Merck Posts Disappointing Numbers As Experimental Hepatitis C Treatment Loses Breakthrough Designation

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Merck (NYSE:MRK) posted disappointing numbers in its Q4 2014 and full year results recently. While its diabetes and immunology drugs continued to perform well, weakness in the cardiovascular segment, a decline in vaccine revenues and the continued fall of legacy products resulted in a 4% decline in pharmaceutical sales alone.   A stronger U.S. dollar further weighed on the company’s results.

Worldwide revenue declined 7% to $10.5 billion in Q4 2014, with unfavorable exchange rates accounting for three percentage points of the drop. Sales for the full year amounted to $42.2 billion, down 4% from the previous year. [1] The company expects currency headwinds to continue and expects 2015 revenue to be between $38.3 billion and $39.8 billion.

Merck also lost the Breakthrough Therapy Designation status for its Hepatitis C combination treatment regimen, which could extend the Food and Drug Administration (FDA)’s review period for the treatment by several months. [1]

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Diabetes And Immunology Drugs Boost Revenue

On a constant currency basis, Merck’s Januvia full-year revenues jumped by 4% amounting to $6 billion. The growth rate in sales in the fourth quarter alone was 6%. [1] However, including the effect of unfavorable currency movements, fourth quarter revenue growth was just 2% since a hefty percentage of sales come from international markets. While the franchise saw a growth of 6% in the U.S., international sales declined by 2% in the fourth quarter. Although 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% in 2014 to reach $3.06 billion. [1] However, the revenues from Remicade dropped 3% on a constant currency basis in the fourth quarter, due to initial competition in Europe from biosimilar therapies. We expect this to worsen as the drug loses its exclusivity in Europe in 2015.

Cardiovascular Segment Gets No Help From Vytorin And Zetia

In the Cardiovascular drugs segment, sales of Zetia and Vytorin were down 8% and 15%, respectively, for the quarter. [1] The cardiovascular segment in general has been under pressure for Merck and other big pharmaceutical companies, as the market has been flooded by generics and R&D productivity has decreased. However, a recent study (the IMPROVE-IT trial) specific to Vytorin, which combines Zetia with a statin drug, has shown its advantage over other drugs in terms of reduced cardiovascular events. It will be interesting to see if this segment continues to decline going forward and the next quarter will provide some answers.

Blow To Experimental Hepatitis C Treatment

Merck stated that the Food and Drug Administration (FDA) has notified the company of its intent to rescind Breakthrough Therapy Designation status for its Hepatitis C combination treatment regimen (drugs MK-5172 and MK-8742), citing the availability of other newly approved treatments for the disease. [1] Breakthrough status is given by the FDA to a drug if tests indicate that the drug would be a significant improvement over the current options for the disease. This helps in speeding up the review process of the drug as the drug is reviewed on a priority basis. The company intends to file a New Drug Application (NDA) for the combination treatment with the FDA in the first half of 2015 but the loss of breakthrough status means that the treatment will undergo a standard review period of 10 months.

The clinical data for combination treatment for Hepatitis C has shown high cure rates among patients with genotype 1 of the disease and this treatment could potentially rejuvenate the pharmaceutical giant’s revenue growth. 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]

Keytruda Offers Significant Potential

Merck’s immune-oncology drug, Keytruda, was approved by the FDA to treat advanced melanoma last September and was launched in the market last quarter. It uses a novel technique, under which it leverages the patient’s own immune system to fight against the disease. While the drug contributed just $50 million to the company’s revenues in 2014, 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 (See: How Significant Can Keytruda Be For Merck?). Melanoma is the fifth most common type of cancer in the United States. According to estimates by the National Cancer Institute, 76,100 Americans were diagnosed with melanoma and 9,710 died from the disease last year. [3] The potential does not end there as the drug is also being studied in more than 30 other cancers and 20 combination settings. [1]

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Notes:
  1. Merck’s SEC Filings [] [] [] [] [] [] []
  2. Gilead leads rivals in race to cure hepatitis C, SFGate, Mar 2 2014 [] []
  3. SEER Stat Fact Sheets: Melanoma of the Skin, National Cancer Institute []