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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-Infectives Revenues 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 last year 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 and MK-8742. A combination therapy for Hepatitis C (grazoprevir and elbasvir) filed by Merck is up for FDA review. The treatment has demonstrated impressive cure rates for genotypes 1, 4 and 6 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 new drug is successful, it could add incremental annual revenues of close to $3-4 billion over the next few years, adding 10% to our price estimate and more than 10% to our EPS for 2017. 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.
Keytruda gets few more approvals
- Merck's Oncology Revenues: Merck's immuno-oncology drug Keytruda has received approval for advanced melanoma. We estimate that the drug could garner as much as $5 billion in annual sales if it penetrates 10% of the patient pool in the U.S. and Europe. Merck has stated that its drug will cost roughly $12,500 per month for treatment and targets advanced melanoma that accounts for most of the deaths from skin cancer cases. Assuming that 20% of all melanoma cases are advanced, the actual addressable patient pool for Keytruda would be close to 340,000 given our estimated total patient pool of 1.7 million in the U.S. and Europe. We still take a conservative view in our pricing model, owing to expected increase in competition in immuno-oncology segment, and assume Keytruda will have slightly less than $3 billion in revenues by 2021. However, the drug is under trial for multiple additional indications including bladder cancer, head and neck cancer, non small cell lung cancer (NSLC) and gastric cancer. Out of these, NSLC has received breakthrough therapy designation from the FDA. 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, animal health and consumer care products which it markets directly and through its joint ventures. The firm's operations are managed through the company's four main divisions, namely Pharmaceutical, Animal Health, Consumer Care and the Alliances division.
The biggest contribution to the value of the stock comes from the Anti-Infectives division. This is explained by the following reasons.
Isentress delivers promising results
Worldwide sales of Isentress, an HIV integrase inhibitor for use in combination with other anti-retroviral agents for the treatment of HIV-1 infection in treatment-naive and treatment-experienced adults, were over $1.67 billion in 2014. Sales growth in recent periods reflects positive performance in the United States, as well as internationally, resulting from continued uptake since launch.
Gardasil gaining popularity
Since September 2012, Gardasil is being used in the HPV vaccination program to protect girls from cervical cancer across schools in the U.K, according to the U.K. Department of Health. This reflects a switch from GlaxoSmithKline’s Cervarix. Continuance of such switch in other countries will drive the sales growth.
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 malignancy.
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, 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 quarters.
In addition, Merck’s cardiovascular division has also been hurt by the patent cliff as its drugs Cozaar/Hyzaar, which garnered over $2.1 billion in revenue in 2010, lost patent exclusivity in large markets including the U.S. and Europe in late 2010. Annual sales have fallen by 62% since then, amounting to $800 million in 2014. Additionally, Propecia, Clarinex and Maxalt together accounted for roughly $1.46 billion in revenues in 2012. This figure dropped sharply to less than $650 million in 2014 as a result of patent expiry.
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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