Januvia’s Performance Raises Concerns For Merck

Merck (NYSE:MRK) has been struggling for the past few quarters due to the loss of exclusivity of certain key drugs including Singulair, competition from generics and the negative impact of currency movements. To revive its growth, the company is banking on its research in areas like diabetes, cancer immunotherapy and neuroscience. Merck believes that its anti-PD-1 therapy for oncology and ACE inhibitor for Alzheimer’s disease have the capability to change the course of medication, and if successful, can lift its growth outlook. The FDA had granted breakthrough status to Lambrolizumab in April, an investigational PD-1 specific monoclonal antibody for the treatment of advanced malignancy. While this may look promising, Merck’s progress in diabetes treatment warrants a closer look given the recent prescription data that suggests that its blockbuster drug Januvia is losing sales in the U.S. Januvia is one of Merck’s biggest drugs with over $4 billion in sales in 2012.

According to BMO Capital Markets, the three week prescription data for the third quarter suggests that Januvia franchise’s prescriptions have declined by 1.7%. ^[1] The drug’s sales have suffered following Invokana’s launch by Johnson & Johnson (NYSE:JNJ) in April, and the research firm expects the prescription volume to continue declining in the second half of 2013. It appears that Invokana is taking away some volume from Januvia.

The U.S. DPP-IV prescription data, which is essentially data for dipeptidyl peptidase-4 inhibitor drugs that are used for treatment of type 2 diabetes, suggests that the overall market has been more or less stable. With Januvia’s sales declining, Merck’s overall revenue growth can come under pressure. However, Invokana is the first diabetes treatment approved by the FDA in a new class, which essentially implies that medical specialists and doctors are likely to take their time to see the drug’s efficacy. Still, Merck may have some work to do to remain competitive.

See our complete analysis for Merck

Merck’s Overall Diabetes Drug Performance In Q2 Looked Good, But Januvia Raises Concerns

Merck’s type 2 diabetes treatment drugs Januvia and Janumet saw strong volume growth in international markets and retained their market leadership with 70% share in the second quarter. ^[2] Excluding the impact of currency movement, Januvia saw its sales jump by 7% while Janumet’s revenues surged 17%. ^[1] In addition, the company is working with Pfizer to develop and commercialize its investigational SGLT2 inhibitor, Ertugliflozin, for the treatment of type 2 diabetes. With obesity on the rise, diabetes is affecting more people globally. In the U.S. alone, roughly 26 million people suffer from the condition. ^[3] Owing to these factors, the global diabetes drug market has seen rapid growth in the last couple of years.

However, Januvia’s overall sales in the first half of 2013 stood at $1.96 billion, down from $1.98 billion during the same period a year ago. While some of this can be attributed to adverse currency movements, the story for the remainder of the year could change. Besides losing volume and facing adverse currency impact, Januvia could find it hard to increase prices due to aggressive rebate tactics in DPP-IV class. ^[1] After the U.S., Japan is the biggest market for type 2 diabetes therapies which suggests that depreciating Yen could further impact Januvia’s growth in the latter half of 2013.

We currently account Januvia’s revenues under Alimentary & Metabolism drugs division, which constitutes roughly 15% to our price estimate for Merck. Januvia’s importance can be gauged from the fact that the exclusion of the drug’s sales from Merck’s revenue forecast leads to downside of about 5-10% to our price estimate. That’s a lot of value for a single drug in a diversified company like Merck. There is absolutely no way that Merck can afford to lose Januvia’s market position, especially when the global type 2 diabetes market is expected to grow at a healthy rate over the next decade.

Global Diabetes Market Is Growing Fast

XBiotech, which is a U.S. based pharmaceutical company, states that the global market for type 2 diabetes therapeutics stood at $23.7 billion in 2011, and has been growing at a compounded annual growth rate of 11.8% for the last decade. ^[4] Although this  growth rate is likely to come down, there is still a substantial opportunity for market leading pharmaceutical firms such as Merck to leverage the market growth. The market for type 2 diabetes drugs is expected to touch $45 billion by 2020, almost doubling from 2011. ^[4]

Our price estimate for Merck stands at $51.60, implying a premium of about 10% to the market price.

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1. Merck & Co., Inc. (MRK): Why Investors Should Be Cautious On Januvia?, iStockAnalyst [↩] [↩] [↩]
2. Merck’s Q2 2013 Earnings Transcript [↩]
3. National Diabetes Fact Sheet, 2011, CDC [↩]
4. XBiotech, Market Opportunities [↩] [↩]