Morningstar | Supported by Keytruda, Merck Posts Solid 2Q as Outlook in Immuno Oncology Appears Underappreciated
Merck reported second-quarter results slightly ahead of both our and consensus expectations, but we don't expect any changes to our fair value estimate based on the minor outperformance. We continue to view the company as undervalued largely due to our bullish expectations for cancer drug Keytruda, with almost $15 billion of sales projected by 2022, ahead of consensus expectations of $13 billion. Also, Merck's leading position in immuno-oncology (led by Keytruda) helps reinforce our wide moat rating for the firm.In the quarter, strong Keytruda growth (up 86% operationally) helped offset growing generic competition, leading to total sales growth of 4%, a growth rate that should largely continue over the remainder of the year. While generic pressures and heavy branded hepatitis C competition remain for the back half of the year, these headwinds should recede in 2019. Further, new indications for Keytruda should continue to drive strong growth for the drug over the next several years. In particular, we expect U.S. approval for Keytruda in first-line squamous non-small-cell lung cancer by the Oct. 30 U.S. Food and Drug Administration deadline and European approval for the use of Keytruda in combination with chemotherapy in NSCLC patients regardless of PDL1 expression by the end of the year. In lung cancer, we expect Merck will gain over 60% of the late-stage disease market, ceding share to Roche and Bristol in the smaller biomarker disease areas that show expression of ALK/EGFR and TMB. Further, we expect Keytruda will gain a new indication in liver cancer by the Nov. 9 FDA deadline.
Outside of immuno-oncology, the majority of Merck's products are more mature and facing poor growth prospects with the exceptions of anesthesia-related drug Bridon, HPV vaccine Gardasil (in international markets) and the animal healthcare division, all of which showed strong growth in the quarter and should continue to post steady gains over the next several years.
For a deeper dive into the outlook for Keytruda and competitive immuno oncology drugs, please see our report "Overall Immuno-oncology Market Underappreciated, Supporting Undervalued Wide-Moat Firms Roche, Merck and Bristol-Myers."
Merck & Co. is a global health care company that delivers health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. The company's segments are: Pharmaceutical, which includes human health pharmaceutical products that consist of therapeutic and preventive agents for the treatment of human disorders, and human health vaccine products that consist of preventive pediatric, adolescent and adult vaccines; and Animal Health, which discovers, develops, manufactures and markets veterinary pharmaceuticals, vaccines and health management solutions and services, as well as a suite of digitally connected identification, traceability and monitoring products.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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