Merck (NYSE:MRK) has had an impressive ride this year, as its stock price has soared close to 25% in the last twelve months on the back of continued growth across business segments and some positive pipeline developments. In the last quarter, the drug maker reported flat growth (excluding currency impact) despite the Singulair patent loss as other major drugs continued to perform well (see Merck Fares Well Despite Singulair Patent Loss And Currency Impacts). In the wake of earnings and recent developments, we have increased our price estimate for Merck to $43 from $50, which is about 10% ahead of current market price. Below we discuss the changes made and the outlook in detail.
Patent expiration has been a matter of concern for pharmaceutical companies including Merck. The company saw Singulair, the asthma drug that is one of its biggest sellers with nearly $5.5 billion revenue in 2011, lose its U.S. patent protection in August 2012. The drug has witnessed a faster than expected decline in revenues post patent expiry and as such we have lowered our revenue expectations from the drug going forward (see Merck Updates: Singulair Prescriptions See A Steep Decline Post-Patent Expiry).
This has been offset by increased sales expectations from its legacy animal & consumer health division, which posted moderate growth despite currency challenges. These currency impacts will likely not recur going forward. In addition, a recent number of deals including two separate licensing agreements in the lucrative HIV drug market should also help (see Merck’s HIV Franchise Gains Momentum With Two Deals And Trial Plans). 
We have reduced our forecast for R&D expenditures and selling, informational & administrative (SI&A) expenses due to Merck’s aggressive efforts to cut costs to prepare for the patent cliff, leading to an increase in our price estimate supported by a significant jump in the company’s net cash.
Strong Pipeline Supports Upside
We expect established drugs like Januvia, Janumet, Isentress and Gardasil to continue to gain sales on broader usage and lend support to growth. In January, the FDA approved Isentress for use in children older than two years for HIV therapy.  In February, Janumet, a once-daily treatment to control blood sugar, got FDA approval for type 2 diabetes treatment.  Most encouraging is the company’s strong drug pipeline, making it less vulnerable to revenue losses from the patent cliff.
The drug maker closed trials for osteoporosis drug Odanacatib early after the release of encouraging data in increasing bone mineral density (fewer fractures) in post-menopausal women with osteoporosis (see Merck’s Stock Gets A Boost From Osteoporosis Drug Trials).  In addition, the experimental insomnia drug Suvorexant exhibited strong efficacy in phase III clinical trials as the drug helped insomnia patients fall asleep faster and stay asleep longer versus a placebo. Also, about 90% of the patients didn’t feel fatigued the day after they took the drug, which is a big advantage for the drug (see Merck’s Insomnia Drug Could Fend Off Patent Cliff). 
Both of these drugs appear on track to receive FDA approval by mid-2013 and have the potential to earn blockbuster status, though we estimate their peak sales on the lower side (around $400-$500 millions) due to generic competition. The efficacy of Suvorexant over well-established competitors like Sanofi’s Ambien and its generics is yet to be proven. Further, Odanacatib will hit the market with two of its major competitors – Eli Lily’s Evista and GSK and Roche’s Boniva – going off patent. These drugs garnered close to $2 billion in sales. However, this provides opportunity to tap the osteoporosis market. 
Merck also plans to seek FDA approval for its investigational cardiovascular drugs Tredaptive and Vorapaxar by early next year (Read Merck Updates: Outcome of Large Clinical Study On Tredaptive Soon). The company last week begun a much-anticipated phase III study of a new type of Alzheimer’s drug.  We expect that, should Merck receive these pending approvals, there is considerable upside to its current valuation.Notes:
- Merck Signs Two Deals for Novel HIV Drug Candidates and Initiates Phase II Clinical Trial of MK-1439 for HIV, Merck News Room, July 24 2012 [↩]
- FDA Approves Merck’s ISENTRESS® (raltegravir) for Use in Children Ages Two Years and Older as Part of HIV-1 Combination Therapy, Merck News Room, Jan 06 2012 [↩]
- FDA Approves JANUMET® XR (sitagliptin and metformin HCl extended-release for Type 2 Diabetes, Merck News Room, Feb 02 2012 [↩]
- Update on Phase III Trial for Odanacatib, Merck’s Investigational Cat-K Inhibitor for Osteoporosis, Merck News Room, July 11 2012 [↩]
- Merck Announces New Phase III Data for Suvorexant, an Investigational Insomnia Medicine, Merck News Room, Sept 10 2012 [↩]
- Will Merck’s Odanacatib Sufficiently Fill Singulair’s Void?, The Montley Fool, Nov 30 2012 [↩]
- Merck Initiates Phase II/III Study of Investigational BACE Inhibitor, MK-8931, for Treatment of Alzheimer’s Disease, Merck News Room, Dec 03 2012 [↩]