These Two Catalysts Can Move Merck’s Stock Up

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Merck

Despite the recent pressure on revenues resulting from loss of patent exclusivity for some drugs and adverse currency movements, Merck (NYSE:MRK) continues t0 streamline its research and development expenses and execute in key growth markets. The company’s focus has shifted to immuno-oncology and Hepatitis C segments. Additionally, its relatively stable diabetes business offers good topline support. Over the next few years, we expect revenues from new launches to more than compensate for the decline in legacy drug sales. However, there still remains uncertainty around its latest development programs, which suggests that there is room for stock price movement depending on how the results turn out in the next couple of years. More specifically, we believe that a competitive HCV (i.e., hepatitis C virus) drug launch and potential new approvals for immuno-oncology drug Keytruda can catalyze Merck’s stock price movement.

See our complete analysis for Merck

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Merck Launches A Highly Competitive Hepatitis C Drug (+10% To Stock Price)

Merck has been looking to get a breakthrough in Hepatitis C market, but its clinical trials haven’t seen the expected success. In November 2014, the company released clinical trial data of a triple-pill regimen for the treatment of treatment-naive group of cirrhotic patients. The combination included a mix of Merck’s Grazoprevir/Elbasvir (MK-5172/MK-8742, MK-5172A)  along with Gilead Science’s Sovaldi. The therapy achieved a cure rate of more than 94% for 8-week therapy, but fell short of satisfactory cure rates in case of 6-week and 4-week therapy. In fact, only 38.7% of the patients showed no signs of the virus after 4-week treatment. ((Merck four-week hep C regimen with Gilead’s Sovaldi comes up short, Reuters, Nov 10 2014) Thus, Merck’s attempt to gain a competitive advantage over current market leaders fell well short of its target.

Having said this, it is possible that we are underestimating Merck’s competitiveness in Hepatitis C market. Its acquisition of Idenix last year has given it the necessary expertise to compete in this lucrative segment. The company is now focusing on clinical trials of combination of MK-5172 and MK-8742, and may file the new drug application soon. However, it has lost breakthrough therapy designation for these drugs. Nevertheless, a highly competitive drug could add incremental revenues of close to $3-4 billion over the next few years, adding 10% to our price estimate and more than 10% to our EPS for 2017. This impact will come not only from improved revenue growth, but also from an increase in gross margins, as we expect high margins for Hepatitis C drugs. Market leader Gilead Sciences’ Sovaldi is garnering more than $10 billion in annual sales and Johnson & Johnson’s Olysio generated more than $2 billion in the first year of its launch.

Keytruda Gets 2-3 More Approvals (+10% To Stock Price)

Merck’s immuno-oncology drug Keytruda has received approval for advanced melanoma. We estimate that the drug could garner as much as $5 billion in annual sales if it penetrates 10% of the patient pool in the U.S. and Europe. Merck has stated that its 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. Assuming that 20% of all melanoma cases are advanced, the actual addressable patient pool for Keytruda would be close to 340,000 given our estimated total patient pool of 1.7 million in the U.S. and Europe (read How Significant Can Keytruda Be For Merck?).

We still take a conservative view in our pricing model, owing to expected increase in competition in immuno-oncology segment, and assume Keytruda will have slightly less than $3 billion in revenues by 2021. However, the drug is under trial for multiple additional indications including bladder cancer, head and neck cancer, non small cell lung cancer (NSLC) and gastric cancer. Out of these, NSLC has received breakthrough therapy designation from the FDA. If the drug gets approval for 2-3 of these indications in the next few years, its revenues could skyrocket. In such a case, there is a good chance of adding incremental revenues of $3-4 billion over what we currently forecast. This will add 10% to the company’s value.

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