Merck named the best pharma stock by Bank of America

  • Bank of America Merrill Lynch names Merck its No. 1 top pick in the U.S. pharmaceutical space and tells investors to expect big returns from its cancer drug.
  • The company's Keytruda treatment generated revenues that topped $2 billion in a quarter for the first time.
  • Sales of the drug soared 66 percent year over year in the fourth quarter and made up nearly 20 percent of the company's total sales.
Employees walk past a Merck sign in front of the company's building in Summit, N.J.
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Employees walk past a Merck sign in front of the company's building in Summit, N.J.

Bank of America Merrill Lynch on Tuesday named Merck its top pick among the many U.S. pharmaceutical stocks thanks to the growing success of its key cancer drug, Keytruda.

"Merck looks well positioned to become the preferred PD1 agent in most major tumor markets, and we estimate upcoming data readouts in lung and renal cancer have the potential to add $4 billion in peak sales or 5 to 10 percent upside," Bank of America's Jason Gerberry wrote in a note to clients.

Investors learned on Friday that Keytruda generated revenues that topped $2 billion in a quarter for the first time, exceeding Wall Street's steep expectations. The better-than-anticipated numbers propelled shares higher, with Merck up nearly 5 percent over the past week.

Keytruda blocks a protein called programmed death receptor 1, or PD-1, on immune cells. It typically works as a type of "off switch" that helps keep the cancer cells from attacking other cells. Sales of the drug soared 66 percent year over year in the fourth quarter and made up nearly 20 percent of the company's total sales of $11 billion worldwide.

"The fourth-quarter and full-year results further bolster our confidence in Merck's innovation-based strategy in which our key pillars — oncology, vaccines, animal health, and select hospital and specialty care products — are expected to drive sustainable growth over the long-term," Merck CEO Kenneth Frazier said in Friday's earnings release. "We enter 2019 with good momentum."

Merck stock rose 1.5 percent in early trading Tuesday after the Bank of America note. The brokerage sees the shares rising to $84 over the next 12 months from Monday's close of $76.87, implying 9 percent upside.

— CNBC's Michael Bloom contributed reporting.