Merck Earnings Preview: It Is Going To Be All About Keytruda

Merck (NYSE:MRK) will report its Q4 2016 earnings on Feb 2nd. We expect decent results considering the recent momentum in its cancer drug Keytruda. Additionally, the company has received FDA approval for Zepatier, which is a Hepatitis C drug targeting genotypes 1 and 4 of the virus. It will be interesting to see how the initial ramp up in sales is. We expect peak sales for Keytruda to be around $6-$8 billion and that for Zepatier to be around $2 billion. The support to Merck’s topline growth from Gardasil and Januvia, which has historically been strong,  is likely to decrease as these drugs are expected to face their own unique challenges. There are several other drugs where Merck will see a decline due to loss of patents and generic competition. Nevertheless, investors are likely to focus on Keytruda which appears to have been the primary driver of Merck’s stock price in recent quarters. While Merck has a clear edge as of now, the competitive threat in Keytruda is likely to increase in the coming years. Our price estimate of $65.50 for Merck is nearly 5% above the market.

Keytruda Will Continue To Be The Focus

The year 2016 has been all about Keytruda. The impressive ramp up in the drug’s sales and additional regulatory approvals helped fuel investor optimism. In the first 9 months of the year, Keytruda generated nearly $900 million in sales and we expect the figure for the full year to reach nearly $1.3 billion. The drug, which was initially approved for advanced Melanoma, saw its usage expand to multiple other areas, including metastatic or recurrent head and neck squamous cell carcinoma, as well as metastatic non-small cell lung cancer (NSCLC). In fact, in the fourth quarter itself, Keytruda received first-line treatment approval in the U.S., EU and Japan for patients suffering from non-small cell lung cancer and exhibiting high levels of PD-L1. We expect these approvals to accelerate the drug’s growth in Q4.

The approval for treatment of first line NSCLC with PD-L1 > 50% is especially interesting considering the large patient pool and first mover advantage. This advantage was reinforced by recent clinical trial failure of a competing drug from Bristol-Myers Squibb – Opdivo. We note that Roche’s Tecentriq has received FDA approval for treatment of lung cancer patients who have failed to respond to previous therapy. Considering that Keytruda is currently approved for ‘first-line’ treatment, Tecentriq’s advance doesn’t pose an imminent threat. As far as the fourth quarter is concerned, we expect the momentum in Keytruda’s adoption to continue. From long term perspective, Tecentriq could pose a challenge if it gets additional approvals.

Expect Some Weakness In The Remaining Portfolio

Some of the important drugs in Merck’s portfolio are facing competitive pressure. Cubicin, an antibiotic that Merck added to its roster by acquiring Cubist, has lost its patent protection and is likely to lose market share to generics. Additionally, we expect Zetia and Vytorin to lose their patent protection next year. Moreover, the diabetes 2 drug Januvia has been critical to Merck’s business with nearly $4 billion in annual revenue. While the drug is still patent protected, it is facing pricing pressure due to competition from other branded drugs.

Gardasil vaccine has continued on an upward track and has helped keep the huge anti-infective drugs and vaccine franchise resilient. While the vaccine has benefited from public sector purchases, it now faces a challenge as the practitioners move from three doses to two doses. Merck is attempting to address the expected decline in volume by raising prices, but it may not be enough. We also expect Remicade and Singulair to show some decline.

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