Keytruda Continues To Drive Growth For Merck

Merck (NYSE:MRK) recently posted its Q1 results, which were more or less in line with street estimates. The company’s overall sales jumped 6%, led by a ramp up in its Oncology drug Keytruda. The company’s management stated that its Keynote – 189 trial results were encouraging, and it will drive Keytruda growth in the long run. The company’s Animal Health segment also did well with a 13% jump in sales. We have created an interactive dashboard of the company’s expected performance in 2018. You can adjust the revenue and margin drivers to see the impact on the company’s performance.

Expect Oncology To Drive Near Term Growth

Merck’s Q1 growth was primarily led by its Oncology segment. Keytruda continued to perform well with a solid 2.5x growth (y-o-y) to $1.46 billion. We expect this trend to continue in 2018, and estimate the sales to top $5 billion. Keytruda is on a strong run due to its recent FDA approvals. The drug was initially approved for advanced Melanoma, but saw its usage expand to multiple other areas, including metastatic or recurrent head and neck squamous cell carcinoma, as well as metastatic non-small cell lung cancer. In fact, in 2017 itself, Keytruda received 5 FDA approvals, including the first cancer treatment for any solid tumor with a specific genetic feature, and first line combination therapy for patients with metastatic non-squamous non-small cell lung cancer, irrespective of PD-L1 expression. Keytruda has large addressable market because of its approval for lung cancer. The commercial opportunity is huge due to larger population of potential patients.

Looking at the other segments, we now expect the Anti-Infective segment to see a low-single-digit decline in 2018. Gardasil have been trending well of late, and grew 24% (y-o-y) in Q1. However, Zepatier continued to face headwinds and saw a 65% decline in sales, as it lost market share and posted volume declines in the recent past. Gardasil will likely continue to do well in the near term, as it was approved in China last year, and it should aid the overall sales. Apart from Oncology and Other Pharma & Segments, we don’t expect any segment to post revenue growth for Merck in 2018. Other Pharma & Segments will likely see mid-single-digit growth in 2018, primarily due to continued growth in its Animal Health business, which posted revenues of over $1 billion in Q1.

Overall, Merck’s Q1 results were largely in line with expectations, with a ramp up in Keytruda sales. We believe that Merck’s near term growth can largely be linked to Keytruda. We currently estimate the drug’s peak sales to be north of $7 billion. However, this can change meaningfully depending on its label expansion and approvals. It should be noted that the drug is currently being tested under 9 programs in phase 3 trials. The company’s overall outlook for 2018 is 4% to 7% growth in overall sales, and EPS guidance of $4.16 to $4.28. However, we expect the company to post revenues of $41.1 billion, and earnings of $4.20 in 2018. We forecast a TTM price to earnings multiple of around 15 by the end of 2018, which is slightly lower than most of the estimates for the sector, reflecting the risk of biosimilars to Merck, to arrive at our price estimate of $63 for Merck. This implies a premium of over 10% to the current market price.

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