Cry About Remicade, But Not About Merck

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Merck

Merck (NYSE:MRK) was quite unlucky with Remicade, even though the marketing rights for the drug are shared by both J&J and Merck. While J&J markets the drug in the Americas, Africa, Asia-Pacific and the Middle East, Merck controls its European business. As a result, the double impact of Euro depreciation and early approval of biosimilar in the region hit Merck’s revenues hard in the second quarter of 2015. [1] Remicade’s sales attributable to the company dropped by 25%, amounting to $455 million. [1] The price discount of the biosimilars was higher than expected, as high as 45% as opposed to the previous expectation of 30%, and the new patient additions will accelerate the sales decline. [2] So how much weight should investors give to this problem? We believe that much of the future decline has been priced in the stock. Investors should also note that Remicade accounts for less than 5% of Merck’s value according to our estimates. If the decline is much sharper than expected, even then the valuation impact will be of the order of 2%-3%, which is not material. We remain positive on the stock due to the immense potential that Keytruda holds, and Merck’s efforts to gain ground in the global Hepatitis C Market.

Our price estimate for Merck stands at $64.50, implying a premium of about 10% to the market price.

See our complete analysis for Merck

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Excluding the impact of currency movements, Januvia, Gerdasil and the Animal Health businesses grew and carried Merck’s weight. Januvia continued to show strong adoption in international markets and growth in prescription share in the U.S. The initial competition from Invokana is wearing off and Merck seems to be maintaining its market position in diabetes for now. Rest of the key drugs — including Isentress, Zetia/Vytorin and Remicade — saw steep declines.

However, there is a bright side to Merck which can not be ignored. Immuno-Oncology and Hepatitis C continue to remain key areas with immense growth potential. Merck’s immuno-oncology drug Keytruda is already approved for Melanoma in the U.S. It recently got approval in the EU for the same specification. Additionally, the drug has received priority review from the FDA for non-small cell lung cancer (NSCLC). The FDA also recently approved a supplemental biologics license for the same drug for patients with advanced non-small cell lung cancer whose disease has progressed on or after platinum-containing chemotherapy. [1] If approved, Keytruda’s target market can witness a huge increase because of larger population of potential patients. Lung cancer is one of the most common cancer types in the world in terms of incidence as well as mortality.

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Notes:
  1. Merck Announces Second-Quarter 2015 Financial Results, Merck Press Release, Jul 28 2015 [] [] []
  2. Merck’s Q2 2015 Earnings Transcript []