This is a combo you don’t hear about very often, “founded in the 17th century” and “cancer killing blockbuster” … usually, the little biotechs that newsletters drop hints about are tiny, young, risky, sometimes fly-by-night outfits that are betting it all on a clinical breakthrough.
Not this time, apparently. So that’s why my eye was drawn to this ad for Mark Skousen’s Forecasts and Strategies newsletter (currently $49.95) — what is it that he’s teasing here?
This is the intro to the ad:
“The New ‘Jaw Dropping’ Cancer Killer that Saved a Former President’s Life!
“One of the world’s oldest, publicly traded companies – founded in the 17th century – has recently transformed itself into a ‘must have’ investment that should belong in everyone’s portfolio.
“The company recently stumbled upon what Cancer Research UK calls, ‘one of the greatest breakthroughs in cancer treatment in four decades’ – a cancer cure that doctors call ‘jaw dropping’!”
And apparently this company is already making money off of their discovery, and treating patients, so this isn’t brand new…
“The Profits from this Amazing New Cancer Breakthrough are Already Staggering
“This is nothing compared to what the company will earn in the months and years ahead.
“Even small shareholders could potentially make fortunes on this one stock.
“Yet, the average investor has no clue what is going on here….
“…this is the closest thing to a “can’t lose” investment I’ve ever seen.”
So what is this breakthrough? We get some more clues — this is what they say it’s already treating:
“… the FDA has already authorized use of this breakthrough cancer treatment for…
… advanced melanoma…
… non-small-cell lung cancer…
… head and neck squamous cell cancer… AND
… metastatic colorectal cancer, one of the deadliest forms of cancer.
“And that’s just the beginning.
“This treatment is so revolutionary… and prolongs life to such an unprecedented degree… it’s currently being studied for more than 30 other forms of cancers.”
And we get a blanket statement from Skousen’s publisher that probably gives us all a warm feeling inside at this particular moment in time:
“It doesn’t matter whether the economy is weak or strong, whether interest rates rise or fall, or whether the U.S. dollar goes up or down.
“It doesn’t even matter what the new administration in Washington does.
“This new cancer breakthrough could make this stock immune to troubles in the broader economy.”
Phew! OK, so here’s one where we don’t have to worry about what the next few months will bring? What a relief!
And we get the quotes from experts and other folks to buttress Skousen’s arguments, which is typical of most ads (you like to see that someone besides this newsletter guy is excited about the company, naturally):
“Science World Report calls it ‘a miracle drug.’
“The U.S. Food and Drug Administration has officially designated it a ‘breakthrough therapy.’
“The chief of medical oncology at the Yale Cancer Centre described test results on the drug as ‘spectacular.’
“And a scientist from Cancer Research UK declares that ‘the evidence emerging from clinical trials suggests that we are at the beginning of a whole new era.'”
Of course, one of the challenges of being an informed reader these days is that everything sounds official and fantastic — Science World Report is, like thousands of other websites, a collection of very brief articles, and it could well be that this is indeed a “miracle drug”… but the person who wrote that headline writes a dozen articles a day, and her most recent one is about chimpanzees who have learned to fish. The quote from the chief of medical oncology at Yale is accurate, but it was a general quote about immuno-oncology… an area of medicine in which this particular drug is one very promising and fairly early product.
So yes, we can tell you the stock — this breakthrough drug is called Keytruda and is pretty well known at this point, and was used in treating President Carter’s cancer. And the company who owns Keytruda is Merck.
Yes, Merck, the giant pharmaceutical company. So is Mark Skousen going to all this trouble to tell us to buy Merck, and implying that “small shareholders can make a fortune” just buy buying Merck shares?
We do get a few other hints:
“Since 2010, the company has generated $8 billion in free cash flow in all but one year (2014), and, in 2015, it delivered a record $11.1 billion in free cash flow.
“Early investors will soon reap the rewards….
“This anti-cancer miracle drug is not all that this pharmaceutical firm is about.
