Where will Merck stock be in 5 years?

Merck (MRK 0.53%) the stock has been a long-time winner for investors, returning 72% over the past five years. A major factor in the success of this pharmaceutical giant is its immunotherapy drug Keytruda, recognized as the global standard of care for various types of cancer.

On the other hand, investors must weigh in on some uncertainty about the Keytruda platform, which could lose patent exclusivity by the end of this decade, forcing Merck to find a new growth engine.

Let’s discuss where the stock might be in five years.

Importance of Keytruda to Merck

The Food and Drug Administration’s (FDA) approval of pembrolizumab, the generic name for Keytruda, in 2014 marked a breakthrough in cancer treatment, demonstrating an impressive ability to increase patient survival rates and long-term disease control.

For Merck, the drug has been a game-changer, posting sales of $26.3 billion in the past year and now accounting for 50 percent of its pharmaceutical business. In the second quarter, Keytruda sales rose 16% year-over-year to $7.3 billion, benefiting from accelerating adoption. The result helped Q2 revenue grow 7% over the same period.

Merck has a broader product portfolio with more than 52 drugs spanning categories such as vaccines, acute hospital care, cardiology, virology and diabetes, but it’s clear that Keytruda has led the charge.

Its next-biggest product is the human papillomavirus (HPV) vaccine Gardasil, with sales up 1% in Q2, contributing about 17% to pharma revenue. The group’s smaller animal health segment adds a layer of diversification but accounts for less than 10% of the total business.

Keytruda, which plays such an important role in the portfolio, becomes a problem for investors because the patent for the pembrolizumab formulation expires in 2028. Even if that deadline could still be extended or come with various exemptions, the challenge for Merck will be to -find his next blockbuster.

Meanwhile, the outlook remains constructive. Merck expects 2024 revenue to rise 5% to 7% from its 2023 result, while its earnings per share (EPS) target of $7.94 to $8.04 represents mid-point growth of 7% against the company record in 2022.

Image source: Getty Images.

Uncertainties in the next decade

Merck’s strategy focuses on securing new indications for existing pharmaceutical products while advancing a broad range of new candidates. There is much optimism for Capvaxive, which was recently approved as the first pneumococcal vaccine designed for adults. Similarly, the initial launch of Winrevair to treat pulmonary arterial hypertension is getting a strong reception in the field.

However, it remains unclear whether the company will be able to find a replacement for Keytruda as biosimilar competition emerges over the next decade. There is also some concern that alternative treatments could start taking market share away from Merck sooner.

Indeed, that was one of the takeaways from biotech Summit Therapeutics’ recently announced phase 3 results showing that its lung cancer drug candidate ivonescimab reduced the risk of disease progression by 49% compared to Keytruda. In particular, Summit’s shares rose more than 60% on the report.

Although the single reading covering only one indication does not affect Merck’s near-term growth trajectory, as it could be several years before ivonescimab is approved in the United States, it highlights the risk that the company’s leadership position in this PD- 1. protein inhibitors could be carved.

In terms of valuation, Merck stock trades at a forward price-to-earnings (P/E) ratio of 14, which is close to the peer group average of 15 among pharmaceutical leaders such as Johnson & Johnson, Pfizer, Novartisand Sanofi. The stock is not overvalued or undervalued, but at the right level that balances current financial strength with long-term question marks.

MRK PE ratio data (before) by YCharts.

Where Will Merck Stock Be In 2029?

The ability of companies to generate profitable growth through challenges and uncertainties is often a key catalyst for long-term share price growth. Investors are confident that Merck’s management will navigate the many moving parts of its drug portfolio and have good reason to remain bullish on the stock. I think Merck remains well-positioned to continue rewarding shareholders, with the stock likely to trade higher five years from now.