Summary

• Keytruda is key to Merck’s growth prospects, as the drug’s growth makes up most of the company’s overall revenue growth for 2019

• Two competing drug regimens announced positive results in 1L NSCLC recently, which could potentially negatively impact Keytruda’s growth trajectory

• Keytruda sets a high bar in efficacy and safety, and the street does not think that competitors will be able to meet this bar to commercially impact Keytruda sales

• With that said, the trial results could act as an overhang in the near-term until full results are released in 2020

Keytruda is Key to the Bull Thesis

Keytruda is key to the Merck bull thesis. The immuno-oncology (IO) drug is expected to grow revenue by $4.1 billion in 2019 (from $7.2B to $11.2B) vs. the $4.6B consensus revenue growth for the entirety of the company. Beyond 2019, consensus data shows that Keytruda is expected to generate peak revenue of $18B in 2025. Growth in the near-term is expected to be driven by continued growth in a number of cancer indications, including in the large first line non-small-cell lung carcinoma (1L NSCLC) indication, as well as expansion into additional indications such as renal cancer, adjuvant melanoma, and esophageal cancer. Longer-term, Keytruda could show positive data and drive additional growth in adjuvant lung cancer.

Note that this is a drug that has continued to perform very well in recent quarters, and has beat consensus expectations in 7 of the last 8 quarters. In the most recent quarter, Keytruda generated sales of $3.1B, which beat consensus by about 10%.

Recent Trials Present Threat, but Don't Appear Likely to Impact Keytruda

Recently, two clinical trials reported positive top-line data for regimens that will compete against Keytruda in 1L NSCLC. This immediately led to a slight decline as investors worried that results could put a dent in Keytruda's growth trajectory. However, the modest selloff ultimately proved short-lived as the stock has recovered in the following days. Institutional investors and the sellside largely remain skeptical that the drugs could take meaningful commercial share from Keytruda. Let's jump into the details for each trial.

On October 22, Bristol-Myers Squibb announced positive results from Checkmate-9LA, studying Opdivo (nivolumab) plus low-dose Yervoy (ipilimumab) with two cycles of chemotherapy for 1L NSCLC against chemo alone. The company reported that it had met the primary endpoint of superior overall survival compared to chemo alone. The company also reported that the safety profile was "reflective of the known safety profiles of the immunotherapy and chemotherapy components in first-line NSCLC."

Additionally, on October 28, AstraZeneca reported positive topline results for POSEIDON, evaluating Imfinzi and chemo, as well as Infinzi, tremelimumab, and chemo. The trial met its primary and secondary endpoints of a statistically significant and clinically meaningful improvement in progression-free survival (PFS) compared to chemo alone. In terms of safety, the company noted that  "the safety and tolerability of Imfinzi was consistent with its known safety profile. The triple combination delivered a broadly similar safety profile to the Imfinzi and chemotherapy combination and did not result in increased discontinuation of therapy."

This is a positive for both Bristol-Myers Squibb and AstraZeneca based on all that has been reported. At the same time, there are a few reasons for why investors do not necessarily see this as a commercial threat against Keytruda:

• Both studies were compared to chemo alone, but the real relevant commercial comparison is vs. Keytruda plus chemo, which is the standard of care at this point in 1L NSCLC. Keytruda holds roughly 80% market share in 1L NSCLC.

• Keytruda's Keynote-189 set a high bar for any competitor to meet. Merck reported an overall median overall survival (mOS) of 22.0 months and a hazard ratio (HR) of 0.56. Among the physicians and investors I have heard from, the prevailing thought appears to be that Checkmate-9LA would need to report a 25.0+ month mOS to convince physicians to switch their patients off of Keytruda.

• Many physicians are comfortable not just with the efficacy of the drug, but also with the safety profile of an IO + chemo regimen vs. an IO + IO + chemo regimen. However, it should be noted that Opdivo and Yervoy have demonstrated their safety in other trials

• Imfinzi is an anti-PDL1. It should be noted that Tecentriq, owned by Roche, is another anti-PDL1 plus chemo option already approved, and it has not been able to capture much share from Keytruda. Unless Imfinzi plus chemo shows meaningfully improved efficacy, it may only steal share from Tecentriq and not Keytruda.

• For Imfinzi, tremelimumab, and chemo, this is the first successful trial for tremelimumab and therefore there is some question over the additive benefit of the drug over Imfinzi and chemo alone.

• These trials do suggest that CTLA-4 regimens are on the horizon. However, Merck has a trial studying Keytruda with Yervoy (Bristol’s anti-CTLA-4) vs. Keytruda (Keynote-598) and a phase 1 trial of its own anti-CTLA-4 underway.

Trial Results Could Be an Overhang on the Stock

We won't know more about the trials until 2020 when Bristol-Myers Squib and AstraZeneca are expected to provide more details at a medical conference. Investors largely remain bullish on Keytruda and are not currently expecting a meaningful commercial impact to Keytruda growth from these two drugs. At the same time, the two trial results could act as an overhang on the stock until the full results are released. As a result, while the bull thesis remains in tact, it could prove difficult in the near-term to show meaningful stock gains until those results are released in 2020.

Outside of the competitive threats, there are three Keytruda catalysts to watch for in the first half of 2020. First, a phase 3 trial studying Keytruda and chemo vs. chemo in first line extensive-stage small cell lung cancer is expected to read out in 1Q20. Second, a phase 3 trial studying Keytruda and chemo vs. chemo in first line triple negative breast cancer is expected to also read out in 1Q20. Third, a phase 3 trial studying Keytruda and Lenvima vs. Sutent in first line renal cell cancer is expected to read out in mid 2020.