Merck's Stock is Suddenly Soaring, but Is the Struggling Healthcare Giant a Buy?

Merck (NYSE: MRK) has taken its shareholders on a wild ride of late -- from last March's record high of more than $130 to this May's low near $76 back to its current price of just a little more than $100.

What gives? And more importantly, is the recent rebound a sign that the pharmaceutical giant's stock is a buy? Here's what you need to know.

Merck's double-edged dilemma

Merck is a drugmaker with more than 40 different products currently on the market, collectively generating annual revenue of roughly $70 billion. The company is one of the pharma industry's biggest players, in fact.

But nearly half of Merck's revenue is generated by a single product. That's oncology drug Keytruda, which has turned out to be something of a miracle drug due to its efficacy as well as its versatility; it's now approved to treat 20 different types of cancer.

This degree of success can become a double-edged sword, though. While the drug has thrived since its first approval back in 2014, its patent protection will begin expiring in 2028. This will allow competitors to make and sell the same drug at a much lower cost, posing a threat to a huge piece of Merck's top line.

That's the chief reason for the stock's steep sell-off over most of last year and the first few months of this year -- investors had been counting on the company coming up with an answer to this threat, but it didn't materialize.

Except that it did. It just took a while for the market to see it.

The bullish thesis is still plenty strong

There's no single specific catalyst to point to as the driving force behind this stock's sizable bounce back from May's low. Rather, there are several contributing factors that finally reached a collective critical mass.

One of those factors is September's approval of Keytruda Qlex as a treatment for most solid tumors that Keytruda itself is already approved to treat. This is just a subcutaneously injected version of the same drug -- otherwise administered intravenously -- which indirectly extends Keytruda's patent protection. While it remains to be seen how often oncologists will opt for this dosing option now that other oncology drugs are starting to compete with Merck's highly successful anti-PD-1 therapy, certainly some doctors will choose Keytruda Qlex.

Image source: Getty Images.

It's also worth mentioning that the results of a phase 3 trial of pulmonary arterial hypertension treatment Winrevair (released in late September) were very well received. Although the already-approved drug is on track to generate a little over $1 billion in revenue in 2025, as its usefulness continues to widen and interest grows, analysts believe it could produce around $8 billion in annual sales within a few years.

In this vein -- and this is the part of the story investors just weren't appreciating until very recently -- Merck contends that the drugs in its current development pipeline could be producing more than $50 billion worth of yearly revenue by the mid-2030s. None of them by themselves will replace Keytruda's revenue. In the aggregate, though, all of them will more than do so.

Then there are the bullish developments that have always been brewing in the background: acquisitions. In October Merck completed its acquisition of pulmonary disease specialist Verona Pharma. In November, it announced it would be acquiring Cidara Therapeutics for a little over $9 billion, bringing a new flu vaccine candidate into the fold. These are just the pharma company's most recent deals, of course. Merck has a long history of buying the right drugs at the right time -- including Keytruda, which it garnered with its 2009 acquisition of Schering-Plough.

Don't lose perspective

But is the drugmaker's stock a buy, particularly after its 30% run-up just since September's low? I believe so, just as it's been for the better part of the past several years. Shares are still bargain-priced, at less than 12 times next year's projected earnings per share, and its current forward-looking dividend yield of 3.3% is better than you'll find with most dividend-paying blue chips.

It will never be a high-growth investment, to be clear. The pharmaceutical giant, however, is built to make steady forward progress, even if the market as a whole occasionally loses sight of this longevity -- as it did for a while in the middle of last year, and early this year when concern over Keytruda's expiring patents turned into panic.

The thing is, Keytruda isn't the first of Merck's drugs to lose patent protection, and won't be its last. Just as it always has, this company will continue to find and develop new profit centers, such as Keytruda Qlex, some of which will prove to be surprisingly productive. Don't fall into the trap of making more out of the patent cliff than it deserves.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.