Merck (NYSE:MRK) is getting close to conducting phase 3 trials for a combination treatment for Hepatitis C, which could potentially rejuvenate the pharmaceutical giant’s revenue growth. The clinical data for a combination of drugs MK-5172 and MK-8742 has showed high cure rates among patients with genotype 1 of the disease, and this has encouraged Merck to move to phase 3 trials. The global market for Hepatitis C treatment is growing, and Gilead Sciences is at its forefront. Given that a lot of major drugs have lost their patent protection in recent years, it is imperative for Merck to find new avenues for growth. A successful Hepatitis C drug launch might just be what Merck needs in the coming years.
Our price estimate for the company stands at $53, implying a slight discount to the market price. However, if Merck were to capture 30% of global Hepatitis C treatment market by 2020, there can be 10% upside to this price estimate.
Merck doesn’t expect any growth this year and 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 a lack of any significant drug launches. In addition to this, the weakness in Januvia franchise isn’t helping. 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 and Merck needs to adapt. The company’s best bet lies in investing in growth areas of anti-infectives, immunology and oncology (cancer treatment), where the overall market is growing and a large number of disease sub-types offer good potential for the development of niche drugs. Can targeting Hepatitis C market help Merck revive its growth?
Why Hepatits C Market Is Worth Investing In?
Gilead Sciences is currently the market leader in Hepatits C treatment, and is on its way to make a fortune selling its breakthrough drug Sovaldi. The drug’s sales for 2014 may amount to anywhere between $7 billion to $12 billion, according to ISI Group.  The high magnitude and wide range of estimates point towards Sovaldi’s tremendous potential. Much of this can be attributed to its high pricing. Gilead Sciences has come under attack from politicians in the U.S., for Sovaldi’s $84,000 for 12-week treatment cost.  However, the company states that the pricing is justified as the drug is superior to the alternatives due to its higher efficacy, much shorter treatment time, and minimal side effects. It goes on to make the case that Sovaldi is, in fact, cheaper as Hepatitis C can eventually lead to liver transplant which costs over half-a-million dollars.  The price points are not the same abroad, as the company recently signed a deal with Egypt to supply the drug at a fraction of its price in the U.S. 
The essence is that there is a lot of potential and the market is up for grabs. The demand is high at close as 150 million people suffer from Hepatitis C globally.  The overall market for Hepatitis C treatment could reach $20 billion by 2020 and Gilead Sciences could capture around 80% of this market according to Deutsche Bank, unless viable alternatives emerge.  Clearly there is lot of incentive for Merck to join the race, and it may do so, provided its phase 3 trials are successful. However, there are other contenders as well including AbbVie, Bristol-Myers Squibb and more. The pricing could come down once the competition increases. If Merck can capture roughly 30% of this market by 2020, it will lead to $6 billion in incremental revenues, resulting in 10% upside to our price estimate.Notes:
- Politicians add fuel to the firestorm over Gilead’s hep C drug pricing, FiercePharma, Mar 24 2014 [↩] [↩]
- Gilead leads rivals in race to cure hepatitis C, SFGate, Mar 2 2014 [↩] [↩] [↩]
- Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters, Mar 21 2014 [↩]