The Year 2014 In Review: Everyone Is Looking At Merck’s R&D Pipeline

-7.26%
Downside
132
Market
122
Trefis
MRK: Merck logo
MRK
Merck

The year 2014 wasn’t exactly spectacular for Merck (NYSE:MRK). The company continued to battle a revenue decline resulting from the patent expiry of key drugs. Even though its diabetes and immunology franchises have been offseting this decline to some extent, they may not be able to carry its business for much longer. The crux is that Merck’s R&D pipeline, or its acquisitions, need to pay off sometime soon. With its acquisition of Idenix this year, and the recent approval of cancer drug Keytruda, the company has kept investors’ hopes alive. These two events were perhaps the most important developments this year as far as Merck’s future is concerned, simply because the markets they address hold a lot of potential. Here is a quick recap of 2014 for Merck. We’ll follow up this note with an analysis detailing what 2015 holds for the company.

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

See our complete analysis for Merck

Relevant Articles
  1. At $100 Does Merck Stock Have Room For Growth?
  2. Should You Pick Merck Stock Over Coca-Cola?
  3. Should You Buy Merck Stock After An Upbeat Q2?
  4. How Has Merck Stock Performed During The 2022-23 Inflation Shock?
  5. Is Merck Stock A Better Pick Over ABBV?
  6. Should You Buy Merck Stock At $120?

Diabetes & Immunology Drugs Continued To Save Face

For the first nine months of 2014, Merck’s Januvia/Janumet (diabetes) franchise’s sales stood at $4.35 billion, representing a growth of about 3.4% over the same period last year. [1] We note that the segment’s growth accelerated slightly in the third quarter. Compared to 2% year-over-year growth that it saw in Q2 2014, third quarter revenues jumped by 5% to $1.44 billion. There was a sequential decline, though, which can be attributed to the timing of purchases as the last year shows a similar pattern. 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 15% during the first nine months of 2014 reaching over $2.3 billion. [1] 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.

Legacy Product Sales Declined

This segment includes Merck’s legacy products, which are facing declining revenues due to competitive pressure from generics. It also includes revenues from non-reportable segments, such as animal health and consumer care, along with revenues from the company’s relationship with AstraZeneca (AZLP, primarily relating to sales of Nexium and Prilosec). Merck’s legacy pharmaceutical and consumer business revenues have declined from roughly $13.5 billion in 2010 to $12.7 billion in 2013. The trend continued this year and we expect the figure to decline to $11.3 billion for the full year 2014.

Merck’s Strategy Of Mid Sized Acquisitions Was Visible

This year has been busy with M&A (mergers and acquisitions) activity in the pharmaceutical industry and Merck has been especially focused on mid-sized acquisitions. In mid 2014, the company announced a definitive agreement to acquire Idenix at $24.50 a share for cash, offering a hefty premium of about 240%. The acquisition strengthened Merck’s Hepatits C portfolio and going forward it may help it stem the revenue decline resulting from patent expiry of major drugs. 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 substantially.

Recently, Merck announced that it has agreed to acquire Cubix for $8.4 billion. The acquisition will give Merck a quick access to the antibiotics market and help it offset the revenue decline it has faced in recent years. The company expects the move to add more than $1 billion to its topline in 2015. Like other big pharmaceutical firms, Merck’s revenues have fallen due to the loss of patent exclusivity of key drugs. As a result, it has been focusing on making medium sized acquisitions to gain patent and marketing rights to promising new drugs and the associated R&D pipelines. The current acquisition fits that strategy. Antibiotics makers are benefiting from a revival in market incentives. The companies that develop antibiotics are now eligible for quicker FDA approvals and longer patent protection periods. Cubist, and its Cubicin, is especially effective in treating against pathogens (common in hospitals) that have developed resistance to conventional antibiotics. With Cubist, Merck secures a significant position in this key under-served market.  The company’s foray in this arena makes sense considering these circumstances.  Treating diseases caused by such bacteria will require more advanced versions of these drugs and we expect Merck to try and be first to the market when it comes to launching follow-on treatments.

Great Expectations Developed For Oncology & Anti-Infectives Franchise

Considering the explosive growth in Hepatitis C market, and promises that oncology sector holds, several big pharmaceutical companies including Merck continued to invest R&D dollars in these segments. Merck’s acquisition of Idenix highlights its commitment to developing effective Hepatitis C drugs. The essence is that there is a lot of potential and the market is up for grabs. The demand is high as 150 million people suffer from Hepatitis C globally. [2] The overall market for Hepatitis C treatment could reach $20 billion by 2020 according to Deutsche Bank. [2] Considering Sovalid’s success in 2014, we believe that these growth estimates may turn out to be conservative. Clearly there is lot of incentive for Merck to join the race, but there are other contenders as well including AbbVie, Bristol-Myers Squibb and more.

Merck received FDA approval for its new immuno-oncology drug Keytruda (pembrolizumab) this year. 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 (read How Significant Can Keytruda Be For Merck).

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Merck’s SEC Filings [] []
  2. Gilead leads rivals in race to cure hepatitis C, SFGate, Mar 2 2014 [] []