Merck stock closed at a record on Wednesday following a cancer-vaccine breakthrough with Moderna. Just as investors began digesting the news, Wall Street moved to temper expectations.
To be clear, it isn't a bearish call-simply a move to the sidelines. RBC Capital Markets analyst Trung Huynh cut his rating on the shares to Sector Perform from Outperform with a $150 price target, up from $142.
As he sees it, Merck's risk/reward balance is fairly reflected in the current share price, "with much optimism embedded in the multiple leaving limited upside from here."
Merck shares slipped 0.7% to $151.17 on Thursday, a natural reaction following a nearly 13% jump on Wednesday. Those gains paled in comparison to Moderna's rally, which saw the stock nearly triple on Wednesday for its biggest single-day percentage increase on record. Moderna sank 19% on Thursday.
Both stocks moved higher on news that a combination of Merck's Keytruda and intismeran autogene, a vaccine jointly developed by Moderna and Merck, proved more effective at preventing skin cancer recurrence than Keytruda alone.
That surge is precisely why Huynh is urging caution. The analyst believes Merck stock is now trading at "unprecedented valuation" for a company facing a significant loss of exclusivity in two years, "and modest interim growth." Huynh is referring to the expiration of key patent protections for Keytruda, a blockbuster that first took the title of the world's best-selling drug in 2023, displacing AbbVie's Humira.
Keytruda has gained explosive popularity since its launch in 2014, when it was granted a Breakthrough Therapy designation by the Food and Drug Administration. The medication is a versatile immunotherapy that helps a patient's own immune system find and kill hidden cancer cells.
Even now, over a decade after its launch, Keytruda remains a major contributor to the drugmaker's top line. While Merck has been working to blunt future lost revenue-by bulking up its pipeline and filing patents to cover new indications and drug combinations-Wall Street "does not believe Merck can grow through the Keytruda patent cliff," Huynh wrote.
He thinks otherwise. Following the intismeran autogene data, "we see modest growth is achievable," with roughly 1% growth in 2028 and 2029, followed by low single-digit growth through 2032.
However, comes with a word of caution: even this modest growth "requires near-perfect execution across multiple assets," Huynh wrote, "making this a high-risk proposition despite the potential upside."
And yet, he believes the company can hit its target of $70 billion in non-risk-adjusted commercial revenue by the middle of the next decade. "Importantly, we think intismeran autogene is not factored into the original framework, creating scope for an upward revision from Merck," Huynh wrote.
There are other assets to watch including sacituzumab tirumotecan (sac-TMT), a targeted cancer therapy co-developed with China's Sichuan Kelun-Biotech Biopharmaceutical.
Kelun-Biotech in May reported positive late-stage trial results for a treatment combining sac-TMT with Keytruda. The treatment improved progression-free survival in patients with advanced non-small cell lung cancer versus Keytruda alone, Kelun-Biotech said at the time.
Upcoming data readouts for sac-TMT and another candidate, tulisokibart, could propel shares higher. However, Huynh warns that high expectations leave little room for error, noting that "any material disappointment could trigger a disproportionate negative reaction."
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