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Investment Overview for Merck (NYSE:MRK)
Key drivers of Merck's value that present opportunities for upside or downside to the current Trefis price estimate for Merck:
Merck launches a highly competitive Hepatitis C drug
- Merck's Anti-Infective Drugs Sales and Merck's Gross Margin: Merck has been looking to get a breakthrough in Hepatitis C market. In November 2014, the company released clinical trial data of a triple-pill regimen for the treatment of treatment-naive group of cirrhotic patients. The combination included a mix of Merck's Grazoprevir/Elbasvir (MK-5172/MK-8742, MK-5172A) along with Gilead Science's Sovaldi. The therapy achieved a cure rate of more than 94% for 8-week therapy, but fell short of satisfactory cure rates in case of 6-week and 4-week therapy. In fact, only 38.7% of the patients showed no signs of the virus after 4-week treatment. Having said this, it is possible that we are underestimating Merck's competitiveness in Hepatitis C market. Its acquisition of Idenix has given it the necessary expertise to compete in this lucrative segment. The company is now focusing on clinical trials of combination of MK-5172. A combination therapy for Hepatitis C (grazoprevir and elbasvir) was approved by the FDA in early 2016 for the treatment of genotypes 1 and 4 of the disease. This puts it in direct competition with Harvoni, which is an oral interferon and ribavarin free drug developed by Gilead Sciences. If Merck’s continues to expand its Hepatitis C efforts and the new drug surpasses our expectations by adding $2 billion more over our current expectation, it could add nearly 5% to our price estimate. This impact will come not only from improved revenue growth, but also from an increase in gross margins, as we expect high margins for Hepatitis C drugs.
Commercial launch of phase 3 drugs
- Revenue from Alimentary and Metabolism Drugs and Anti-Infectives Drugs: Alimentary and Anti-Infectives together account for more than 50% of the valuation of the company. Together these two divisions have 8 drugs under phase 3 trials with combined peak sales of $9 billion. Our valuation reflects 50% probability of phase 3 drugs reaching commercial launch stage, and expected revenues are adjusted accordingly. If all phase 3 drugs are approved within the next 3 years, it could imply 15% upside potential to our price estimate.
Alimentary/Metabolism phase 3 drugs
- Ertugliflozin: This SGLT2 inhibitor is used to treat type 2 diabetes and is being co-developed with Pfizer. The drug could face stiff competition from Jardiance, which is the only diabetes medication to reduce cardiovascular risk in a dedicated outcome trial. If approved by 2018, it could generate peak sales of $1.2 billion.
- MK-1923: This is a biosimilar drug aimed at treating diabetes. In two separate phase 3 studies it stood up to the original biologic Lantus in terms of efficacy and safety in type 1 and type 2 diabetes. It is currently under FDA review, and could generate peak sales of $1.5 billion.
Anti-Infectives phase 3 drugs
- Relebactam: A beta-lactamase inhibitor, the drug is currently being tested with imipenem for the treatment of acute bacterial infections. We expect an approval by 2019 with potential peak sales of $1.2 billion.
- MK-8228/Letermovir: This is once-daily antiviral agent under development for the prevention of human cytomegalovirus(CMV) infection. It could generate peak sales of $1 billion.
- V212: This is an inactivated varicella zoster virus (VZV) vaccine and is expected to be filed for FDA approval by 2019. It could generate peak sales of $1 billion.
- Doravirine: This non-nucleoside reverse transcriptase inhibitor (NNRTI) is being evaluated for the treatment of HIV infection. It could generate peak sales of $1 billion.
- MK-6072/Zinplava: This drug is currently under FDA review for the prevention of Clostridium difficile infection. If approved, it could generate peak sales up to $1 billion.
- V419: It is an investigational pediatric hexavalent combination vaccine. V419 is being evaluated for the prevention of six infectious diseases: diphtheria, tetanus, whooping cough (Bordetella pertussis), polio (polio types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b, and hepatitis B. The drug is currently under FDA review, and could generate peak sales of $1 billion if approved.