“It currently boasts 11 mid-stage programs in its pipeline (including cancer and diabetes drugs)… 25 late-stage development programs (including HIV, multiple myeloma, and roughly a half-dozen cancer types)… and five new drugs already under review by regulatory agencies.
… new treatments for large B-cell lymphoma, diabetes and heart failure…
… vaccines to prevent ebola, herpes zoster and even HIV… and
… potential breakthroughs in the treatment of alzheimer’s disease, atherosclerosis, bacterial pneumonia and osteoporosis.”
So yes, this stock that Dr. Skousen just added “at the top of his recommended list” is indeed Merck (MRK). They were founded in the 17th century (OK, technically it was their original parent Merck that was founded back then, the US company is only 130 or so years old and has only been independent since it was nationalized in WWI). And yes, they did have $11.1 billion in free cash flow in 2015, though that was a near-term peak (the trailing twelve month free cash flow is more like $9.4 billion right now), and that is obviously a huge number that means we’re dealing with a real megacap company — Pfizer has free cash flow that’s slightly higher, Novartis is a little lower, Roche is in roughly the same neighborhood, Gilead is quite a bit higher… but that’s about it for big pharma, there aren’t many bigger names when it comes to cash flow.
Merck has a big ol’ market cap as well, it is currently valued at about $175 billion — and, as we’ve become accustomed to seeing with big pharma, it pays a nice and growing dividend, and now that they’ve survived their “patent cliff” from a few years ago they’re again growing earnings. Though, as is always the case with big pharma, there’s another patent cliff right around the corner — patent cliffs refer to the expiration dates for patents on major pharmaceutical products, since in some cases, particularly when generic versions are relatively easy to create and sell, the revenues from blockbuster drugs can fall “off a cliff” in the space of a year or less. Right now Merck is dealing with a somewhat unexpected patent cliff next year for Cubicin, the antibiotic they bought when they acquired Cubist a few years ago (they were hoping to have a few more years on that one, but lost in court), and they’re also seeing sales drop for Remicade, which has some biosimilar competition now, and will soon see generic competition for Zetia.
So Keytruda is indeed a big deal for Merck, and is expected to make up for some of that revenue drop over the next few years. Analysts do still expect Merck to grow earnings, from $3.67 this year to $3.88 next year and $4.21 in 2018, on average — so that means that investors right now are paying about 16 times next year’s earnings for Merck shares, and getting a dividend of almost 3%. That puts them pretty squarely in the middle of the pack when it comes to big pharma… it may well be that Keytruda is phenomenal and turns into a $5 billion drug instead of a $3 billion drug over the next couple years, I don’t know, but either way a small investment in Merck is not going to turn into a fortune in short order.
Will a MRK buy bring you riches? Well, maybe, but I’d guess that it will probably take a long time. The total return for MRK shares over the past decade has been about 115%, which, again, is pretty much in the middle of the “big pharma” pack, and that’s probably your best bet — that it will be a pretty solid stock in the future for long-term investors, as it has been in the past. Merck has returned about 500% over the past 20 years (including dividends), which is very impressive, and it was not a tiny company 20 years ago (it had a market cap of about $50 billion in the mid-90s), so maybe you’ll be fortunate and see returns similar to that in the decades to come… but it’s not going to generate 10,000% or 50,000% gains like Gilead or Celgene have over the past couple decades, if only because it’s already a massive and profitable company.
Keytruda is a powerful and important drug, and it is inspiring lots of other PD-1 inhibitors that will also come along and try to do a better job of boosting the immune system to fight off cancer cells, but it’s not necessarily going to create new fortunes out of thin air for Merck shareholders in the next couple years. Merck is almost the definition of a “blue chip” pharma stock and has been for decades, and assuming that it will probably have blue chip returns for a long time is probably a decent guess, absent any expert knowledge about future sales of Keytruda or the progress of their R&D of new drugs… but more than that is probably expecting too much.
Have a different opinion of Merck or Keytruda? Experience with Skousen’s Forecasts & Strategies? Other immunotherapy drugs you think are exciting that your fellow investors should hear about? Let us know with a comment below.
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