Does This Move Make Merck Stock a Buy?

Key Points

• Merck is seeking ways to prepare for a significant upcoming patent cliff.

• The company has just announced another acquisition that will help it achieve that goal.

• With its newer products, strong dividend, and reasonable valuation, Merck still looks attractive.

• 10 stocks we like better than Merck ›

Merck (NYSE: MRK), a leading pharmaceutical company, generates consistent revenue and profits. However, the stock has been under pressure over the past year due to its reliance on Keytruda, its famous cancer medicine. It might be the best-selling drug in the world, but Keytruda will experience a patent cliff by the end of the decade -- a significant risk investors have to take into consideration.

Merck has been looking for ways to mitigate the risk of competition, and the drugmaker just made a move that could help along those lines. Should investors consider buying the stock?

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Merck dishes $10 billion to expand its lineup

On July 9, Merck announced that it would acquire Verona Pharma, a U.K.-based biotechnology company specializing in the development of medicines for respiratory diseases. Merck will pay $10 billion in cash for this transaction, allowing it to add Ohtuvayre -- which treats chronic obstructive pulmonary disease (COPD) -- to its portfolio.

First approved by the U.S. Food and Drug Administration (FDA) last year, Ohtuvayre is a treatment for COPD that looks highly promising. It has so far had a successful launch, and it is still being investigated across other conditions, which could later lead to label expansions.

Though estimates vary (as always), some analysts think Ohtuvayre sales could peak at around $4 billion. So, it seems the company has yet another blockbuster on its hands. But will that be enough to replace Keytruda?

Merck's multipronged approach

Merck has entered into several such agreements in recent years. In 2021, it acquired Acceleron Pharma for $11.5 billion. This deal eventually allowed it to launch Winrevair, a medicine for pulmonary arterial tension. Winrevair is yet another promising therapy, with projected peak sales at around $3 billion.

Between Ohtuvayre and Winrevair, that's at most $7 billion in peak annual revenue, though, much lower than the $29.5 billion in sales Keytruda generated last year. Merck will need far more than that, but the company does have a plan.

Some of its acquisitions have yet to yield approved products with blockbuster potential. In 2023, the company paid $10.8 billion for Prometheus Biosciences and its promising candidate for ulcerative colitis, MK-7240. That could be another great addition to the company's portfolio, provided it aces enough clinical trials to land regulatory approval from the FDA.

Merck isn't just relying on buyouts to plan for its post-Keytruda life, though. One of the company's most important internally developed projects is a subcutaneous (SC) version of its crown jewel. SC Keytruda recently aced a phase 3 clinical trial in which it proved noninferiority compared to the original, intravenous version of the medicine in treating patients with non-small cell lung cancer, one of Keytruda's most important markets.

The newer version of the cancer therapy does have some advantages over the old, though, including significantly cutting the time patients spend in the treatment room and the time physicians spend preparing the therapy, administering it, and monitoring patients afterward.

SC Keytruda should attract plenty of business across many of the original's indications once all is said and done. And, together with the newer therapies Merck now has under its banner, should allow the company to smooth out the losses once biosimilar competition for Keytruda enters the market.

The stock could perform well post-Keytruda

Merck currently has more than 80 programs across its phase 2 and phase 3 pipeline. So, even beyond the candidates mentioned, the company should be able to find new gems.

Putting aside label expansions for existing medicines, even a 25% success rate on brand-new clinical compounds should translate to several novel launches over the next five years. Not all will be blockbusters, but Merck's deep pipeline and recent moves show that it is capable of moving beyond Keytruda.

Additionally, there are other reasons to consider buying the stock. First, Merck's shares look incredibly cheap right now. The company is trading at 9.3 times forward earnings estimates. The average for the healthcare sector is 16.2.

Second, Merck is a solid dividend stock. The company's forward yield sits around 4%, and it has increased its payouts by 88.8% in the past decade.

Merck's shares have lagged the market over the past year, but the company's prospects are still strong, at least for those willing to hold onto the stock for a while.

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Prosper Junior Bakiny 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.