Merck’s Ebola Vaccine Won’t Move The Needle

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At the end of last month, the World Health Organization stated that an effective Ebola vaccine may be around the corner, citing an interim analysis of phase 3 trial results of Vesicular Stomatitis Virus-Ebola Virus Vaccine (also called VSV-EBOV) that is licensed to Merck (NYSE:MRK) now. ((World on the verge of an effective Ebola vaccine, WHO Press Release, Jul 31 2015)) Merck purchased commercial rights for the vaccine from NewLink Genetics in late 2014 and agreed to pay royalties to NewLink in some markets. So the question arises — what’s Merck’s commercial opportunity in this? We believe that Merck will approach this from a humanitarian perspective rather than a commercial endeavor, thus keeping margins and returns low. In other words, a successful Ebola vaccine won’t be a needle mover for Merck’s stock. Let’s see why.

Our price estimate for Merck stands at around $65, implying a premium of about 10% to the market price.

See our complete analysis for Merck

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The estimates that follow are not precise, but are still indicative of the order of the impact that the new vaccine can have on Merck’s topline and, consequently, its value. Some of the text below is taken from our previously published analysis for J&J outlining the company’s revenue potential from its own Ebola vaccine (under development). However, much of it applies to Merck and has been adequately modified.

The typical cost to develop a vaccine is in the range of $200 million to $500 million. [1] This figure includes vaccines that are abandoned during the development. However, the market opportunity tends to be much smaller for vaccines as compared to drugs due to lower pricing and one-time use. Nevertheless, given that Ebola has run rampant in poor African countries from time to time, and considering the pressure from various bodies to speed up vaccine development, we expect Merck to target a relatively low return on investment as compared to its typical drugs. It must be noted that Merck has spent $50 million to acquire commercial rights to Newlink’s Ebola vaccine, and has agreed to pay the company royalty payments in certain markets.

Ebola cases have been registered in Liberia, Sierra Leone, Guinea, Nigeria, Mali and Senegal, with the first three countries having faced the brunt of it. Liberia, Sierra Leone and Guinea have a total population of little over 22 million and were hit the worst. Nigeria, Mali and Senegal have a total population of close to 200 million and were declared Ebola-free several months ago. Assuming 100% vaccination rates in the first three countries and 40% vaccination rates in the remaining three, we get a potential market size of 100 million vaccine doses. Considering that there could be around 3 potential vaccine players including J&J and GSK, we estimate that these vaccine makers may collectively target around 15 million vaccinations per year. GlaxoSmithKline aims to have 1 million doses per month by the end of 2015. In such a scenario, it is plausible that Merck can target perhaps around 4 to 5 million vaccinations annually. This would imply annual revenues of $40-$50 million assuming price of $10 per vaccine which can be further subsidized by the governments to make these vaccines available for masses. That’s a drop in the bucket for Merck.

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Notes:
  1. Assembling a Global Vaccine Development Pipeline for Infectious Diseases in the Developing World []