Here Are The Implications Of Merck Withdrawing Its Keytruda Application From EU
Merck (NYSE:MRK) withdrew its EU filing for the approval of Keytruda in lung cancer a few weeks ago. This naturally casts doubt over the sales forecast for Keytruda, which has emerged as a key growth driver for the company. Take a look at our interactive breakdown of Merck’s business, which can be used to test scenarios and judge whether the market reaction was justified.
Our price estimate for Merck stands at $64, which is meaningfully above the current market price.
Merck Withdrew Because Filing Was Premature And Lacked Sufficient Data Support
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Merck had filed for EU approval for Keytruda/chemotherapy combo for first line non-small cell lung cancer, supported by small clinical trial data which would likely have been insufficient. However, the company hoped that it would be able to present data from a bigger ongoing phase 3 trial in time. However, that didn’t happen and the expected trial conclusion was delayed until early 2019. This delay may raise some doubt over the efficacy of the drug, which would pose some valuation risk to the company given its importance.
Valuation Risk Can Be Meaningful As We Expect Keytruda To Account For 15% Of Merck’s Business In The Long Run
10% Downside Risk If Merck Fails To Get Keytruda Approval In EU
The EU typically accounts for around 30-40% of the global market for branded drugs. Therefore, EU approval failure for Keytruda could reduce our forecast for Merck’s oncology revenue from $6 billion to $4 billion, implying more than a 30% decline. In addition, Merck’s gross margin, which jumped last year due to the Keytruda ramp-up, could fall back to 70% if sales growth slows down. This scenario would imply a 10% downside to our price estimate for the company. However, it should be noted that Keytruda could get EU approval for other indications, which can meaningfully reduce this downside risk. This scenario assumes that in the long run, most of Keytruda’s revenue will come from its use in treating lung cancer, which is one of the most common cancer types.
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