Since taking over as CEO in July 2021, Merck & Co. MRK 0.00%↑ leader Robert M. Davis has built the kind of internal following that top execs dream of – but rarely achieve.
Observers say he’s approachable – and “does a great town hall.” He creates a “sense of mission” by painting clear pictures of where Merck is today … and where it needs to go. And he’s sparked the “buy in” the company needs to make his vision happen.
Davis is relatable. But he’s also got one of the most-complete CVs that I’ve seen in my 40 years analyzing big public companies.
He’s run operating units. He’s managed such crucial initiatives as corporate strategy, business development, information technology, manufacturing and research. He even did a stint as Merck’s CFO.
Add all this up and it’s no surprise Davis earned an “A-” CEO grade on Comparably, a platform that ranks corporate cultures and executive compensation. The employee-and-outsider reviews placed him in the top 15% of CEOs at 1,339 companies with more than 10,000 employees. And it placed him second on a list of four “peer” firms.
For Merck – a Big Pharma company that’s careening into a challenging stretch – a CEO like Davis is more than a competitive edge … it’s like a “secret weapon” that can help bring victory.
Three years ago, it spun off its women’s health unit. Now it’s motoring toward a “patent cliff” on its biggest blockbuster drug. But it’s also wheeling and dealing and just won approval for its “Next Blockbuster” therapy.
In short, there’s a lot to like about Merck – the company and the stock. It’s an intriguing investment – and a possible opportunity for us Wealth Builders.
I’m going to give you a rundown here in today’s issue of Stock Picker’s Corner (SPC).
The Two Strengths of Top CEOs
Let me start by telling you folks that Merck is a company I’ve followed for years.
In fact, it was one of the great growth plays of the 1980s and ‘90s: Between 1985 and 2000, the company’s shares soared more than 3,500%.
But with any stock, it’s “what comes next” that matters. And I’ll start that review with a bit more about Davis, the CEO.
As a reporter and a stock picker who was paid to analyze companies – and as a guy who’s worked in (and watched) organizations of all sizes and types – I learned a lesson that far too many folks just don’t get.
Let’s call it Management 101 – the lesson of management versus leadership.
As always, I’m intentionally oversimplifying this. That said, here it is …
Management is the science/art of taking limited resources (things like time, talent, money, equipment, raw materials and production capacity) and then using them to achieve your company’s goals.
Leadership is the ability to inspire folks to buy in and help you use those resources to hit those goals.
In short, while they’re very different things, they’re also intertwined.
Some execs are good at one but not the other. Many are lousy at both. Some talk a great game – but can’t perform when that game’s on the line.
And it looks to me like Davis is the rarest of all: A CEO who’s great at both.
His resume alone serves as a super “proof point.”
I also really like his “message.”
Davis operates with what he characterizes as a “one team” approach.
And as I learned studying under the late Prof. Janet C. Barnard – an expert on management, organizations and how people best perform inside a company – executives leading research, tech or other innovative ventures face a major specific challenge: Those execs need to get all those innovative people focused on the big strategic goals – but without stifling the creativity that’s crucial to that inventiveness.
If you want proof that Davis seems to get this, check out what he told an interviewer from Northwestern University’s Kellogg School of Business, where he earned his MBA back in 1993. (Davis also earned his law degree from Northwestern in 1998: Talk about overachievers 😆.)
“If you’re a great CEO, it’s because you’ve cleared the way for everyone else to thrive,” Davis said in that 2023 interview. “If I can be comfortable that my people across the functions — the scientists, the teams in manufacturing, my commercial colleagues — are all thriving, we’ll win. And we’ll do it as one team.”
His relatability may stem from his Midwest upbringing: Davis told that interviewer that he “grew up in a small town in Indiana in the shadow of Eli Lilly & Co. LLY 0.00%↑ ” – a bit of career irony, since Lilly is a company he spent 14 years with before he joined Merck.
Losing a Blockbuster – Gaining Another
Let’s look next at challenges/threats … threats that I think the firm can handle.
Merck’s No. 1 challenge is the 2028 patent cliff for its cancer-drug Keytruda, which topped $25 billion in revenue last year – or about half of the company’s pharmaceutical sales. It’ll generate sales of $27.45 billion this year, will peak at projected $32.62 billion in 2027 – and will contribute a still-hefty $32.39 billion in 2028, says FactSet Research.
