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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:
Nasonex & Other Anti-Infectives
Merck's Nasonex and Other Anti-Infectives Sales : We expect the Merck's revenues from anti-infective drugs to increase from roughly $11 billion in 2013 to around $12.5 billion by the end of our forecast period. However, there could be an upside of roughly 5% if this figure was to reach $14.5 billion instead. This could happen if drugs and vaccines like Isentress and Gardasil expand rapidly overseas.
Zocor & Other Cardiovascular Drugs
- Merck's Gross Margin: We expect Merck's gross margin to remain more or less around current levels of a little over 72%. However, there could be 5% downside to our price estimate if margins were to fall further to 69% as Merck's revenue growth continues to remain under pressure. On the other hand there could be an upside of a similar order if these margins were to increase to 76%, a level seen in 2009.
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 $1.64 billion in 2013. 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.
Vaccines pipeline shows positive results
The U.S. FDA and European Medicines Agency (EMA) granted marketing authorization to 'Victrelis' in 2011 and the vaccine's sales grew to over $500 million in 2012. Although this figure declined in 2013, other new vaccines are promising compounds and could generate nearly $200-300 million in additional revenues by the end of our forecast period.
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, and if successful, they can lift its growth outlook. The FDA had granted breakthrough status to its anti-PD 1 drug Keytruda (Lambrolizumab) in April, and subsequently approved it in September 2014. Keytruda is an investigational 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. As a result, sales fell by more than 50% over the next two years amounting to $1 billion in 2013. Additionally, Propecia, Clarinex and Maxalt together accounted for roughly $1.46 billion in revenues in 2012. This figure dropped sharply to $667 million in 2013 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 are substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run.
Lack of approval for Biosimilars by FDA
At present the Food & Drug Administration Authority (FDA) does not have a process to grant approvals for Biosimilars.
Though its hard to say when such a process would be initiated, the potential impacts would be severe for any big pharmaceutical firm, as Biologics seem to be the last bastion of long term profits for big pharma.
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.
Trefis Forecast Rationale for Anti-Infective Drugs Global Revenue
Market size is defined as the global spending on drugs within the anti-infectives therapeutic class in US dollars.
Global spending on the anti-infectives market increased from $31 billion in 2007 to $40 billion in 2011 according to the IMS Health Reports.
We expect the entire anti-infectives market to grow and reach a market size of nearly $55 billion by the end of the Trefis forecast period.
Trefis considered the following factors for its forecast:
- Strong growing market presents countless opportunities
- Six infectious diseases namely pneumonia, tuberculosis, diarrhea , malaria, measles and HIV/AIDS account for half of all premature deaths worldwide, killing mostly children and young adults according to the World Health Organization.
- Threatening pandemics such as swine flu (H1N1 influenza A virus) are adding new markets for potential drugs to capture.
- Key market segments gaining momentum
- Vaccines are the new hot research area in pharmaceuticals. This segment is expected to grow 4-5% and reach a market size in excess on $15 billion by the middle of this decade as reported by IMS Health. Various factors contributing to the growth of this segment include the introduction of needle-free systems, increased product safety, DNA vaccinations, and use of vaccines to prevent pandemics and address bio terrorism.
- Anti-virals, especially to counter HIV have been growing at a furious pace mainly to stop the disease from becoming an epidemic.
- Cephalosporins (Anti-bacterials) & their combinations grew around 6% annually between 2006 & 2010. This segment is expected to grow annually between 4-5% till the end of this decade
- Major growth for anti-virals
- Anti-virals, especially to combat HIV have seen tremendous growth in the past decade at nearly 12% every year.
- According to predictions by IMS Health, this segment could grow by 7-8% for the next 4-5 years and reach a market size in excess of $22 billion.
- Various factors considered responsible for this forecast are - increased awareness of diseases and their progression, development of novel drug classes, limited generic competition and increased R&D investments fueled by the growth of drug resistance among patients.
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- Threat of generic products
- Threat of generic products especially from emerging economies which are cheaper and readily available are a significant threat as they effectively reduce the market size in value terms.
- Healthcare reforms to affect revenues
- Reforms put into effect all over the world are adversely impacting pharmaceutical revenues.
- The US Healthcare Reform Act of 2010 is a prime example where pharmaceutical manufacturers will be required to pay an annual health care reform fee of $2.5 billion in 2011 which will be assessed on each company in proportion to its share of sales to certain government programs such as Medicare and Medicaid.
- High cost of treatment
- Ethical issues concerning the high cost of treatments especially in the case of HIV are a big concern.
- Earlier in the U.S. before anti-retroviral therapy was developed and show to be effective, HIV infection often quickly progressed to a terminal illness. The availability of highly effective but expensive anti-retroviral therapy has prolonged survival rates.
- In the developing world where anti-retroviral therapy is generally not available, palliative care, which focuses on relief from suffering is the only tenable goal.
- There have been numerous efforts to make HIV medications more available to the developing world by pressuring pharmaceutical manufacturers to reduce prices, permitting production of generic versions of effective therapies and providing funds for drug purchases.
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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