Merck Has A Silver Lining

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Merck

We noticed the continuation of previous trends in Merck‘s (NYSE:MRK) Q3 2015 results. Remicade saw its sales (attributable to Merck) slump by 27%, which was partially due to currency effects and partially due to increased competition in Europe where the company markets the drug. [1] The decline represents a mild sequential acceleration, but remains more or less in line with our expectations. The price discount of the biosimilars is ranging between 30% to 45%, and even higher in certain regions in Europe. [2] We expect Remicade to continue to lose its market share, which is still quite high at around 90%, in the coming years. The decline is likely to be gradual as it will take time for the physicians to switch to biosimilars for existing patients. We continue to believe that there is silver lining for Merck in terms of its pipeline and newly launched drugs, which will more than offset the impact of competition in Europe. Januvia, Gerdasil and Keytruda continue to impress. Merck is taking a breather in case of Januvia, and is back to comfortable position following wearing off of competition from Invokana. This is a key drug considering the target market is expanding.

We are currently reviewing our price estimate for Merck in the light of recent earnings, and will have an update ready soon.

See our complete analysis for Merck

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All said and done, there is still much to cheer about Merck. We believe that the situation should improve over the course of next few quarters, assuming dollar appreciation is limited next year. Here is why we believe Merck’s results are not that bad

1) Despite the continued pressure on revenues, Merck’s profits improved along with earnings per share as the third quarter of last year felt the burden of restructuring costs and fee paid to the federal government.

2) Keytruda, although new, has made a lot of advancements. Keytruda is already approved for Melanoma in the U.S. Earlier this year, it also approval in the EU for the same specification. The FDA also recently approved the drug for patients with advanced non-small cell lung cancer whose tumors express PD-L1 and whose disease has progressed on or after platinum-containing chemotherapy. [1] If approved for broader use in lung cancer, Keytruda’s target market can witness a huge increase because of larger population of potential patients. There are several other clinical and regulatory advancements for Keytruda listed here.

3) Excluding the currency impact, Merck managed to grow its revenues, which is not bad considering the issues affecting pharmaceutical industry. We expect the currency impact to get diluted going forward and underlying operational growth will be more visible.

4)  Merck is not averse to considering strategic acquisitions as an avenue for growth. The biotech stocks have taken a hit recently and valuations are looking more attractive, although that may not necessarily imply that transactional value would be lower as well when it comes to actually making a deal.

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Notes:
  1. Merck’s Q3 2015 Earnings Release [] []
  2. Merck’s Q3 2015 Earnings Transcript []