Merck’s Gardasil Is Not Fulfilling Its Potential, Some Upside Possible

Merck‘s (NYSE:MRK) business suffered in the third quarter of 2013 from weakening of Yen and Japanese government’s decision to suspend proactive recommendation of HPV (human papillomavirus) vaccine. This impacted the sales of Gardasil, which has otherwise performed extremely well over the last few quarters. Japan is the third biggest market for Merck after the U.S. and Europe, and accounted for 12.3% of its revenues in 2012. ^[1] Although the slowdown in the growth of Merck’s vaccine sales in Japan raises some concern, there is another issue that the company needs to tackle domestically in the U.S. The vaccination rates have been relatively low for Gardasil and other HPV vaccines. According to The Journal of American Medical Association (JAMA), only about 54% of girls received at least one dose of an HPV vaccine in 2012, with just 33% receiving the full course of 3 shots. ^[2] In comparison, about 85% of teens received vaccination for tetanus, diphtheria and whooping cough during the same period. ^[1]

This essentially indicates that Garadasil is missing out on a lot of potential customers, and could effectively increase its sales by another 60% if steps were taken to increase the awareness about the necessity of the vaccine. The reason why the vaccination rates are low is because HPV is sexually-transmitted virus. Therefore the parents’ attitude towards sex can govern their decision of getting their children vaccinated, according to JAMA. ^[1]

Our current price estimate for Merck stands at $52, implying a slight premium to the market price

See our complete analysis for Merck

We expect Gardasil’s sales to exceed $1.8 billion in 2013, up 50% from  $1.2 billion in 2009. If HPV vaccination rates were to increase to the levels of other vaccines, the revenues from Gardasil could jump to close to $3 billion in the next few years. This vaccine accounts for roughly 15%-20% of Merck’s anti-infective division’s revenues (reflected as Legacy Pharma), which in turn constitutes roughly 30% to the company’s value according to our estimates. This implies that 5% of Merck’s value can be attributed to Gardasil based on our current revenue projections. The scenario discussed above could add $1 billion in incremental revenues leading to a small upside to Merck’s stock. The upside will be relatively small because Merck is a large diversified pharmaceutical company and no single drug accounts for a substantial portion of its revenues.

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1. Merck’s SEC Filings [↩] [↩] [↩]
2. Merck, Glaxo HPV vaccines held back by more than sex and money, FiercePharma, Nov 26 2013 [↩]