Is This Pharmaceutical Giant a Buy After a Major Acquisition?

Are things finally looking up for Merck (NYSE: MRK)? After being mostly southbound for the better part of the last two years, the pharmaceutical giant is showing signs of life. Over the past month, its stock has climbed 27% due to several developments, including yet another acquisition that arguably improves its prospects.

Should investors expect the momentum to continue? And is the company still a solid buy-and-hold option? Let's find out.

Joining the hunt for a better flu vaccine

Influenza has been around for a long time, and several vaccines are available to help protect against this virus. Unfortunately, their effectiveness leaves much to be desired. According to the U.S. Centers for Disease Control and Prevention (CDC), during the 2023-2024 flu season, vaccines were 44% effective. That's not at all an outlier when looking at the past decade: The highest efficacy rate over this period was 60%, with the lowest being a meager 19%. Clearly, there's room for improvement in this area. And several companies are working on that project.

Image source: Getty Images.

Some, like Pfizer, are seeking to develop mRNA-based flu vaccines. Here's why this approach could work: mRNA vaccines are faster to manufacture than traditional ones, which means scientists can wait until closer to the start of the flu season to choose which strains of the virus to include. Having to predict circulating strains months in advance with traditional candidates is one of the key reasons current flu vaccines aren't effective.

However, there is yet another approach. That brings us back to Merck, which recently agreed to acquire Cidara Therapeutics (NASDAQ: CDTX), a smaller biotech company developing a promising flu candidate, for approximately $9.2 billion in cash. Cidara's CD388 isn't an mRNA-based product. Strictly speaking, it isn't even a vaccine. It's a long-acting antiviral drug that could confer protection against influenza -- and across many different strains of the virus and for a broader set of individuals -- for longer periods than traditional flu vaccines.

In other words, CD388 could revolutionize a market that still has plenty of work to be done. During the 2023-2024 flu season, there were 470,000 flu-related hospitalizations and 28,000 deaths, according to the CDC. CD388 has performed well in phase 2 studies and is now undergoing pivotal clinical trials. If it's approved, it could easily exceed blockbuster status.

Merck's post-Keytruda strategy

One reason for Merck's poor performance over the past two years is that the market was increasingly concerned about what the company would do once it loses patent exclusivity for its best-selling medicine, cancer drug Keytruda, in 2028. Also, Merck's vaccine business, typically spearheaded by HPV vaccines Gardasil and Gardasil 9, has not been performing well due to lower demand, primarily in China.

Merck has made moves to address these issues. The acquisition of Cidara and its highly promising CD388 is one of them. Merck is also making progress in launching another exciting new product, Winrevair, which treats pulmonary arterial hypertension. The medicine hit the market just last year and is already generating strong sales -- to the tune of $360 million in the third quarter, which gives it an annual run rate of well over $1 billion.

Then there's Capvaxive, a pneumonia vaccine that Merck also launched last year, which is also performing well. Its $244 million in sales in the third quarter puts it close to the $1 billion annual run-rate mark.

Last but not least, Merck earned approval for a subcutaneous formulation of Keytruda, which will remain under patent protection for a longer period. One of this version's appeals is its shorter preparation and administration time than original Keytruda, but without sacrificing efficacy, which makes it beneficial for both physicians and patients. These products (and others) will help Merck move beyond the 2028 Keytruda patent cliff.

Is Merck stock a buy?

Merck's third-quarter revenue increased by 4% year over year to $17.3 billion. That's not that impressive, and over the next few years, the company may eventually see its sales move in the wrong direction once competition for Keytruda intensifies.

That said, investors focused on the long game should still strongly consider Merck's shares. The drugmaker is gradually expanding its portfolio of newer products. It has a deep pipeline beyond the candidates discussed above. And it has a diversified business that also includes a large animal-health portfolio.

Finally, Merck is an excellent dividend stock. It offers a juicy forward yield of 3.2% and has increased its payouts by 93.8% over the past decade. Merck is an excellent blue chip dividend stock to buy and hold on to for a long time.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and Pfizer. The Motley Fool has a disclosure policy.