Merck May Dent Gilead’s Hepatitis C Sales
Merck (NYSE:MRK) recently filed a combination therapy for Hepatitis C (grazoprevir and elbasvir) for FDA review, which shows high cure rates for genotypes 1, 4 and 6. This puts it directly on Harvoni’s turf, which is an all oral interferon and ribavarin free therapy offered by Gilead Sciences. So far, Gilead has enjoyed a strong uptake for its Hepatitis C drugs due to a quantum leap in efficacy and patient convenience. However, this may change in the next couple of years as Merck and other companies make their mark in this growing market. While Merck currently does not have any particular advantage over Gilead Sciences, it is trying to at least match the latter, and this could trigger some price competition. The essence is that Gilead’s sales growth may slow, and Merck may add several billion dollars of incremental revenue if its new drug is successful.
Our price estimate for Merck stands at $60.57, which is slightly above the market price.
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Merck Has Been Trying For A While
For some time, Merck has been trying to make inroads in the lucrative Hepatitis C market but didn’t get the expected breakthrough last year. In November 2014, it released data from clinical trials of a triple-pill regimen aimed at treating 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 programs 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) In other words Merck could not gain a competitive advantage over Gilead sciences. It appears that the company is now going to challenge the market leader with a therapy that has similar efficacy, and this could mean a price war. This could be good news for payers.
Could There Be Upside To Merck?
It is possible that the market is underestimating Merck’s competitiveness in Hepatitis C treatment, especially because of immense success that Gilead’s drugs have seen. The latter clearly has an early mover advantage in the market. With its interferon-free therapy, Sovaldi, as well as its interferon and ribavirin free all-oral pill, Harvoni, Gilead is the undisputed market leader as of now. However, Merck’s new combination therapy will stack up competitively against Harvoni except in genotype 1 cases when the viral load is low. If Merck’s new drug is successful, it 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.
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