The stock market offers pockets of opportunity in sectors that combine a decent dividend yield with a good quality business. In other words, growth and income.

One such sector is the pharmaceuticals sector, which overall has lagged the S&P 500 in the past five years, although not by much.

There are, no doubt, some world-class companies in this sector. One candidate that caught my attention is Merck & Co. (MRK), even though its yield is just 2.67%. Let me tell you why…

Merck’s Blockbuster Drug

The company’s stock—trading at about $110 a share—is up 87% over the past five years and nearly 25% over the past year, although it is slightly down year-to-date. Merck’s share price has beaten the S&P index by 60% in the past 12 months.

The key factor behind the rise in Merck’s share price rise is its blockbuster cancer immunotherapy treatment, Keytruda, accounting for more than a third of Merck’s sales. In the first quarter, Keytruda accounted for 40% of revenues, coming in at $5.8 billion, up 20% year-on-year.

The treatment, approved in 2014, harnesses the body’s own immune system to fight cancers. And the results have been impressive, to say the least: it has led to a five-year survival rate in about one-quarter of advanced lung cancer patients, compared to 5% of people historically.

In 2022, Keytruda’s sales hit almost $21 billion and looks to be on its way to an annual figure that industry analysts suggest will top out at almost $60 billion. This growth comes despite the cost of Keytruda being very controversial in some circles—its list price is about $185,000 per patient per year.

Merck is looking to keep this gravy train on track. That’s why it’s looking to patent a new formulation of Keytruda that can be injected under the skin, allowing it to protect its best-selling drug from biosimilar competition, expected as soon as 2028.

The company is running clinical trials on two versions of the drug that can be injected under the skin. This is a quick alternative to infusions, the current delivery method, in which patients receive an intravenous drip in a health office once every three or six weeks. The new formulation will likely replace the current one in most cases, and its success will be crucial to Merck’s future.

On average, Wall Street analysts expect Keytruda revenues to top $30 billion in 2026 and $35 billion by 2028, according to Refinitiv data. However, BMO Capital’s Evan Seigerman told Reuters that private insurers in the U.S. may balk at paying for the more expensive branded product and prefer a biosimilar infusion version. Nevertheless, he believes the new formulation could allow Merck to hold onto as much as 20% of its Keytruda revenue into the 2030s.

Merck’s Long-Term Prognosis

The company’s future looks healthy.

Importantly for longer-term cash flows, Merck’s core products—Keytruda, as well as the human papillomavirus vaccine (HPV) Gardasil (sales up 35% to $2 billion in the first quarter)—continue to post strong gains.

Despite being on the market for a relatively long time, these products should continue to drive growth thanks to their high efficacy and expanding markets. These include adjuvant indications for Keytruda and expansion into the world’s developing markets for Gardasil.

The company has some potential future blockbuster drugs in the pipeline too. For instance, Merck’s phase 3 data for the pulmonary arterial hypertension (PAH) drug sotatercept was excellent, with an improvement of 84% in event-free survival. A key unmet need in pulmonary arterial hypertension is a lack of disease-modifying, curative therapies. But that may now change soon, thanks to sotatercept.

Originally developed by Acceleron Pharma, sotatercept is the only drug to have achieved breakthrough therapy designation in the U.S. for PAH, alongside orphan designation in the U.S. and the EU. Merck acquired Acceleron Pharma and its pipeline of therapies in September 2021 for $11.5 billion, with sotatercept being the key drug.

It looks like this acquisition has paid off for Merck, which has positioned it as a top competitor, with the potential to overtake the current leader in the PAH space, United Therapeutics. I believe the drug will be a home run for Merck.

MRK Stock

Regarding distributions to shareholders, Merck’s dividends and share repurchases are secure. Merck has generally targeted close to a 50% payout in dividends as a percentage of normalized earnings, which seems right for a mature industry. And Merck has shown a willingness to buy back stock at generally favorable time periods.

Morningstar analyst Damien Conover put it this way: “Merck supports a strong dividend yield that looks secure based on a wide diversified portfolio of drugs.”

MRK stock is a buy anywhere in the $105 to $115 price range.