Merck Enters Ebola Vaccine Race

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Merck (NYSE:MRK) is the latest among the big pharmaceutical firms to join Ebola Vaccine race. The company has just announced a deal with NewLink Genetics under which Merck will get the rights to the latter’s experimental vaccine for Ebola virus and in turn, it will make an upfront payment of roughly $30 million and an additional payment of $20 million at the beginning of clinical trials in 2015. [1] The investment is much smaller than what Johnson & Johnson is putting in, which makes us question Merck’s confidence in the vaccine and potential return. In a recent note, we discussed how Johnson & Johnson would like to target around 4-5 million vaccines annually (read How Will Johnson & Johnson’s Ebola Investment Pay Off?). Merck is going to compete in the same market, which could be larger than 100 million vaccinations. However, the incremental value addition from a successful launch and commercialization will be low considering Merck’s size and our expectation that the price of vaccine is likely to be low.

Our price estimate for Merck stands at $52.50, implying a discount of more than 10% to the market.

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Currently, there is no cure or vaccine for the Ebola virus and the fatality rates remain high. Ebola virus can be transmitted through multiple body fluids including sweat, and therefore it has been difficult for the authorities to contain its spread. While there have been many instances of the Ebola outbreak in Africa in the past, the current incidence is the worst in the recorded history, in part because it has reached urban populations. The CDC (Centers for Disease Control and Prevention) has predicted that in the worst case scenario where the disease spirals out of control, there could be 1.4 million Ebola cases by January 20th, 2015. [2] The CDC states that the total case count stood at 13,676 as of October 27 2014, with laboratory confirmed case counts totaling 7,606. Additionally, the number of deaths from Ebola have reached 4,910, resulting in a fatality rate of around 65%. Clearly, the efforts from health authorities have been insufficient and the shortage of personnel could make it difficult to quarantine all potential patients. The potential risk is immense and even if it doesn’t look like a profitable venture for pharmaceutical firms, someone has to develop the cure. Johnson & Johnson, Bavarian Nordic, Newlink Genetics (now partnering with Merck) and GlaxoSmithKline have taken initiatives in this direction.

Ebola cases have been registered in Liberia, Sierra Leone, Guinea, Nigeria, Mali and Senegal, with the first three countries facing the brunt of it. Liberia, Sierra Leone and Guinea have a total population of little over 22 million and are still battling a rising number of Ebola cases. Whereas Nigeria, Mali and Senegal have a total population of close to 200 million and have been declared Ebola free. Assuming 100% vaccination rates in the first three countries and 40% vaccination rates in the remaining three, we get a potential market size of 100 million vaccine doses.

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Notes:
  1. Merck Obtains Rights to Experimental Ebola Vaccine, The Wall Street Journal, Nov 24 2014 []
  2. Ebola Cases Could Reach 1.4 Million Within Four Months, C.D.C. Estimates, New York Times, Sep 23 2014 []