What Drove Merck's Keytruda Shortfall In Q4

Merck & Co., Inc.'s MRK shares have underperformed the broader market and the pharma sector per se, and one among the two factors that have led to weakness is soft sales for its wonder cancer drug Keytruda in the fourth quarter.

The Merck Analyst

JPMorgan analyst Chris Schott maintained an Overweight rating and $98 price target for Merck shares in a note released Monday.

The Merck Thesis

Overall, Keytruda concentration has emerged a key controversy on the Merck story but most of the issues that led to the shortfall are one time in nature, Schott said in the note. The analyst said Keytruda sales came in at $3.11 billion in the fourth quarter, about $169 million shy of the consensus.

Keytruda sales in the European Union suffered due to a price adjustment tied to first-line non-small cell lung cancer, or NSCLC, reimbursement decisions in France, Italy and Spain. However, Keytruda now has access to a significant growth opportunity in first-line NSCLC in all major EU countries.

Keytruda sales took a small hit from an anticipated price cut in Japan that led to destocking this quarter, according to Schott. The analyst expects depressed sales in the region yet again in the first quarter ahead of a second planned cut in April. That said, the analyst sees this as transitory, given robustness in underlying volume and demand.

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Outside of the Keytruda softness, the analyst attributed the pullback to investor skepticism on the longer-term prospects for Keytruda sales amid growing Keytruda sales concentration, the Street's uneasiness over the company's late-stage pipeline and the NewCo spin plans announced recently.

"[W]e feel very comfortable with the stock setup for 2020 as we anticipate a return of strong Keytruda performance throughout the year and see a number of pipeline updates, and with valuation that screens increasingly attractive vs peers and the broader market," Schott wrote in the note.

MRK Price Action

Merck shares were slipping 1.8% to $80.80 at time of publication.

Photo courtesy of Merck.