Merck shares are suddenly soaring, but will the struggling healthcare giant buy them? | Colorful fool

Merck (MRK 1.16%) has taken its shareholders on a wild ride of late – from last March’s high of more than $130 to this year’s May low of nearly $76, back to a current price of just over $100.

what gives More importantly, is the recent rally a sign that the pharma giant’s stock is a buy? Here’s what you need to know.

Merck’s double-edged dilemma

Merck is a drug manufacturer with more than 40 different products currently on the market, collectively generating annual revenues of approximately $70 billion. The company is actually one of the biggest players in the pharmaceutical industry.

Today’s Change

(-1.16%$-1.17

Current price

$99.72

Key data points

Market capitalization

248 billion dollars

Daily range

$99.19 -$102.09

Range 52 weeks

$73.31 -$105.84

Volume

16 million

Avg. flight

13M

Gross margin

75.81%

Dividend yield

3.25%

However, almost half of Merck’s revenue comes from a single product. This is the oncology drug Keytruda, which has proven to be something of a miracle drug due to its effectiveness as well as its versatility; it is now approved to treat 20 different types of cancer.

However, this degree of success can become a double-edged sword. While the drug has flourished since its first approval in 2014, its patent protection will begin to expire in 2028. That will allow competitors to make and sell the same drug at a much lower cost, posing a threat to a huge chunk of Merck’s top line.

That’s the main reason for the stock’s steep selloff during most of last year and the first few months of this year — investors were counting on the company to come up with an answer to that threat, but that didn’t materialize.

In addition it did. It just took a while for the market to see it.

The bullish thesis is still quite strong

There is no specific catalyst that can be pointed to as the driving force behind this stock’s significant bounce from the May lows. Rather, there are several contributing factors that eventually reach a collective critical mass.

One of those factors is the September approval of Keytruda Qlex as a treatment for most solid tumors for which Keytruda itself is already approved. This is just a subcutaneously injected version of the same drug – otherwise given 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 beginning to compete with Merck’s highly successful anti-PD-1 treatment, some doctors will certainly choose Keytruda Qlex.

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

Along those lines—and this is a part of the story that investors simply didn’t appreciate until recently—Merck says the drugs in its current development pipeline could generate more than $50 billion a year by the mid-2030s. None of these alone will replace Keytruda’s income. In summary, however, they all do more than just that.

Then there’s the bullish development that’s always simmered in the background: acquisitions. In October, Merck completed the acquisition of lung disease specialist Verona Pharma. It announced in November that it would be acquired Cidara Therapeutics for just over $9 billion, landing a new flu vaccine candidate. Of course, these are just the latest offers from the pharmaceutical company. Merck has a long history of buying the right drugs at the right time — including Keytruda, which it acquired through its 2009 acquisition of Schering-Plough.

Don’t lose perspective

But are the drugmaker’s shares a buy, especially after their 30% rise just since the September low? I believe so, just as it has been for most of the past few years. The stock is still a bargain at less than 12 times next year’s projected earnings per share, and its current forward dividend yield of 3.3% is better than you’ll find for most dividend-paying blue chips.

To be clear, this will never be a high growth investment. But the pharmaceutical giant is built to make continued progress, even if the market as a whole loses sight of that longevity at times — as it did for a while in the middle of last year and early this year, when concerns 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 it won’t be its last. As always, this company will continue to find and develop new profit centers like the Keytruda Qlex, some of which will prove to be surprisingly productive. Don’t fall into the trap of getting more out of the patent cliff than it deserves.