Merck Falls On Slightly Weak Results

Merck‘s (NYSE:MRK) shares slid slightly as the company reported another quarter plagued by revenue decline. While its diabetes and immunology drugs continued to be the face savers, weakness in the Hepatitis C franchise, a decline in vaccine revenues and the continued fall of legacy products resulted in 4% decline in pharmaceutical revenues. Merck 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. Additionally, Merck is all the more counting on its newly launched drugs Keytruda and Belsomra to pay off. The next quarter isn’t going be to be rosy either, unless these drugs can mitigate the impact of weakness in other categories.

Our price estimate for Merck stands at $55.75, implying a slight discount to the market.

See our complete analysis for Merck

Diabetes And Immunology Segments Were Face Savers, But May Not Always Be So

Merck’s Januvia franchise’s sales growth accelerated slightly in Q3 2014. Compared to 2% year over year growth that the franchise saw in the second quarter, third quarter revenues jumped by 5% amounting to $1,439 million. ^[1] There was a sequential decline though, which can be attributed to the timing of purchases as the last year shows a similar pattern. We note that favorable currency movement slightly aided this growth. Considering that a bulk of sales is now coming from international markets, exchange rate movements can have a notable effect. While the franchise saw a growth of 6% in the U.S., international sales grew by 4%. The difference possibly resulted from a 10% decline in Japan due re-pricing and increased competition. While Januvia still holds a large market share in the U.S., competition could increase, especially from Johnson & Johnson’s Invokana. Additionally, other companies such as Eli-Lilly are making efforts to comprehensively cover multiple diabetes drug classes.

In the Immunology segment, Remicade and Simponi brought some relief, with total immunology revenues growing by more than 10% and reaching $770 million. However, the revenues from Remicade haven’t grown much sequentially this year which may be a cause of concern. Also, the drug loses its exclusivity in Europe in 2015, which will again put pressure on Merck’s growth unless its new launches can make up for it.

Merck’s R&D Efforts Need To Pay Off

Amid growing competition, patent expirations and declining R&D productivity, Merck’s hopes are pinned on its newly developed drugs. One such name is its recently approved immuno-oncology drug Keytruda. The company beat Bristol-Myers Squibb in terms of getting the drug market ready, but the latter sued it for patent infringement. The drug will cost roughly $12,500 per month for treatment and targets advanced melanoma that accounts for most of the deaths from skin cancer cases. It uses a novel technique, under which it leverages patient’s own immune system to fight against the disease. Our findings suggest that it could generate as much as $5 billion in revenues for the company, and has the potential to end its patent woes (for details read How Significant Can Keytruda Be For Merck?) Merck has also won the regulatory approval in the U.S. for its new insomnia drug Belsomra. Unlike previous medicines, Belsomra has lesser side effects. However, the FDA has only approved it in small doses. Consensus estimates suggest that the drug can bring in revenues of more than $300 million in 2017. ^[2]

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1. Merck’s SEC Filings [↩]
2. Merck Wins U.S. Approval of New Type of Sleeping Pill, Bloomberg, Aug 14 2014 [↩]