The push to develop the mRNA COVID-19 vaccine was one of the most astonishing engineering and scientific efforts of all time. There were decades of dry-powder research and a brilliant multi-national effort to turn that research into an effective way to produce mRNA at scale. And then there was an even more difficult parallel effort to figure out an effective delivery mechanism for that mRNA-based vaccine.
But what's crazy is that this mRNA technology is going to lead to even more breakthroughs in the medical field for years to come. And at the same time, this pulled a LOT of focus into the pharma industry over the last 2 years. On the sidelines, there are a LOT of underreported breakthroughs happening that will drive value in their own right for years to come.
One company powering those breakthroughs is Merck -- who just posted a brilliant Q1 earnings report and looks to be poised for a breakout after 3 years of sideways motion. Merck did a lot of work to help bring the COVID 19 mRNA vaccine into existence, but it's their COVID treatment pill, Lagevrio, which is helping push into a new era of growth for the company.
However, it is Merck's incredible work in cancer treatments that are going to be the big differentiator this year. Their alternative to chemotherapy, Keytruda, is poised to take on a huge amount of market share with expanded approvals.
And the key to picking the right stocks in pharma/biotech is much more about advances in medicines because they drive future financial performance. Let’s get into it👇
Merck Overview:
Okay, Merck has technically been around for like, 400-ish years. We're not going to be able to cover a solid overview of the company without talking your ear off. The oversimplified version is that Merck has been a mid-tier big-pharma player for a while, really coming to prominence across the back half of the 20th century. They rose to prominence on the back of a few solid drugs.
But we want to talk about what's driving growth at Merck now. Merck is mostly popping off mainly due to three products:
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Lagevrio: A COVID-19 treatment pill that pulled in $3.2 Billion in sales last quarter
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Gardasil: An HPV vaccine that has grown 60% in the last year to $1.5 Billion in sales
- Keytruda: A genuinely revolutionary antibody cancer treatment standing on top of the pile with $4.2 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:
Keytruda is a really amazing new way of treating cancer using antibodies. Basically, Keytruda is an IV drug that attaches to certain receptors on cancer cells that help activate your body's own immune system to attack tumors better. It's actually a really fascinating mechanism because--
Editor's note: We had to step in here and muzzle our pharma analyst because (once again) he turned a simple stock analysis into an 8-page paper on biochemistry and immunology. We're sure that's cool and all, but we don't think that's what you're here for. If you want us to unleash our pharma guy and tell you more about the really dense science stuff behind what makes these products powerful enough, please let us know in the comments. Let's get back to the real analysis though.
Keytruda rocks because let's face it, chemotherapy sucks. Chemo was an incredible breakthrough and has saved millions of lives, but it's hell to go through. Keytruda beats chemo because your own immune system is way more precise than carpet-bombing your body with radiation. (But, it's important to know that Keytruda has some real gnarly side effects too. Cancer sucks y'all)
Right now, Keytruda is approved to treat a handful of different cancers, but it's getting more approvals all the time. Because of the way different tissues in the body are constructed, Keytruda probably won't ever be a general-purpose cancer treatment the way chemo is--but it has a LOT of room to expand.
That's why Keytruda is both the biggest current line-item on Merck's revenue sheet AND the biggest growth potential moving forward. We expect expanded sales from Keytruda every quarter.
While Keytruda is the strong foundation for Merck's new breakout, Lagevrio is the wildcard.
Lagevrio and the COVID cycle:
Yea so we don't talk enough about treating COVID once people get infected and that infection turns bad. A lot of our mental effort in the last year has been focused on getting people vaccinated. But coronaviruses are tricky and treatment is also extremely important.
Merck's Lagevrio is a really important COVID treatment that looks really promising compared to other drugs like Paxlovid. I don't want to bore you with the details, but basically Lagevrio hijacks a coronaviruses ability to replicate mid-infection. It doesn't stop the virus completely, but it trips it up enough to give a patient's immune system the chance to catch up and beat it. Just keep in mind this is a fairly drastic oversimplification of the mechanism.
COVID turns really bad when the infection gets widespread, so folks who get prescribed Lagevrio early enough have a really strong chance of getting through a bad COVID infection without really severe symptoms.
But let's look at this from the business side of the equation.
Lagevrio accounted for 20% of Merck's sales in Q1 2022. This is equal parts amazing and risky because of how fast this COVID pandemic is moving.
While it's impossible to predict new variants and how COVID will evolve and develop, the pandemic is starting to follow predictable cycles. Typically, there's a huge wave of COVID cases and hospitalizations that kicks off in mid-November and lasts through most of January. These Q1 sales picked up the back 3rd of this latest omicron wave.
If there are any other big COVID waves, Lagevrio prescriptions will rise in tandem. Even with widespread vaccinations, these new variants of COVID 19 can still produce breakthrough infections that require treatment in vaccinated people. This isn't because vaccines are ineffective, but more due to the fact that Coronaviruses are particularly evil in how they change and evolve over time.
So, we might see Lagevrio sales lag behind in future earnings reports, or completely pop off if there's another big COVID wave. The way the virus is playing out right now, we can bare minimum expect a rise in cases and hospitalizations come Q4 2022.
But that's not a guarantee for Lagevrio though. There are LOTS of COVID treatments in trials right now and any one of them can get approved and unseat Lagevrio's current segment. It's a really crowded and competitive space. Lagevrio can rule it for a while or get completely replaced by a more effective treatment.
And it gets even riskier because Lagevrio is only authorized in the US (for now) for patients who can't get access to treatments like Paxlovid. This too can change pretty rapidly -- for better or for worse.
And lastly even if Lagevrio moves in a more positive direction, Merck is going to be sharing profits from it with their development partner -- so they're not getting access to all the margins associated with a Lagevrio run.
This is why Lagevrio is the wildcard of Merck's growth. It can provide a huge amount of value in the next year or instantly become irrelevant. This is the risky part of playing Merck through 2022.
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: $105 (24% upside)
Current Price: $87
Target Date: Q1 2023
Rating: Overweight
Risk / Reward: Medium / Medium
Ticker: MRK
Market Cap: $221.1B
Dividend Yield: 3.17%