Merck’s Keytruda Continues To Roll With Another FDA Approval

Merck’s (NYSE:MRK) Keytruda was recently approved by the U.S. FDA for gastric cancer. Keytruda has been on a strong run in 2017 with a series of approvals. Keytruda already had approval for melanoma, metastatic, non-small cell lung cancer, head and neck cancer, Hodgkin’s lymphoma and urothelial carcinoma. Recently, U.S. regulators approved the drug for two types of advanced gastric cancer in patients who have received at least two prior rounds of therapy. This marks Keytruda’s fifth approval this year.

Keytruda’s sales grew over 2x year-on-year in 2016, and we expect it to grow by another 2x in 2017 to around $3.2 billion. The company reported close to $1.5 billion in sales in the first half this year. Merck mentioned that IMS data suggests that Keytruda is the most prescribed drug in first-line lung cancer treatment, where it is the only anti-PDL1 treatment in the market. Additionally, Merck’s second-line lung cancer treatment share has been relatively stable. We expect the drug’s sales to reach $5.5 billion by the end of our forecast period in 2023, accounting for nearly 15% of Merck’s total sales. The chart below shows the historical and projected revenue trajectory for Keytruda.

The numbers certainly look impressive, but there are risks to be considered. Earlier in September, at the 2017 European Society of Medical Oncology (ESMO) conference in Madrid, Phase III data for head and neck cancer for Keytruda and Opdivio was presented and Keytruda’s study was considered negative while Opdivio’s was positive. It should be noted that Keytruda received fast-track conditional approval in August 2016 by the U.S. FDA for head and neck cancer. Since it was a conditional approval, the stakes are high for Keytruda, as the FDA can revoke its approval if it fails to see any benefits in follow-up clinical trials. However, the chances of that happening are remote.

Looking at other risks for Keytruda, the competition is growing and the number of drugs in the immuno-oncology class is increasing. Bristol-Myers Squibb’s (NYSE:BMY) Opdivio is expected to generate sales of around $4.5 billion in 2017, and we expect the figure to increase to north of $5.5 billion by 2023 (See – Opdivo In Focus After BMY’s Checkmate-214 Study Being Stopped Early). Similarly, Johnson & Johnson’s (NYSE:JNJ) Imbruvica, Zytiga and Darzalex are expected to generate sales of around $5.5 billion in 2017, and the figure is expected to grow to around $10 billion by the end of our forecast period in 2023 (See – Imbruvica And Darzalex Are of Key Importance For J&J’s Future Growth). This year, AstraZeneca’s Imfinzi was also added to the list of immuno-oncology drugs after it received approval for bladder cancer treatment. These drugs will likely expand their usage to additional cancer types over time, so Merck will likely try to get a first mover advantage in as many indications as possible. The company is studying more than 30 types of cancer in over 500 trials, and around half of them are in combination with other cancer drugs.

Overall, 2017 has been particularly eventful for Keytruda, and we believe that Merck’s near term performance is likely to be tied more to Keytruda than any other drug.

We currently have a price estimate of $65 for Merck, which is slightly ahead of the current market price.

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