Keytruda is currently administered intravenously. Part of Merck’s game plan to compete with generic IV versions of the drug that debut after the patent expires is to develop a “subcutaneous” (under-the-skin) counterpart. That could extend Keytruda’s revenue for a few more years.
In late March, Merck gained its “Next Blockbuster” drug when it won U.S. Food and Drug Administration (FDA) approval for its pulmonary arterial hypertension (PAH) drug Winrevair.
PAH affects about 40,000 folks here in the U.S. market – so it’s pretty rare.
But it’s also very nasty.
The blood vessels in the lungs narrow – leading to pain, high blood pressure, difficulty breathing … and heart failure.
It progresses quickly. It affects more women than men. And it usually kills within five years.
Winrevair keeps those blood vessels from narrowing by blocking the proteins that cause that to happen. The Merck drug is dosed subcutaneously every three weeks. Since it goes for $14,000 per vial, you’re looking at an annual outlay of $238,000 per patient.
This drug is important because it illustrates three things that are key to Merck’s future:
First and foremost, analysts say it’s going to achieve blockbuster status – with sales forecasts of $1 billion to $8 billion a year.
Second, the drug (known scientifically as sotatercept) was originally developed and investigated by Acceleron and Celgene as a possible treatment for such maladies as osteoporosis, anemia and multiple myeloma. Only later did researchers see it could treat PAH. That shows how new drug compounds can have unexpected benefits – something Wealth Builders need to look for with the biotech stocks they’re researching.
And, third, the drug was brought aboard thanks to a buyout deal. Winrevair is the “crown jewel” of Merck’s $11.5 buyout of Acceleron back in 2021. That’s crucial because Merck will need to keep shopping to bolster its drug pipeline.
Let’s Make a Deal
If you look at Merck’s drug pipeline for cardiac, cancer and immunotherapies right now, analysts say you’re looking at annual sales of $35 billion by the middle of the next decade.
And dealmaking – licensing deals and buyouts – will be key.
Some of those deals are already in the books.
In addition to Winrevair, there’s Tulisokibart – a treatment for inflammatory bowel disease (IBD) and a medicine Merck snagged in last year’s $10.8 billion buyout of Prometheus Biosciences.
There’s also licensing.
Merck and Daiichi Sankyo (the second-largest pharmaceutical company in Japan) also signed a cancer-drug licensing deal back in October – a pact that could end up with Merck paying as much as $22 billion. These drugs are called “antibody drug conjugates,” or ADCs. And they deliver killer compounds directly to tumor cells – a targeting mechanism that hammers the tumor – without damaging the nearby healthy tissue.
What Comes Next … And a Stock I Like Even More
Davis recently told investors that Merck will keep looking for licensing deals. And it’ll look for acquisition deals in the $1 billion to $15 billion range.
Mizuho Securities analyst Mara Goldstein says Merck will manage the transition from Keytruda to its next wave of winners. The drugs the company already has in late-stage testing could generate revenue of $13.6 billion in 2029 – the year after the Keytruda patent expires, she says.
"Our thesis on Merck has been that the company would be able to maintain itself through a combination of internal development, licensing and acquisitions," Goldstein wrote.
In the years I’ve watched this company, I’ve seen ebbs-and-flows and booms and busts.
Back at the very start of the 2000s, for instance, four of its biggest-revenue-generating drugs went off patent. Then, in 2004, it had to spike Vioxx, its blockbuster arthritis drug, after research emerged showing the therapy skyrocketed the risks of heart attacks and strokes in patients who were extended users.
The day of the Vioxx revelations, Merck’s shares lost more than a quarter of their value.
Over the long haul, however, the company has repeatedly remade itself.
Merck was recently trading at about $129 a share, up about 14% year-to-date and near the top of its 52-week range.
Thanks to Merck’s strategies and Davis’ leadership, Merck is a stock worthy of a long look.
Before You Go: There’s another Big Pharma stock I like even more.
It’s a true opportunity for Wealth Builders.
And I’ve developed a full investment dossier – including a pricing model that points to a potential gain of better than 400% in the next few years.
SPC Premium members have full access to it, and all of our readers can see a preview by clicking here.