Merck (NYSE:MRK) will release its Q2 2013 earnings on July 30 and like its counterpart Pfizer (NYSE:PFE), its results will reflect the negative impacts of patent expiry of big drugs and adverse currency movements. The company’s revenues declined 9% to $10.67 billion in Q1 2013 compared to the same quarter a year ago as sales of its blockbuster drug Singulair slumped by 75%.  It is likely that there will be no respite in the near term, although the revenue decline for some of the major drugs will moderate in the latter half of 2013. Merck’s best bet lies in its R&D to develop key drugs that can tap growing markets of oncology, immunology and diabetes. Some of the drugs in the pipeline seem promising, but it is too early to determine their marketability.
Patent Expiration Issues Continue To Haunt Merck
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. Worldwide sales of Singulair, a once-a-day oral medicine for chronic treatment of asthma and relief of symptoms of allergic rhinitis, stood at $5.5 billion for 2011.  However, this figure declined to $3.85 billion in 2012 following the patent expiry in August same year.  Merck expects that within two years following the patent expiration it will lose substantially all U.S. sales of Singulair, with most of those declines coming in the first year.
In addition, Merck’s cardiovascular division has also been hurt by the patent cliff as its drugs Cozaar/Hyzaar, which garnered over $2 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 roughly 35% to $1.3 billion in 2012. Additionally, Propecia, Clarinex and Maxalt together accounted for roughly $1.5 billion in revenues in 2012. Due to patent expiry, we expect their combined sales to go down to about $1-1.1 billion in 2013. Another blockbuster drug Remicade that brought in $2 billion in revenues in 2012 will lose exclusivity in 2015.
Guidance For 2013
Merck will continue to face headwinds in 2013 due to the expiration of its drugs as well as unfavorable currency movements. As a result, the company expects an overall revenue decline of 3% to 4% for the full year. However, in order to support the stock, it has launched a $15 billion share repurchase program. We believe that Merck’s long-term growth can come from focus on oncology and immunology as well as tapping the market for biosimilars.
Will New Alliances & Drugs In Pipeline Bring Relief?
Although Merck currently has five drugs under regulatory review, it will not be easy for it to compensate for the loss of sales due to multiple drug patent expiries. The silver lining is that the FDA had granted breakthrough status to Lambrolizumab in April, which is an investigational PD-1 specific monoclonal antibody for the treatment of advanced malignancy.  Phase 2 clinical trials are underway, but there is still plenty of time to gauge the marketability of this drug.
The company has announced a worldwide collaboration agreement with Pfizer to develop and commercialize its investigational SGLT2 inhibitor, Ertugliflozin, for the treatment of type 2 diabetes. With obesity on the rise, diabetes is affecting more people globally. In the U.S. alone, roughly 26 million people suffer from the condition.  Owing to these factors, the global diabetes drug market has seen rapid growth in the last couple of years. According to GBI Research, a leading business intelligence provider, the type 2 diabetes drug market, which constitutes a significant chunk of the total diabetes drug market, is expected to grow from $26 billion in 2011 to $50 billion in 2021 in developed markets including the U.S., Japan and Europe.  The company has also announced agreements with Bristol-Myers and Samsung concerning Hepatitis C and biosimilars, respectively.
To add to this, Merck’s stock jumped in March as investors cheered the Data Safety Monitoring Board’s recommendation that the “IMPROVE-IT” trial, which is being conducted to prove the efficacy and safety of Merck’s blockbuster drug Vytorin, should continue until its projected deadline of September 2014. Vyotrin, which garnered $1.7 billion in revenues in 2012, is seeing dwindling sales following concerns around its safety and efficacy.
Our price estimate for Merck stands at $48.34, implying a slight premium to the market price.Notes: