The holy grail for pharmaceutical companies is developing a blockbuster drug, that magic elixir with powerful efficacy, a huge potential market, and long shelf life, suggests Rich Moroney, editor of Dow Theory Forecasts.

Merck (MRK) found such a drug in its Keytruda cancer-fighting therapy. Keytruda, which represents roughly one-third of Merck’s total sales, has driven much of the company’s growth in recent years.

With 2023 shaping up as a challenging year for the stock market, dividend-payers in defensive industries have appeal.

Keytruda has helped Merck carve out a leading position in immuno-oncology treatments. Keytruda, which uses the body’s own immune system to treat cancer, has already shown efficacy against a broad spectrum of cancers, from skin and lung to stomach and cervical.

Merck’s growth strategy involves expanding the use of Keytruda for other cancer indications, as well as in combination therapies. Keytruda revenue totaled $5.4 billion in the third quarter, up 26% excluding foreign exchange impact.

Keytruda’s primary U.S. patents expire in 2028, but Merck is exploring ways to extend the drug’s shelf life, most notably via a different delivery system than the current intravenous infusion. Merck has trials under way to develop a subcutaneous formulation, which could potentially earn patent protection until at least 2040.

Of course, Wall Street casts a skeptical eye toward big pharmas seen as one-trick ponies. Merck hopes to avoid the label by building out other therapeutic areas.

Vaccines: Gardasil combats human papillomavirus (HPV). September-quarter sales rose 20% to $2.3 billion. With only 9% of the world’s eligible population receiving the vaccine, Gardasil has a long runway for growth

Hospital acute care: Bridion, which helps restore muscle function blocked during surgery by other medi- cines, had sales of $423 million in the quarter, up 22%.

Animal health: This unit grew revenue just 4% in the quarter excluding the impact of foreign exchange. However, with annual sales of more than $5 billion and expected growth in the companion-animal segment, this business represents a nice kicker to the growth story.

Merck’s pipeline, not the most robust in the industry, is improving. The firm has made headway in the cardiovascular market with sotatercept, a treatment for patients with pulmonary arterial hypertension, which recently reported positive results for a phase 3 trial. Sotatercept has been granted breakthrough designation by the U.S. Food and Drug Administration, which allows for an accelerated review.

Despite a gain of more than 40% in 2022, Merck trades at less than 15 times the 2023 earnings estimate of $7.52 per share. That profit target has risen 1% over the last 90 days. Merck boosted its dividend nearly 6% in December and should continue advancing the payout in coming years. The firm is set to announce December-quarter results on February 2nd. Merck, yielding 2.6%, is a Focus List Buy.

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