Merck Reports Solid Q2, Buoyed by Hospital Drug Sales

Merck MRK reported second-quarter results largely in line with our projections, and we don’t expect any major changes to our fair value estimate. We continue to view the stock as undervalued with the market not appreciating Merck’s strong immuno-oncology position and developing pipeline, key areas that reinforce our wide moat rating.

In the quarter, sales increased operationally by 19% (excluding the divested Organon business), supported by an unusually easy comparison with the second quarter of 2020 when pandemic concerns weighed on sales. Relative to the Big Pharma group, Merck sells a greater amount of hospital-administered drugs, which created amplified headwinds as patients avoided in-office visits over the peak of the pandemic; this trend is reversing as expected.

The company’s top drug Keytruda (over a third of total sales) posted 20% operational growth based on further entrenchment in several indications, including the most important market of lung cancer. We expect further gains for the drug in the adjuvant setting. Recent positive adjuvant data in breast and renal cancer bodes well for future growth and shows that early use of the drug could work well in the important lung cancer adjuvant setting (data expected later in 2021).

Merck’s vaccines and animal healthcare products bounced back as well. While the vaccines are lapping an easy comparable period, we expect strong growth for human papillomavirus vaccine Gardasil based on excellent efficacy and increasing supply capacity coming on line over the next two years.

On the pipeline, we are most bullish on HIV drug islatravir and several early-stage cancer drugs. The strong safety and efficacy of islatravir set up the drug well in several potential settings. Also, recent data from cancer drugs quavonlimab (CTLA-4) and favezelimab (LAG-3) with Keytruda suggests strong efficacy and the potential to extend the exclusivity period for Keytruda based on coformulation strategies.

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