Merck to End Development of Two Cancer Candidates: Time to Sell?

Earlier this week, Merck MRK announced that it is discontinuing the development of two of its cancer candidates, vibostolimab and favezelimab. Merck was separately studying vibostolimab and favezelimab in fixed-dose combinations with its blockbuster cancer drug, Keytruda, under the KeyVibe and KEYFORM clinical development programs, respectively.Merck is discontinuing the KeyVibe-003 and KeyVibe-007 studies evaluating the fixed-dose combination of vibostolimab, an anti-TIGIT antibody and Keytruda in a non-small cell lung cancer (NSCLC) indication based on the recommendation of an independent Data Monitoring Committee (DMC). Both the studies met the pre-specified futility criteria for the primary endpoint of overall survival. The immune-related adverse events were higher for the fixed-dose combination than for Keytruda alone. Merck is also ending the phase III KeyVibe-006 study and other vibostolimab studies.Separately, Merck has also decided to end the development program on favezelimab and will stop enrolment in the phase III KEYFORM-008 study, evaluating the fixed-dose combination of favezelimab and Keytruda for certain patients with relapsed or refractory classical Hodgkin lymphoma (cHL).The latest pipeline setbacks have made MRK investors wonder whether to hold or sell the stock. However, this is only a temporary setback. Let’s understand the company’s strengths and weaknesses in detail to better analyze how to play the stock.Keytruda: Merck’s Biggest StrengthMerck boasts more than six blockbuster drugs in its portfolio, with PD-L1 inhibitor Keytruda being the key top-line driver. Keytruda, approved for several types of cancer, alone accounts for around 50% of the company’s pharmaceutical sales. The drug has played an instrumental role in driving Merck’s steady revenue growth in the past few years.Keytruda’s sales are gaining from rapid uptake across earlier-stage indications, mainly early-stage non-small cell lung cancer. Continued strong momentum in metastatic indications is also boosting sales growth. The company expects continued growth from Keytruda, particularly in early lung cancer.Merck is working on different strategies to drive Keytruda's long-term growth. These include innovative immuno-oncology combinations, including Keytruda with TIGIT, LAG3 and CTLA-4 inhibitors. In partnership with Moderna MRNA, Merck is developing a personalized mRNA therapeutic cancer vaccine (V940/mRNA-4157), in combination with Keytruda, for treating adjuvant melanoma and non-small cell lung cancer.However, Merck is heavily reliant on Keytruda. Though Keytruda may be Merck’s biggest strength and a solid reason to own the stock, it can also be argued that the company is excessively dependent on the drug and should look for ways to diversify its product lineup.There are rising concerns about the firm’s ability to grow its non-oncology business ahead of the upcoming loss of exclusivity of Keytruda in 2028.MRK’s Pipeline Progress & Strategic M&A DealsMerck made meaningful regulatory and clinical progress this year across areas like oncology (mainly Keytruda), vaccines and infectious diseases while executing strategic business moves like the acquisitions of Eyebiotech Limited, Harpoon Therapeutics and Elanco’saqua business. It also expanded its existing cancer deal with Japan’s Daiichi Sankyo and signed a collaboration with Exelixis EXEL to advance the development of the latter’s cancer candidate, zanzalintinib.Merck's phase III pipeline has almost tripled over the past three years, positioning it to launch several new vaccines and drugs over the next five years, with many having blockbuster potential. Merck’s new 21-valent pneumococcal conjugate vaccine, Capvaxive, and pulmonary arterial hypertension drug, Winrevair, have the potential to generate significant revenues for Merck over the long term. Both the products are witnessing a strong launch.Merck has other promising candidates in its late-stage pipeline, such as MK-0616, an oral PCSK9 inhibitor for hypercholesterolemia, tulisokibart, a TL1A inhibitor for ulcerative colitis and Daiichi-Sankyo-partnered antibody drug conjugates (ADCs).Declining Sales of Gardasil in ChinaSales of Merck’s second-largest product, its human papillomavirus (HPV) vaccine, Gardasil, are declining in China due to a significant step down in shipments to Merck’s distributor and commercialization partner, Zhifei. Merck expects to continue to see a decline in shipments to China in the fourth quarter of 2024 and into 2025. Though the company is working to increase promotional resources and patient education efforts to increase demand, it will take time. However, Gardasil sales remain strong in almost every major region outside China, including the United States. Merck is also seeing weakness in the diabetes franchise and the generic erosion of some drugs.MRK Stock Price, Valuation & EstimatesMerck’s shares have lost 21.9% in the past six months compared with a decline of 3.7% for the industry. The stock has also underperformed the sector and the S&P 500 Index, as seen in the chart below. The stock is also trading below its 200 and 50-day moving averages.Merck Stock Underperforms Industry, Sector & S&P 500Image Source: Zacks Investment ResearchFrom a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 10.53 forward earnings, lower than 16.29 for the industry as well as its 5-year mean of 13.41.MRK Stock ValuationImage Source: Zacks Investment ResearchThe Zacks Consensus Estimate for 2024 earnings has remained stable at $7.72 per share over the past 30 days. For 2025, earnings estimates have risen from $9.43 to $9.57 per share over the same timeframe.MRK Estimate MovementImage Source: Zacks Investment ResearchShort-Term Investors May Sell MRK SharesThough Merck’s problems are many, the company has one of the world’s best-selling drugs in its portfolio, generating billions of dollars in revenues. Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. Though Merck does not have any new product or pipeline candidate that can replace Keytruda’s sales when it loses patent protection, it has $14.6 billion in cash and short-term investments on its balance sheet, which it can use to buy companies with promising R&D programs.In 2025, Merck expects to deliver 6% to 7% growth in revenues, almost the same as its expectations for 2024. It expects top-line growth in 2025 to be driven by Keytruda, especially in early-stage cancers, new products Welireg, Winrevair and Capvaxive, and the Animal Health segment, partially offset by declining sales of Gardasil in China.We believe investors with a long-term horizon should stay invested in MRK stock, while short-term investors should consider selling the same as the company may take some time to show strong earnings growth.Merck has a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Free Today: Profiting from The Future’s Brightest Energy SourceThe demand for electricity is growing exponentially. At the same time, we’re working to reduce our dependence on fossil fuels like oil and natural gas. Nuclear energy is an ideal replacement.Leaders from the US and 21 other countries recently committed to TRIPLING the world’s nuclear energy capacities. 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