Can Merck’s Keytruda Be Worth $200 Billion?

Keytruda is to Merck (NYSE:MRK), the way iPhone is to Apple. From nothing, it garnered >$11 billion in sales over the last 5 years, and it is now a leading oncology drug. In this note, Can Merck’s Keytruda Be Worth $200 Billion By 2025?, we estimate an “outlier” case where Keytruda can grow from $11 billion in 2019 to >$30 billion in revenues, and worth almost $200 billion to Merck. In comparison, Merck’s total market cap today is about $177 billion. While a lot needs to fall in place for that to materialize, oncology as a therapeutic area has a history where success in one cancer type, example skin, or lung cancer, is known to snowball into approvals and success for other types of cancer, such as, renal, prostate, or head & neck.

In Keytruda’s case, it first secured regulatory approvals for skin cancer in 2014, and later its use expanded to gastric, bladder, Hodgkin’s lymphoma, cervical, liver, head & neck, and most importantly 1st line treatment for lung cancer. These approvals helped the company reach $11 billion in sales in 2019. But the party is far from over. Keytruda is currently undergoing 14 different trials in Merck’s late-stage pipeline. Some of those indications, such as breast and prostate cancer are very lucrative markets. While Keytruda has been leading the revenue growth, the company’s vaccines portfolio is also helping. Our analysis of Merck’s Revenues, compares the company’s different segments, their historical performance, forecast, and peer comparison in detail.

In this analysis, we focus on an outlier case of how Keytruda can add $22 billion in incremental revenues by 2025. It is possible for Keytruda with success on 2 fronts:

• Establishing leadership position in indications it has already entered, including lung, cervical, renal, gastric, Hodgkin’s lymphoma, skin, and head and neck cancer, collectively worth more than $35 billion
• Entering + establishing leadership positions in indications currently in trial, including breast, colorectal, ovarian, and prostate cancer, worth over $30 billion

Below we discuss the size of different indications, and Keytruda’s current state in each. Look at our interactive dashboard analysis on Keytruda Sales vs Indications Timeline, which shows the drug’s approvals by year, and how approvals map into sales increases.

#1.1. Lung Cancer:

Keytruda is the leader in the lung cancer market. [Keytruda $7 billion; lung cancer market > $20 billion]

• Lung cancer is the largest market within oncology. Over $20 billion plus sales garnered from top drugs, including Merck’s Keytruda, BMS’ Opdivo, Roche’s Tecentriq and Alecensa, and Pfizer’s Xalkori.
• Keytruda and Opdivo’s primary source of revenue is lung cancer, but they are also approved for other indications, including skin, renal, head & neck cancer, and Hodgkin’s lymphoma, among others.
• Lung cancer is also one of the largest markets, in terms of diagnosis each year. For 2020, it is estimated that 228,820 new cases of lung cancer will be diagnosed in the U.S., and Keytruda will likely continue to be the leader.
• Note that drug revenues in charts are for all indications combined for a drug, example, Keytruda is about $7 billion in lung, and about $11 billion total in 2019.

#1.2. Renal Cancer: 

[Renal cancer market > 5 billion]

Novartis leads in renal cancer with sales of over $2 billion, followed by Pfizer with sales of $1.5 billion.

• Keytruda secured the approval for renal cancer in combination with Pfizer’s Inlyta as first line treatment in Aug 2019.
• The market for renal cancer is over $5 billion in size with top drugs being Novartis’ Afinitor and Votrient, Pfizer’s Sutent and Inlyta, and Bayer’s Nexavar.
• Afinitor’s primary indication is cervical cancer, but it has also been approved for breast cancer. Similarly, Sutent is also approved for pancreatic cancer, and Nexavar is also approved for thyroid cancer.

#1.3. Breast Cancer:

[Breast cancer market > 18 billion]

Roche leads the breast cancer market with sales north of $11 billion, followed by Pfizer with $5 billion.

• Keytruda is currently being tested in phase 3 trials for the treatment of breast cancer, and Merck would be eyeing a lion’s share in this indication.
• Breast cancer is the second-largest oncology market with over $17 billion sales garnered from top drugs, including Roche’s Herceptin, Perjeta, and Kadcyla, Pfizer’s Ibrance, and Novartis’ Kisqali.
• Herceptin’s primary indication is breast cancer, but it is also approved for gastric cancer.
• Breast cancer is a large addressable market with over 275,000 new cases expected in 2020.

#1.4. Prostate Cancer:

[Prostate cancer market >10 billion]

Johnson & Johnson And Astellas Pharma lead the prostate cancer market with sales north of $3 billion each. 

• Keytruda is currently being tested in phase 3 trials for the treatment of prostate cancer.
• Prostate cancer is the most common type of cancer (after skin) in men.
• Prostate cancer is a large addressable market with over 191,000 new cases expected in 2020.

#1.5. Cervical And Gastric Cancer:

[Cervical & Gastric cancer market > 8 billion]

Roche is the leader in cervical cancer with sales of over $7 billion, while Eli Lilly’s Cyramza is one of the key drugs for gastric cancer with sales of around $1 billion.

• Keytruda secured approval for gastric cancer in 2017 and for cervical cancer in 2018.
• Cervical cancer drug market size is north of $7 billion with Roche’s Avastin being the primary drug.
• Apart from Cyramza, Roche’s Herceptin is another drug approved for gastric cancer.
• Cyramza’s primary indication is gastric cancer, but it has also been approved for other indications, including lung cancer, colorectal cancer, and hepatocellular carcinoma.
• Avastin’s primary indication is cervical cancer, but it has been approved for other indications, including renal, colorectal, lung, and brain cancer.

#1.6. Head & Neck Cancer And Bladder Cancer:

[Head & Neck And Bladder cancer market > 2 billion]

Eli Lilly’s Erbitux is one of the key drugs for head & neck, and AstraZeneca’s Imfinzi for bladder cancer.

• Keytruda secured approval for head & neck cancer in 2016, and for bladder cancer in 2017.
• Eli Lilly’s Erbitux is the approved targeted therapy for head & neck with sales of around $0.5 billion, while AstraZeneca’s Imfinzi with sales of around $1.5 billion is one of the approved immunotherapy treatments for bladder cancer.
• Bristol-Myers Squibb’s Opdivo is another drug approved for head & neck cancer, while Johnson & Johnson’s Balversa was approved only in 2019 as a targeted therapy for bladder cancer.
• Other approved immunotherapy treatments for bladder cancer include Bristol-Myers Squibb’s Opdivo, Pfizer’s Bavencio, and Roche’s Tecentriq.
• Erbitux is approved for colorectal and head & neck cancer while Imfinzi is also approved for stage 3 lung cancer.

#2 Merck’s Keytruda Valuation Could Be $200 Billion In 2025

• We arrive at Keytruda’s valuation using a price to earnings multiple of 20x, the company’s adjusted net income margin of 30%, and average sales growth of 20% between 2019-2025.
• The company’s margins have fared well over the last few years, led by a decline in Merck’s expenses, when viewed as a percentage of revenue.

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