Stock of the week - Merck (07.10.2021)

Share price of Merck (MRK.US), the US pharmaceutical company known primarily for its cancer immunotherapy drugs, jumped around 10% at the end of the previous week and at the beginning of this week after the company announced that its Covid-19 treatment showed promising results. While stock has pared some gains since, shares continue to trade more than 5% above pre-announcement price. Let's take a closer look at the story.

Merck shows promising results of Covid-19 treatment

Merck announced on Friday early results of its Covid-19 treatment trials that proved to be very promising. Molnupiravir - a new drug that was initially researched as an influenza treatment - was administered to a group of patients with mild to moderate Covid-19 infections. Compared to a control group that received placebo, the new drug led to an around 50% drop in hospitalizations. Moreover, among those who received molnupiravir, no deaths were registered. However, there are some important caveats. Firstly, the trial sample was very small (less than 800 participants) and results were not peer reviewed yet. Secondly, experimental drugs similar to molnupiravir have shown mutagenic effects. Results of a large-scale trial on a statistically significant sample may be different from the ones announced already by Merck while mutagenic effects of the drug (if discovered and proved) may make it a drug of last resort due to risk of developing diseases, like for example cancer.

Why is it big news?

Some may ask - why is it big news? After all, Gilead Science has come up with Covid-19 treatment last year (Remdesivir). This is true - potential Covid-19 treatment from Merck will not be the first one. However, there are significant differences between the two. Treatment from Gilead Sciences is an infusion and because of this needs to be administered in hospitals or special facilities. A new treatment from Merck is a pill - not only is it cheaper but also can be administered at home without need of assistance from medical professionals. This would make it much more accessible for the people, especially given that the price of Remdesivir treatment is often upwards of $2,000. Meanwhile, the estimated cost of a new Merck Covid-19 treatment is three times lower. Having said that, this new drug may prove to be a real gamechanger in Covid-19 treatment. Of course, if its safety and efficacy is proven.

Deals are already coming in

While results of the small-sample study have not been reviewed and Merck did not release full results (just mentioned them in press release), numerous countries are already taking actions to secure supply. Singapore, Malaysia and Australia signed deals with Merck for supply of a new drug while Thailand, South Korea and Taiwan are mulling similar move. Securing deals to supply its new drugs is a key for Merck as the patent for its top selling drug used in cancer immunotherapy - Keytruda - is set to expire in 2028. Keytruda accounted for 30% of Merck sales in 2020 and still experiences growth trajectory, meaning its share in total revenue continues to increase. While patent expiration will not plunge those sales to 0, it is likely to reduce them as alternative generic drugs will enter the market. 

Technical Analysis

Merck (MRK.US) has been trading in a wedge pattern since the beginning of 2020 and recent share price jump fueled by upbeat news on new Covid-19 treatment allowed the stock to break above the upper limit of the pattern. In theory, such a break suggests an upward move that will push the price above highs from the turn of 2019 and 2020 ($87.80). However, rally has taken a pause after two days of gains and the stock pulled back to the 38.2% retracement of its recent upward impulse ($80.65). Current premarket quotes point to a flat opening for the stock today, what may suggest that a floor has been reached and an upward move is about to resume. As we have mentioned earlier, new Covid-19 drug from Merck has not been peer-reviewed yet. Traders should keep in mind that if further research on it shows it to be not as efficient or as safe as expected, stock may take a dive.

Source: xStation5