Merck Earnings Preview: Expect Continued Pressure On Topline Growth

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Merck (NYSE:MRK) will release its Q3 2014 earnings on October 27th. While we expect a continued decline in legacy products, revenues from its diabetes, drugs as well as anti-infective medicines and Remicade, will continue to grow. The story for Merck is simple. The company, like many other big pharmaceutical firms, is battling revenue growth due to the loss of patent exclusivity for its key drugs. As a result, it is pegging its future hopes on developing therapeutic agents for cancer- and hepatitis C-related markets. Meanwhile, its drugs catering to immunology, diabetes and infectious diseases continue to carry it along. Here is what investors can expect from Merck’s upcoming earnings announcement.

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Diabetes And Anti-Infectives Will Grow

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The growth in Merck’s diabetes and immunology drugs has helped offset its revenue decline to an extent this year.

The Januvia franchise’s sales increased by 2% year over year in Q2 2014, amounting to $1.6 billion. [1] However, international markets now account for half of these sales, which implies that the impact of currency movements could be more notable going forward. Nevertheless, the global diabetes opportunity is huge and international expansion holds the key to unlock this potential. With obesity increasing, 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, the type 2 diabetes drug market, which constitutes a significant portion of the total diabetes drug market, is expected to grow, in developed markets including the U.S., Japan and Europe, from $26 billion in 2011 to $50 billion in 2021. Additionally, China’s diabetes market is expected to grow 20% annually and reach $3.2 billion by 2016, according to IMS health. [2]

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 drug grew its revenues by 10% in Q2 2014, amounting to $453 million. 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. [3] 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 since its enactment in Q4 2013. The vaccine still managed to register 7% year-over-year growth in the second quarter of 2014.

Legacy Pharmaceutical Business Will Continue To Decline

This segment includes Merck’s legacy products which are facing declining revenues due to competitive pressure from generics. Merck’s legacy pharmaceutical and consumer business revenues have declined from roughly $13.5 billion in 2010 to $12.7 billion in 2013. The figure came down in the first half of 2014 as well, and third quarter may not be any different. Considering that Merck has now completed the sale of its consumer business to Bayer AG, the factor offsetting the decline in the company’s legacy drugs that have lost their patent protection has diminished. To offset the weakness in its legacy products and other drugs, Merck is banking on its R&D pipeline. The company has some hopes from its research in the areas of Hepatitis C and Oncology.

Key Potential Drugs For The Future

Merck recently completed the tender offer to acquire Idenix. The acquisition will strengthen Merck’s 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. The 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.

Merck has channeled some of its funds for developing immuno-oncology drugs. It recently won FDA approval for MK-3475 (pembrolizumab), which is a 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. Investors have also welcomed the company’s decision to investigate the drug’s effectiveness in combination with other investigational agents. The drug is currently being studied in several clinical trials for more than 30 types of cancer. [4] MK-3475 is a new class of drugs and could well be the future of cancer treatment. [5] It has also filed for approval of the drug for treatment of advanced Melanoma in Europe.

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Notes:
  1. Merck Announces Second-Quarter 2014 Financial Results, Merck Press Release, July 20 2014 []
  2. China Diabetes Triples Creating $3.2 Billion Drug Market, Bloomberg, Nov 5 2012 []
  3. BCC Research []
  4. Merck’s Q1 2014 Earnings Transcript []
  5. Merck’s Q2 2014 Earnings Transcript []