New Jersey-based leading pharma company, Merck & Co. Inc.’s MRK share price rose 8% in 2016. This is impressive, given that the year was fraught with challenges for the pharma/biotech sector, which faced immense flak for steep drug prices. The company’s price movement compares favorably with the 6.1% fall for the Zacks categorized Large-Cap Pharma industry.

Let us analyze the reasons for the same.

Consistent Strong Results; Raised Guidance: Merck’s sales and profits have been relatively strong this year. It delivered positive earnings surprises in all the three quarters of 2016.

At the third-quarter call, Merck raised both its sales and earnings outlook for the year. Continued strong performance of newer drugs and cost-cutting initiatives should help it to achieve its guidance.

Keytruda, a Key Driver: Merck’s new products like cancer drug Keytruda have been contributing meaningfully to its top line, somewhat making up for the generic competition for several drugs. In October, Keytruda received an earlier-than-expected FDA approval for the first-line treatment of metastatic lung cancer. This is an important milestone for the company and Keytruda sales should improve sharply with the first-line NSCLC indication.

Importantly, Keytruda is being studied for more than 30 types of cancer. Merck is collaborating with several companies including Amgen, Inc. AMGN, Incyte, GlaxoSmithKline plc GSK and Pfizer Inc. PFE among others, separately for the evaluation of the drug, in combination with other regimens. The last few months saw a series of positive news related to Keytruda, raising sales expectations for the drug.

New Drugs Doing Well: Apart from Keytruda, other new products are also performing well. Products that should contribute significantly to revenues include fertility drug Elonva, Simponi (inflammatory diseases), Dulera (asthma), and Daxas (chronic obstructive pulmonary disease), among others. Recently approved products include Zinplava (infection), Zepatier (HCV), Zontivity (anti-thrombotic), Belsomra (insomnia), Zerbaxa (antibiotic), Grastek, and Ragwitek.

Pipeline Matters: For any pharma or biotech company, the pipeline is of utmost importance and plays an important role in investment decisions. So, it always makes sense to take a look at a company’s pipeline.

Merck  has many pipeline candidates in advanced stages of development targeting multiple disease areas such as atherosclerosis, cancer, diabetes and cardiovascular diseases. It has more than 10 candidates in phase III development. Some of the important pipeline candidates include MK-0859 (anacetrapib - cholesterol management), verubecestat (Alzheimer’s disease), MK-8228 (letermovir, cytomegalovirus (CVM) infections) and MK-8835 (ertugliflozin, type II diabetes).

Cost Savings and Strategic Initiatives: In Oct 2013, Merck launched a strategic initiative to streamline its business. The company generated net cost savings of more than $2.5 billion in 2015 primarily by reducing marketing and administrative and R&D expenses.

Merck already has another global restructuring program in progress, which is aimed at reducing the cost structure and increasing efficiency. It intends to reduce the number of manufacturing sites, including animal health sites, and consolidate other facilities. The company expects annual savings of about $4.0−$4.6 billion once the restructuring program is completed.

Merck also divested segments like the Consumer Care business to focus on its core areas of expertise. The company is also returning value to shareholders in the form of share buybacks and dividends.

Conclusion

Like many of its peers, Merck is facing generic competition and pricing pressure for some products. Yet, we believe its diversified business model, deep pipeline and strong financial position will continue to help the company navigate tough times.