Merck (NYSE:MRK) doesn’t expect any growth this year. In fact, the mid-point of its guidance implies that the revenues will see a decline of roughly 3% in 2014. This indicates continued pricing and competitive pressure from generics and lack of any significant drug launches. Yet there are few bright areas that have perked up the investor sentiment, as evident from a meaningful gain in the stock price since mid-November. Merck has significant opportunity to expand its diabetes profile, and can further consolidate its hold in anti-infective drugs market. These are the areas where the company has seen strong revenue growth in recent years. In addition, the development of MK-3475 and the newly announced collaboration to test the agent’s ability in combinational therapies for cancer is something to watch out for. The company may also potentially look at divesting non-core animal healthcare and consumer businesses to unlock shareholder value and re-focus its efforts on core pharmaceutical segment.
Our price estimate for Merck stands at $53, implying a slight discount to the market price
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MK-3475 May Hold Some Promise
The FDA has granted breakthrough status to MK-3475 (or lambrolizumab), which is an investigational PD-1 specific monoclonal antibody for the treatment of advanced malignancy. The drug essentially enables a patient’s immune system to detect cancerous cells that are otherwise extremely hard to identify. T cells can then target and kill these exposed tumor cells. In June 2013, Merck’s shares jumped nearly 5% on the news that 38% of the cancer patients under trial responded positively to this drug. And now, investors are welcoming the company’s decision to investigate the drug’s effectiveness in combination with other investigational agents. To do so, it has partnered with Pfizer, Amgen and Incyte. 
MK-3475 is a new class of drugs and could well be the future of cancer treatment. Bristol-Myers Squibb has a similar drug in clinical trial under the name nivolumab and is expected to garner $6 billion in peak sales. Currently these drugs are being tested for melanoma (skin cancer), and if their usage expands to other cancer types, it could open a much bigger market for these pharmaceutical companies. Merck has already initiated a study to identify other cancer types where the drug can have a therapeutic effect. The company could revive its oncology division if MK-3475 is successful.
Efforts To Sustain Diabetes And Anti-infective Drug Growth Are Needed
Merck’s diabetes drugs Januvia and Janumet registered small growth in 2013. While both these drugs grew strongly in international markets, the U.S. was a different story as Januvia’s sales suffered due to a slight decline in prescription volume. We believe that this was primarily due to the launch of Johnson & Johnson’s competing drug Invokana. It will be interesting to see whether the drug’s adoption continues in 2014, thereby further denting Januvia’s sales. Nevertheless, the overall diabetes market is growing with sales opportunities emerging in developing countries such as China and India. The growth in international markets should help Merck offset the weakness observed recently in the U.S.
Isentress and Gardasil are Merck’s biggest drugs catering to infectious diseases. (Isentress is a retroviral and Gardasil is technically a vaccine.) Isentress’ sales stood at over $1.64 billion in 2013, registering growth of roughly 8.5% over 2012. The global growth has been steady, and Merck has maintained its share in the U.S. market. However, Gilead Sciences is the global leader in HIV medications and will continue to give tough competition to Merck. The global market for HIV drugs stood at $10.7 billion in 2010 and is expected to reach $13.2 billion by 2016.  Merck also needs to make efforts to ensure that its HPV (human papillomavirus) vaccine Gardasil continues its top line growth. The Japanese government’s decision to suspend proactive recommendation of HPV vaccine has impacted the drug’s sales in Q4 2013. Notes: