Merck Is Banking On Pembrolizumab And Hepatitis C Pipeline

Merck‘s (NYSE:MRK) legacy pharmaceutical and consumer business revenues have declined from roughly $13.5 billion in 2010 to $12.7 billion in 2013. This trend continued in the first half of 2014 as well and the company expects its overall revenues to fall by approximately 2.5% (mid-point of guidance) this year, owing to pressure from generics. To mitigate this risk, it is developing some promising drugs to treat cancer and hepatitis C. The market for both these diseases is significant and  the industry is witnessing strong R&D efforts from big pharma companies in this area at present. While Merck saw some support from immunology and diabetes drugs in Q2 2014, its long term growth is likely to come from potential success of Pembrolizumab and Hepatitis C .

Our price estimate for Merck stands at $56.80, roughly in line with the market price.

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Pembrolizumab Development Overview

Merck has channeled some of its funds for developing immuno-oncology drugs. MK-3475 (pembrolizumab) is Merck’s 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 reported that 38% of cancer patients under trial responded positively to this drug. Investors have welcomed the company’s decision to investigate the drug’s effectiveness in combination with other investigational agents. The drug is currently being studied in 17 clinical trials involving over 4,000 patients across more than 30 types of cancer. ^[1] MK-3475 is a new class of drugs and could well be the future of cancer treatment. The company is nearing the drug launch and anticipates some regulatory action by end of October this year. ^[2] It has also filed for approval of the drug for treatment of advanced Melanoma in Europe.

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.

Hepatitis C Opportunity

Merck is in the process of completing the acquisition of Idenix. The move will strengthen its Hepatits C portfolio and help it stem the revenue decline resulting from patent expiry of major drugs. The company will be 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 shown high cure rates among patients with genotype 1 of the disease, and this has encouraged Merck to move to phase 3 trials. Acquisition of Idenix could be a game changer considering the possibility that a combination treatment leveraging Idenix’s drugs could potentially reduce the treatment window to four to six weeks. 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. ^[3]

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1. Merck’s Q1 2014 Earnings Transcript [↩]
2. Merck’s Q2 2014 Earnings Transcript [↩]
3. Politicians add fuel to the firestorm over Gilead’s hep C drug pricing, FiercePharma, Mar 24 2014 [↩]