Questor: This ‘wonder drug’ firm is being backed by top fund managers

Time waits for no-one.

When this column first tipped Merck & Co in July 2019 the US-based pharmaceuticals giant was basking in the success of its blockbuster “wonder drug” Keytruda, a highly effective treatment used among other things for melanoma and certain forms of lung cancer.

A little over a year later, we suggested investors hold after a dip in the share price and the Covid pandemic.

Now almost exactly five years since our original recommendation, Keytruda is fast approaching the end of its patent protection which when it expires in 2028 is likely to prompt fierce competition from cheaper generic versions.

It will be a big moment for Merck and one that has prompted us to review our stance.

Incidentally those investors that have stayed with us so far are sitting on a total return of 84pc which includes dividends paid.

New buyers of the US-listed shares, which are available through most British brokers, need to fill in the correct paperwork to minimise the withholding tax on dividends.

SHARE PRICE CHART

Keytruda has wildly surpassed expectations, rapidly becoming the world’s top-selling prescription medicine.

The treatment recorded sales of $25bn (£19.7bn) last year, comfortably more than a third of the group total of $60bn.

Keytruda sales are forecast to surge to $32bn by 2026, before tailing off once the patent expires.

Merck has not sat on its hands while the clock runs down. Indeed it looks well prepared.

It has over 30 treatment programs in its pipeline at Phase III late-stage trials.

Nearly three-quarters are in oncology. Last year alone it spent a whopping $30.5bn on research and development (R&D) to strengthen the pipeline.

That was more than double the figure for the previous year and the highest among Big Pharma.

The size of the increase reflects a jump in research and development spending classed as “business development activity”, as Merck pursues acquisitions and drug co-development deals with gusto.

Last October, for example, it agreed a deal with Japan’s Daiichi Sankyo to co-develop three cancer drugs.

Merck paid an initial $5.5bn, but could end up paying a further $16.5bn based on reaching agreed future sales.

The group’s deal spree in the area has prompted it to double its expected revenues from new oncology treatments to more than $20bn by the mid-2030s, from just over $10bn previously.

Oncology is only one part of Merck’s business development push.

In April last year it bought Prometheus, a clinical stage biotech specialising in treatments for immune disorders for $10.8bn in cash.

There have been other acquisitions in Merck’s favoured areas, which include vaccines, cardio-metabolic disorders and infectious diseases.

Merck’s activities have drawn the attention of the world’s best-performing investors, some 29 of whom have bought into the business.

These investors are among the top 3pc of the more than 10,000 fund managers whose performance is tracked by financial publisher Citywire.

The significant smart-money backing for Merck means it has gained a top AAA rating from Citywire Elite Companies, which rates companies based on ownership by the best fund managers in the world.

One of them is Bill Smead, who runs the $5.9bn Smead Value Fund with his son, Cole.

Smead reckons that by the time the Keytruda patent expires, Merck will have used its expertise – one of its specialisms is immunotherapy where the body’s own defences are used to fight off diseases – to develop an array of other cancer therapies.

“This idea that when the patent comes up on their lung cancer treatment in four or five years’ time it’s going to mean the end of Merck – no.

“In four or five years’ time they will have taken that same science [immunotherapy] and gone to breast cancer, prostate cancer, colon cancer, liver cancer,” says Smead.

The health of Merck’s oncology pipeline suggests he has a good point.

Smead is a “value” investor who hunts for shares that he thinks looks cheap.

If he’s right about Merck’s prospects, then its shares’ valuation certainly fits the bill at 14 times forecast earnings over the next 12 months and offering a prospective dividend yield of 2.6pc.

Given that and Merck’s dynamism, we upgrade the shares to a buy.

Questor says buy

Ticker: NYSE:MRK

Share price: TBC

Miles Costello is a contributing journalist to Citywire Elite Companies

Read the latest Questor column on telegraph.co.uk every Monday, Tuesday, Wednesday, Thursday and Friday from 6am

Read Questor’s rules of investment before you follow our tips