Merck, one of the top pharmaceutical companies, regularly brings in substantial revenue and profits. Nevertheless, its stock has faced challenges over the last year primarily because it heavily depends on Keytruda, its renowned cancer treatment. Despite being the world’s best-selling drug, Keytruda is expected to encounter a patent expiration by the end of the coming decade – a potential risk that investors should keep in mind.
Merck is exploring strategies to lessen competitive pressures, and they’ve recently taken an action that might aid in this endeavor. Is it worthwhile for investors to purchase the stock?
Merck dishes $10 billion to expand its lineup
On July 9th, Merck announced their intention to purchase Verona Pharma, a British biotech company focused on creating medications for respiratory illnesses, for a sum of $10 billion in cash. This acquisition will enrich Merck’s offerings by including Ohtuvayre, a treatment for chronic obstructive pulmonary disease (COPD), within their product line.
Last year, the U.S. Food and Drug Administration (FDA) endorsed Ohtuvayre as a treatment for COPD, and it’s proving to be quite promising. The initial launch has been successful, and ongoing investigations into its effectiveness across other health conditions may pave the way for broader application or label expansions in the future.
It appears that several experts predict Ohtuvayre’s sales might reach approximately $4 billion at their peak. This suggests another potential commercial success for the company. However, the question remains whether this would be sufficient to outperform Keytruda in the market.
Merck’s multipronged approach
In recent years, Merck has signed multiple agreements, one of which was the acquisition of Acceleron Pharma for approximately $11.5 billion in 2021. This purchase enabled them to introduce Winrevair, a medication designed for pulmonary arterial hypertension. Winrevair is another promising treatment option, with estimates suggesting peak sales could reach around $3 billion.
Comparing Ohtuvayre and Winrevair, their combined peak annual revenue is approximately $7 billion, which is significantly less than the $29.5 billion Keytruda brought in last year. Even though Merck needs much more than that, they do have a well-thought-out strategy.
The company made some acquisitions that haven’t produced products with significant market success yet. One such acquisition was Prometheus Biosciences in 2023, which had a potential drug for ulcerative colitis, MK-7240. If this drug passes enough clinical trials and gets approval from the FDA, it could be another valuable asset for the company’s collection.
I’m thrilled to share that Merck isn’t solely banking on acquisitions for its future beyond Keytruda. One of our most promising in-house projects is a subcutaneous (SC) variant of our prized asset – SC Keytruda. In a recent phase 3 clinical trial, this SC version demonstrated noninferiority compared to the original intravenous Keytruda in treating patients with non-small cell lung cancer, a significant market for our star drug.
Instead of the older version, the upgraded cancer treatment offers several benefits. For instance, it dramatically decreases the amount of time patients need to spend in the treatment area, as well as reducing the time doctors invest in preparing the treatment, delivering it, and observing patients post-treatment.
In the end, Keytruda by SC is expected to bring in a significant amount of business across various initial applications. Moreover, with the new treatments that Merck now owns, the company should be able to offset its losses when biosimilar competition for Keytruda appears on the market.
The stock could perform well post-Keytruda
Currently, Merck boasts over 80 projects spanning both their phase 2 and phase 3 development pipelines. Therefore, there are likely additional promising discoveries yet to be unveiled within the company’s portfolio.
Neglecting the expansion of labels for existing drugs, a 25% success rate on newly developed pharmaceutical substances implies multiple new product launches within the next five years. Not every launch will become a blockbuster, but Merck’s extensive research pipeline and recent strategic decisions demonstrate their ability to go beyond Keytruda.
Over and above the existing motivations, it’s worth pondering over the prospect of purchasing Merck’s stocks. Notably, I find their shares strikingly affordable at the moment. The company is currently trading at a multiple of just 9.3 times its forward earnings estimates – an exceptionally low figure compared to the sector average of 16.2 for healthcare companies.
As I stand by, I can’t help but notice the impressive nature of Merck as a dividend stock. Its forward yield hovers comfortably at approximately 4%. Moreover, over the past ten years, this company has shown remarkable growth by boosting its dividends an astounding 88.8%.
Over the last year, Merck’s stocks haven’t kept pace with the overall market, but if you’re prepared to be patient, the company’s future looks promising.
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2025-07-20 17:02