Cardiovascular and other phase 3 drugs
- Anacetrapib, a CETB inhibitor, could prove to be a risky venture. It is being tested for the treatment of atherosclerosis. Three CETB inhibitors by Roche, Eli Lilly and Pfizer failed phase 3 trials. If approved, it could generate peak sales of $1.2 billion.
- MK-8931 is an inhibitor of beta-site amyloid precursor protein cleaving enzyme 1 (BACE), and is being evaluated for the treatment of Alzheimer's disease. If approved, it could generate peak sales of $5 billion.
Phase 3 pipeline fails
- Revenue from Alimentary and Metabolism Drugs: Our valuation includes 50% probability adjusted revenues of phase 3 drugs reaching commercial launch stage. Omarigliptin and Odanacatib phase 3 trials had to be called off by the company which were expected to generate peak sales of $3.2 billion. Even an agreement with ALK-Abello was terminated by the company for the development of MK-8237. Anacetrapib, a CETB inhibitor approval seems less likely as three similar kind of inhibitors by other companies have previously failed phase 3 trials. If all phase 3 drugs fail to reach commercial stage, it could pose 10% risk to our price estimate.
Keytruda gets few more approvals
- Merck's Oncology Revenues: Merck's immuno-oncology drug Keytruda has received approval for advanced melanoma and non-small cell lung cancer. We estimate that the drug could garner as much as $4-$5 billion in annual sales. We still take a conservative view in our pricing model, owing to expected increase in competition in immuno-oncology segment. However, the drug is under trial for multiple additional indications including bladder cancer, head and neck cancer and gastric cancer. If the drug gets approval for 2-3 of these indications in the next few years, its revenues could skyrocket. In such a case, there is a good chance of adding incremental revenues of $3-4 billion over what we currently forecast. This will add 10% to the company's value.
Merck is currently the world's second largest pharmaceutical company after Pfizer in terms of revenues. The company delivers innovative health care solutions through its prescription medicines, vaccines, biologic therapies and animal health products which it markets directly and through its joint ventures. The firm's operations are managed through the company's three main divisions, namely Pharmaceutical, Animal Health, and the Alliances division. Merck sold its consumer care business to Bayer in 2014.
Anti-infective drugs form the most valuable division for Merck because of the following:
Large number of drugs constituting nearly 25% of Merck's revenue
Merck has a strong portfolio of anti-infective drugs and vaccines, and the company acquired Cubist pharmaceuticals in 2015 to strengthen its roster. Its anti-infective division now boasts of nearly 12 marketed drugs with average annual revenue of about $840 million per drug. The revenue from division are higher than any other reported segment. We expect the company to build on its market leading position by bringing more drugs to the market. Some of the biggest drugs include Isentress, Gardasil, Cubicin and Proquad. Additionally, the division is unlikely to see any decline in revenues because the patent losses will be more than compensated by the growth in new drugs and launch of phase 3 pipeline candidates. Merck currently has 6 anti-infective candidates in phase 3 trials, more than the number for any other therapeutic area.
Launch of new drugs
Merck believes that its anti-PD-1 therapy for oncology and ACE inhibitor for Alzheimer’s disease have the capability to change the course of medication. The FDA had granted breakthrough status to its anti-PD 1 drug Keytruda (Lambrolizumab) in April 2014, and subsequently approved it in September 2014. Keytruda is PD-1 specific monoclonal antibody for the treatment of advanced melanoma and non-small cell lung cancer.
Loss of patents impacting sales
Like other major pharmaceutical companies, Merck is also battling against the impact of patent expiry of its several major drugs including Singulair, Remicade, Propecia, Clarinex, Maxalt, Cozaar and Hyzaar. Out of these, asthma drug Singulair has had the biggest impact and has continually weighed on Merck’s growth for the past few years.
Growing threat of generic products
The fast growing pharma market in emerging economies or referred to as the 'Pharmerging' economies have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run. Merck's drugs could face potential threat from biosimilars in future, which are generic versions of biologics.
Globalization of healthcare reforms
Governments around the world are trying to rein in fiscal spending in order to manage their budget deficits.
Since healthcare costs are one of the biggest components of any national budget, it is expected that an increase in healthcare legislation and reforms around the world will hurt revenues for the entire pharmaceutical sector.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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