The last few days have been a disaster for pharmaceutical giant Merck (NYSE:MRK) in the aftermath of the company’s earnings report and news about its key wonder drug. MarketWatch reported that Merck suffered on Friday and Monday its “biggest 2-day selloff since February 2009.” The company lost 11.5 percent of its value in those two days before hovering around $55 for most of Tuesday. If that was not bad enough, Merck has lost 6.6 percent of its value year to date while the Dow Jones Industrial Average has risen by 18 percent.
Merck’s recent fall is the product of a disappointing earnings report as well as delays in the testing of its key lung cancer drug Keytruda. In addition, Merck withdrew its application to market Keytruda in Europe, signaling that regulators there are not comfortable with the drug.
Merck is a large drug company, and these delays regarding Keytruda could just be short-term prudence which will pay off in the long run. But buyers should look elsewhere for now. Merck has questions it must answer regarding Keytruda and other facets of its business before it can be viewed as an opportunity.
The Keytruda Problem
Understanding Merck’s current problems and long-term potential requires understanding Keytruda’s problems. As noted above, Keytruda is a lung cancer drug which is supposed to work in conjunction with chemotherapy to help patients, and is the only FDA approved immunotherapy drug on the market, albeit only for certain groups and not the general public. A Reuters report last Friday noted that lung cancer is the most lucrative oncology market by far, and Keytruda’s sales in the United States eclipsed $1 billion last quarter for the first time. However, Merck’s de
cision to withdraw its European application and its U.S. testing delays is a major blow towards Keytruda’s growth prospects.
Investors still expect Keytruda’s value to grow despite these setbacks. For example, Benzinga reports that a {{|0Barclays}} investors which recently downgraded its valuation of Merck still holds that Keytruda sales will hit $5.4 billion in 2018 and $6.6 billion in 2019. But this is about 10 percent lower than the estimates before the announcement.
Furthermore, delays in Keytruda’s general approval allows other medical firms more time to catch up with Merck and finish developing their lung cancer immunotherapy drugs. Merck had solidly beaten competitors Bristol-Myers Squibb Company (NYSE:BMY) and Roche Holding AG Participation (SIX:ROG) in cancer drug tests earlier this year, but both of those companies could come out with further lung cancer drug data later this year or in early 2018. While neither of those companies are likely to surpass Merck, Merck could find itself as just another competitor in the lung drug oncology market instead of having a solid lead like investors had anticipated.
Optimistic investors interested in business capital could interpret Merck’s delays as the company taking the time to make sure that its drugs work, and thus sacrificing short-term benefits to ensure the long-term efficiency of such an important drug. But the reality is that the Keytruda news is a major setback for a firm which could ill afford further bad news.
Further Bad News
While the Keytruda failure is disappointing, it is not the only concern which investors should have about Merck. After all, the company’s stock had not performed well over the year even before these announcements.
The major reasons why investors have been so fixated on Keytruda is that it represents Merck’s best chance to get out of its growth slump as shown in its earnings report. In that report, Merck’s 3Q 2017 sales declined by 2 percent compared to the same quarter 12 months ago and pharmaceutical sales declined by 3 percent.
Merck states that the sales decline is due to losses from a June cyberattack which shut down production, reduced sales, and forced them to borrow drugs from the United States government and thus wants to claim that the decline is a temporary factor. But even if that is the case, they still need to discuss future growth prospects beyond Keytruda as well as a foray into animal health. Merck could perhaps increase revenue through acquisitions such as Cubist Pharmaceuticals and it will be okay as long as it has a steady supply of drugs. But okay does not mean great or growing.
Long Term Potential – Maybe
Despite the stock collapse and Merck’s various issues, investors holding Merck stock should have some reason for optimism. The stock will likely rebound somewhat soon and Keytruda will still be successful even if expectations have dropped.
But until Merck can show that it will grow again, particularly through further Keytruda sales, expecting a real bounce back in the near future is not realistic, especially as Merck has been struggling since the beginning of the year. Analysts are right to slash their forecasts, and this is a stock probably not worth picking up for now. Only consider it if you plan to hold it for an extremely long time, and have confidence that Keytruda’s success will make the eventual struggles worthwhile.