Merck Earnings Preview: Competition From Generics & Currency Movements Will Continue To Plague Merck

Merck (NYSE:MRK) will release its Q3 2013 earnings on October 28, and the results will reflect the impact of growing competition and adverse currency movements. On a broader level, the company is facing similar problems as the rest of the pharmaceutical industry. The R&D (research and development) productivity has declined over the years, and the strategy of developing drugs for major diseases is not working. The landscape of the global pharmaceutical industry is shifting towards more niche, innovative and genetically targeted medicines. In addition, Merck is suffering from the loss of patent exclusivity for some of its major drugs and may look for acquisition of some promising medicines to offset the failure of some of its research projects. Let’s take a more detailed look at what to expect from the company’s upcoming earnings.

See our complete analysis for Merck

Generic Competition Will Continue To Weigh On The Revenue Growth

Merck is facing tremendous competition from low priced generics due to 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. ^[1] However, this figure declined to $3.85 billion in 2012 following its patent expiry in August same year. ^[1] 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 the first half of 2013, the drug’s sales dropped by a whopping 78%. ^[1]

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. In the first half of 2013, the drug’s revenues further came down by about 23%. Additionally, Propecia, Clarinex and Maxalt together accounted for roughly $1.5 billion in revenues in 2012. Due to patent expiries, we expect their combined sales to go down to about $1-1.1 billion in 2013.

While the big drugs are losing their sales, there is little chance for new blockbusters replacing them. The R&D productivity has significantly declined over the last decade. Although the industry’s R&D spend has increased, the number of new drugs approved by the FDA has come down. In fact, Merck is planning to terminate certain drugs in late stage development and intends to focus on acquiring experimental drugs.

Merck’s Overall Diabetes Drug Performance Is Looking Good, But Januvia Raises Concerns For The Third Quarter

Merck’s type 2 diabetes treatment drugs Januvia and Janumet saw strong volume growth in international markets and retained their market leadership with 70% share in the second quarter. ^[2] Excluding the impact of currency movements, Januvia saw its sales jump by 7% while Janumet’s revenues surged 17%. ^[1] In addition, the company is working 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. ^[3] Owing to these factors, the global diabetes drug market has seen rapid growth in the last couple of years.

However, Merck’s progress in diabetes treatment warrants a closer look given the recent prescription data that suggested that its blockbuster drug Januvia is losing sales in the U.S. According to BMO Capital Markets, the three week prescription data for the third quarter indicated that Januvia franchise’s prescriptions had declined by 1.7%. ^[4] The drug’s sales seem to have suffered following Invokana’s launch by Johnson & Johnson (NYSE:JNJ) in April, and the research firm expects the prescription volume to continue declining in the second half of 2013. It appears that Invokana is taking away some volume from Januvia, which is one of Merck’s biggest drugs with over $4 billion in sales in 2012.

We currently account Januvia’s revenues under Alimentary & Metabolism drugs division, which constitutes roughly 15% to our price estimate for Merck. Januvia’s importance can be gauged from the fact that the exclusion of the drug’s sales from Merck’s revenue forecast leads to downside of about 5-10% to our price estimate. That’s a lot of value for a single drug in a diversified company like Merck.

Our price estimate for Merck stands at $51.60, implying a premium of about 10% to the market price.

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1. Merck’s SEC Filings [↩] [↩] [↩] [↩]
2. Merck’s Q2 2013 Earnings Transcript [↩]
3. National Diabetes Fact Sheet, 2011, CDC [↩]
4. Merck & Co., Inc. (MRK): Why Investors Should Be Cautious On Januvia?, iStockAnalyst [↩]