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Merck on Solid Footing This Year: Can it Sustain the Trend?

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Merck & Co., Inc. (MRK - Free Report) has done relatively well this year so far, coming up with strong quarterly results and positive pipeline and regulatory updates.

Strong First Half Performance

Merck’s sales rose 6% in the first half of 2018 while adjusted earnings per share rose 19%. Pharmaceutical segment sales rose 7% in the first half while that of the Animal Health unit rose 14%.

Strength in Keytruda, Bridion, Gardasil and Animal Health offset headwinds from loss of exclusivity for some products and competitive pressure for Zostavax and Zepatier. Keytruda continued its robust performance on strong demand trends.

Keytruda: A Key Growth Catalyst

A significant part of Merck’s outperformance this year was driven by strong performance and positive regulatory updates related to its PD-1 inhibitor, Keytruda. In a very short span of time, Keytruda has become Merck’s largest product. It is already approved for use in 12 indications across eight different tumor types in the United States. Keytruda is continuously growing and gaining approval for new indications and markets globally. Keytruda sales are gaining particularly from strong momentum in the indication of first-line lung cancer as it is the only anti-PD-1 approved in the setting both as a monotherapy as well as combination therapy.

In fact, the Keytruda development program is also progressing rapidly. Merck is conducting numerous studies to evaluate Keytruda for more than 30 types of cancer in more than 800 studies, including more than 400 combination studies. Merck is collaborating with several companies including Amgen (AMGN), Incyte (INCY), Glaxo and Pfizer separately for the evaluation of Keytruda in combination with other regimens.

Keytruda is being studied in phase III studies for breast, colorectal, esophageal, gastric, head and neck, hepatocellular, nasopharyngeal, renal and small-cell lung cancers

Other Pipeline/Regulatory Success

Other than that, key recent new drug approvals include Steglatro and its fixed-dose combinations for type II diabetes, two new HIV drugs — Pifeltro and Delstrigo — containing doravirine and Prevymis (letermovir) for cytomegalovirus (CVM) infection. Merck also gained several label expansion approvals for Keytruda and another cancer drug Lynparza, which it markets in partnership with AstraZeneca (AZN). All these approvals can boost the company’s sales in future quarters.

Merck also announced positive data from several late-stage studies, mainly evaluating Keytruda for further line extensions.

Merck also signed a co-development deal with Japan’s Eisai Co., Ltd for the latter’s tyrosine kinase inhibitor, Lenvima.It also agreed to buy Viralytics Limited, an Australian pharmaceutical company that develops oncolytic immunotherapies for a range of cancers, which should strengthen its oncology portfolio.

What to Expect?

For Keytruda, overall regulatory decisions for new indications in the United States as well as in Europe are due in the fourth quarter and 2019, which if approved can further boost sales.

A key decision toward the end of October will be on the label expansion as a first-line treatment (in combination with chemotherapy) or metastatic squamous non-small cell lung cancer (NSCLC) — a difficult-to-treat lung cancer patient population — based on data from the phase 3 KEYNOTE-407 study.

Meanwhile, Keytruda, Bridion, Lynparza, Gardasil and Animal Health should continue the strong performance, driving sales and profits in the second half. This should make up for headwinds from loss of exclusivity (LOEs), softness in the diabetes franchise, and competitive pressure on Zepatier and Zostavax.

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