How Merck Gets To $51 Billion: Oncology or Vaccines?

Merck (NYSE:MRK) revenue grew from $39.8 billion in 2016 to $46.8 billion in 2019, and it is estimated to top $51.5 billion in 2020, primarily driven by its oncology drug, Keytruda, according to our estimates. The company’s oncology drugs will account for 32% of the company’s total sales in 2020, and they will also be the key to the near term revenue growth. Oncology drugs are expected to be the single-biggest revenue driver with $16.4 billion in revenues, which is almost 2x the size of Vaccines, Merck’s second largest business segment, in 2020. Oncology drugs, which includes the blockbuster Keytruda, among other drugs, will be the fastest-growing segment – adding $11.8 billion over 2017-20 (103% of $11.5 billion in incremental revenues). This can be attributed to a decline in revenues from several other segments. Vaccines, which includes Gardasil, and Proquad, among others, will add about $2.7 billion over 2017-20 (23% of the $11.5 billion in incremental revenue). In this analysis, MRK Revenues: How Does Merck Make Money?, we focus on Merck’s business model, its revenue segments, their historical performance, forecast for 2021, and peer comparison, parts of which are highlighted below.

Merck’s Revenue Has Been On A Rise Over The Last Few Years

• Merck’s total revenue grew from $39.8 billion in 2016 to $46.8 billion in 2019.
• This growth was largely led by its oncology drugs portfolio, which benefited from higher Keytruda sales. We discuss more in the sections below.
• As we look forward, we expect the revenues to continue to grow led by Keytruda. The growth rate will likely slow in 2021, as higher sales of Keytruda could partly be offset by a decline in sales of some of the other drugs, including Noxafil, and RotaTeq, that will lose market exclusivity.

• Merck’s sales grew at a CAGR of 5.7% between 2016 and 2019.
• This compares with 4.5% CAGR for Johnson & Johnson, (0.7)% for Pfizer, and 6.6% for Roche.

Merck Has A Large Oncology Drugs Portfolio, Courtesy of Keytruda

• Merck’s oncology sales grew from $2.2 billion in 2016 to $12.3 billion in 2019, of which 90% can be attributed to Keytruda.
• We estimate the segment sales to grow to $18.6 billion in 2021, and continue to grow thereafter as well.
• The stellar growth in the past was primarily led by Keytruda’s approval as a 1st line treatment for lung cancer. Additionally, it has received approvals for several other indications, including renal, bladder, Hodgkin lymphoma, skin, cervical, and head & neck cancer.
• Moreover, the drug is being tested in phase 3 for additional indications, including breast, colorectal, and prostate cancer, which, if approved, will result in further upside to Keytruda’s sales.

Gardasil Is Driving Merck’s Vaccines Sales

• Merck’s Vaccines sales grew at a CAGR of 11% from $5.8 billion in 2016 to $8.0 billion in 2019.
• It will likely grow to around $9.2 billion by 2021, according to our estimates.
• Merck’s vaccines portfolio includes Gardasil, Proquad, Pneumovax, Rota Teq, and Vaqta.
• Gardasil is an important vaccine, used for protection against human papillomavirus (HPV), which can cause certain types of cancers, including cervical, head & neck, and throat cancer.
• Gardasil has gained traction over the last few years with sales of over $3.7 billion in 2019, and the sales could even top $5.0 billion, in our view. Proquad also generated sales of over $2.0 billion in 2019.

Diabetes Portfolio Protected Till 2022

• Merck’s Diabetes drugs portfolio includes Januvia and Janumet, with combined sales of over $5.5 billion in 2019.
• The segment sales have declined from $6.1 billion in 2016 to $5.5 billion in 2019.
• The segment sales will remain north of $5.0 billion over the next couple of years, but come 2022, both the drugs will face generic competition. Moreover, the sales are already seeing pressure from other drugs, reflected in decline in the segment sales over the past few years.

Among Other Segments, Animal Health Could Continue To See Steady Growth, While Diversified Brands & Women’s Health And Hospital Acute Care Could See A Decline.

• Diversified Brands & Other revenue has declined from $9.8 billion in 2016 to $8.5 billion in 2019, and it could decline further to $8.2 billion by 2021, led by increased competition for legacy drugs. Merck in February 2020 announced a spin-off of some of the products from its women’s health, legacy brands, and biosimilars businesses, into a new company. As such, this segment will no longer be part of Merck Inc., once the spin-off is completed.
• Looking at Animal Health & Other segment, the sales have increased from $4.7 billion in 2016 to $5.1 billion in 2019, led by the impact of the Antelliq acquisition in 2019. Antelliq provides digital animal identification, traceability, and monitoring solutions.
• Hospital Acute Care revenue has declined from $3.6 billion in 2016 to $2.8 billion in 2019, and it will likely hover around the $2.8 billion mark in the near term. This can be attributed to strong growth in Bridion sales, which will likely be offset by declines in Cubicin and Invanz, which saw their patent expire in 2016 and 2017 respectively, and they now face generic competition.

Impact of Coronavirus

• While the current coronavirus outbreak could result in supply disruptions, we don’t expect any significant impact on the company’s total revenue in 2020.
• Merck’s stock has seen a 15% drop since February 1 (through March 18), after the WHO declared a global health emergency. The markets have been on a decline since, amid fears of global recession after the coronavirus outbreak outside of China, and oil price war.
• Merck, in particular, will likely outperform the broader markets, when the current crisis winds down, given that Keytruda will continue to drive its earnings growth. Even after the 2008-09 crisis, Merck outperformed the broader markets during recovery.
• For more detailed charts and a timeline of the 2008 and 2020 crisis for different stocks, view our interactive dashboard analyses on coronavirus.

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