prospects and valuation.
3. Intense competition in the pharmaceutical industry, posing a threat to Merck’s blockbuster drugs.
4. Pricing pressure and healthcare reforms, potentially leading to lower revenues.
5. Legal and regulatory risks, negatively impacting financial performance and reputation.
6. Global economic and political uncertainties, resulting in revenue volatility and business disruptions.

Conclusion

We maintain a buy rating for Merck stock based on the company’s compelling EPS growth prospects, led by Keytruda and Gardasil in the near/mid-term. Unlike what some market participants are worried about, we believe the late-decade loss-of-exclusivity cycle for Merck to be less of a concern looking at the recent positive development on upcoming late-stage candidates (PCV program, sotatercept, Oral PCSK9, PRA023). Please read our initiation article for more detail about the company’s overall strategy and positioning.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of MRK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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